Saturday, April 30, 2011

The Enemy of the Good?

Over the past couple of years 401(k) evaluation service BrightScope has made quite a splash.

Early on, most folks I spoke with were quite keen on what was being undertaken by the firm. 401(k) fees were unfortunately still mystery meat to many plan sponsors, and thus a service that purported to help them make sense - not only of what they paid, but how it compared to other programs - looked to be a godsend.

As time has worn on, there have been questions and concerns. The data that underlaid Brightscope’s computations was drawn from government files – and while that made it “official”, it apparently didn’t always mean it was accurate, and it surely didn’t make it timely (though the latter is getting better all the time). Moreover, BrightScope employs a proprietary methodology that relies on certain weightings and assumptions that not everyone would agree with – but then, it’s a proprietary methodology, after all. If you don’t like it, or don’t think it does a fair job of representing the real situation, one has only to say so.

What made them different, at least at the outset, was that they went public with that information – and by public, we mean all the way to retail participants - with data for a vast number of plans, and with a good deal of press coverage, to boot.
That created a modest amount of consternation for some plan sponsors and advisers – not because they had a problem (though some surely did), but because the data presented to the public about their plan and its relative competitiveness vis-à-vis other programs (particularly on the sensitive issue of fees) was, as noted above, incomplete, inaccurate, and/or out of date. None of which the BrightScope folks contested, by the way. But in the couple of conversations I have had with them on the subject, their response has been “if our data is wrong, tell us and we’ll fix it.”

Last week BrightScope turned its attention to financial advisers with its BrightScope Advisor Pages; not to rank them or rate them (though who would be surprised to see that come to the fore one day – particularly since there are already placeholders for “qualifications”, “experience”, and “conduct” on the new adviser tool), but rather to provide information to the public. Data that, like the retirement plan information noted above, wasn’t in one place, wasn’t easy to find, and surely isn’t easy to understand for many. And then, as it had with the retirement plan analytics information that launched the firm, it rolled its adviser database out – to everyone.

Well, advisers are sensitive about such things (with good reason), and a number have already checked out the database and found “issues.” Mike Alfred, co-founder and CEO of BrightScope told me last week that “…many of the “errors” we’re being accused of are really just issues with the advisor’s ADV or U-4 which they did not notice until it was published in this format”. And, as was the case with the retirement plan filings, Mike noted that “Once we get the updated information from a public filing, we will always move quickly to have it updated on the site because our foremost concern is having accurate data”.

Of course, I’m guessing that getting “updated information from a public filing” isn’t an overnight process, and Mike acknowledged that the BrightScope team has been “slammed by a very large volume of incoming requests to claim the Advisor Pages profile as well as general messages of both support and dismay.” More troubling have been the published reports and emails from advisers who say they’ve been told they will have to pay to have their information corrected (or at least strongly encouraged to do so), though Alfred dismissed that as “totally untrue.”

Still, the public release of data that may be old, inaccurate, and/or outdated is surely cause for some concern, and hopefully speedy remediation by BrightScope, where appropriate.

After all, Voltaire once famously said that the perfect is the enemy of the good. But IMHO, the real enemy of the good is more often “not ready yet”.

- Nevin E. Adams, JD

Sunday, April 24, 2011

“Smoke” Signals

Plan sponsors spend a lot of time wondering—and worrying—about the “right” way to do things. They rely on the guidance of experts, the insights of publications like ours, the black—though often gray—letter of the law, and sometimes they must rely on the occasionally contradictory adjudications of the courts.

Those contradictions have been much in evidence in the series of 401(k) revenue-sharing lawsuits, which, IMHO, continue to suffer from what seems to be a confusing “flexibility” in judicial discernment regarding the standards of fiduciary responsibility and application of ERISA’s 404(c) safe harbors. In fact, it is only a matter of time until some plan sponsor somewhere files an injury claim for whiplash incurred from simply trying to keep up with the direction of these decisions.

The most recent example was the case of Gerald George vs. Kraft Foods Global (see Appellate Court Sends Back Kraft Fee Case), a case the 7th U.S. Circuit Court of Appeals remanded (albeit in a split 2-1 decision) for further deliberation to a District Court—which had already determined that there was no issue presented that required a formal adjudication, while granting the employer-defendant’s motion for summary judgment (see Kraft Excessive Fee Case Thrown Out).

That District Court, which relied heavily on the decision of this same federal appellate court ruling in Hecker v. Deere & Co., reasoned that ERISA requires only that fiduciaries use a “reasoned decisionmaking process” that utilizes the appropriate methods to decide on a proper course of action in running a plan, and that in continuing to employ its current recordkeeper (Hewitt Associates) , the Kraft fiduciaries were under no obligation “to scour the market” for the cheapest fund or service provider (see “Reasonable Redoubts”).

However, in the recent appellate decision, we find that, since hiring Hewitt in 1995, the plan’s fiduciaries had not solicited competitive bids from other recordkeepers—a finding that raised my eyebrows, as it doubtless would most retirement professionals. Now, one should always be careful in reading judicial explanations of the facts on which they based their decisions as a complete picture, but this court said that the defendants “…emphasized that they engaged several independent consultants for advice as to the reasonableness of Hewitt’s fee and argued that in doing so they satisfied their duty to ensure that Hewitt’s fees were reasonable”—a statement that the appellate court juxtaposed against a statement that, over a 10-year period, “fees paid to Hewitt ranged between $43 and $65 per participant per year.”

The implication seemed to be that casual conversations with “independent consultants” were no replacement for a full-blown competitive bidding process—and the fee trend, lacking context, was an eye-opener as well. But the District Court outlined a series of plan changes and negotiations over that time period that painted a very different picture and were anything but “casual.” True, one might well wonder why a full RFP wasn’t issued, but the District Court opinion paints a picture of lots of merger-related plan changes; an active discussion, review, and comparison of fees; alongside a pattern of negotiation that both reduced fees and/or expanded services over the period in question. In sum, the picture painted by the lower court’s opinion was the kind of thing you might expect to come from a full competitive bid without the time, pain, and—yes—expense of undertaking it. And, yes, it was documented.

That said, the appellate court found error in the District Court’s dismissal based on a finding that the “defendants satisfied their duty of prudence by relying on the advice of their consultants”, going on to note that “although the fact that defendants engaged consultants and relied on their advice with respect to Hewitt’s fee is certainly evidence of prudence, it is not sufficient to entitle defendants to judgment as a matter of law” (1).

Ultimately, while some commentators have painted this opinion as a reversal of fortunes for employers in these cases, I am disinclined to see it that way. Rather, to my reading, you have a court that sees just enough smoke2 to wonder if there might be a fire; a large plan that went a decade without a formal RFP3. Determining not that not doing so was inherently imprudent4—but that making that determination would require a more complete airing of the facts.

—Nevin E. Adams, JD

1 In explaining its determination, the court cited Donovan v. Cunningham, 716 F.2d 1455, 1474 (5th Cir. 1983) (stating that “[a]n independent appraisal is not a magic wand that fiduciaries may simply waive over a transaction to ensure that their responsibilities are fulfilled”).

2 There were also issues raised about the use of two different accounting structures in two different plans for its company stock funds, and questions about how float was accounted for, in addition to questions about the use of actively managed funds. In fact, considering the volume of the opinion dedicated to it, the company stock accounting may well have been the most compelling triable issue of fact for the appellate court.

3 The appellate court also took issue with the District Court’s dismissal of testimony by an expert witness by the plaintiffs. According to the appellate court, Lawrence R. Johnson reviewed the process that defendants followed when they extended Hewitt’s contract and opined that defendants acted imprudently by extending the contract without first soliciting bids from other recordkeepers. The District Court found his expertise was limited to mid-size plans and dismissed it, while the appellate court said that “defendants have not pointed to any differences between the recordkeeping needs of mid-sized and large plans that would make experience with mid-sized plans an insufficient qualification for rendering an opinion about the recordkeeping needs of a large plan.”

4 In a “spirited” dissent, Judge Richard D. Cudahy, who characterized the lawsuit as an “implausible class action based on nitpicking with respect to perfectly legitimate practices of the fiduciaries,” noted that “[i]f plaintiffs can find one ‘expert’ who will testify that the fee is too high, must there be a trial? Here, the trustees have a relationship with Hewitt going back fifteen years. They have a good sense of the dimensions of the job and Hewitt’s performance in carrying it out. Must they substitute any lower bidder that happens along?”

Sunday, April 17, 2011

Rest “Room”

It should come as no surprise that the vast majority of plan sponsors who have adopted automatic enrollment have chosen to default that initial deferral at 3% of pay. No, that’s not the level at which most plans match deferrals, and it’s certainly not a level of deferral likely to produce sufficient retirement savings. It is, however, the starting deferral rate attributed to such programs under the auto-enroll safe harbor provisions in the Pension Protection Act (PPA). Coincidence? I think not.

Ironically, that same safe harbor provision requires that employers either go back and automatically enroll all eligible participants (giving them the ability to opt-out), or be able to establish that they did at some point (see “The Pension Protection Act: This Changes Everything”). Most providers, certainly pre-PPA, were unable to provide the requisite proof of those prior enrollments—and thus it would seem that most employers seeking the protections of that auto-enroll safe harbor would have re-enrolled all eligibles; and yet, surveys (including PLANSPONSOR’s own DC Survey) routinely show that only about one in three employers do so. In fact, twice as many choose to implement automatic enrollment only for new hires (see “IMHO: A Prospective Perspective”).

Now, when you look at the former finding and compare it to the latter, you can only draw one of two conclusions: either that most plan sponsor adoptees of automatic enrollment aren’t interested in obtaining the protections afforded by the PPA’s safe harbor, or they don’t understand that their approach doesn’t qualify.

There’s nothing wrong with opting to embrace automatic enrollment at a point in time and only applying that to employees hired after that date. Sure, you won’t garner the benefits of the PPA safe harbor, but most plan sponsors probably don’t “need” that (though they might well want it). Moreover, there are some very real financial consequences associated with automatic enrollment—survey after survey shows that very nearly every employee who is automatically enrolled stays in the plan. Depending on your match and current participation levels, that can add up to a lot of additional contribution dollars.

Oddly, as real as that financial impact is, that’s not the reason I most often hear from plan sponsors. Instead, they are (still) more inclined to suggest that the longer-tenured workers have had—and rebuffed—their opportunity to participate in the plan. Many plan sponsors remain worried that these longer-tenured workers will consider such “un-permissioned” actions to be some kind of personal affront. And yet, five years after the passage of the PPA, all I ever seem to hear are stories about how those more-seasoned employees are appreciative, even thankful, for finally being enrolled in the plan. It’s as though they heard the messages all those years, knew they should be doing something about retirement, but didn’t quite know how to get started.

There’s another interesting finding from PLANSPONSOR’s DC Survey, and it has held true for several years running. Asked about their motivation for adopting automatic enrollment, the vast majority—nearly two-thirds, in fact—say, “Our organization wanted to be more proactive in helping employees save.”

Perhaps it’s now a good time to help the rest of them.

—Nevin E. Adams, JD

Sunday, April 10, 2011

Expert Opinions

I learned a long time ago that when it comes to things like automobile maintenance, home repair, or gardening, I’m better off hiring an expert. Now, I have friends who derive great pleasure from things like “puttering around” in the backyard, who relish the accomplishment of laying down their own carpet or wallpapering a bathroom, who derive great satisfaction from installing their own car stereo or home entertainment center. But as for me, I’m happy to support our nation’s economy by paying someone who actually knows how to do such things. It’s not that I CAN’T do those things, mind you—it’s just that they take time I don’t have to do things I’m not good at for a final result with which I am never completely satisfied.

And, if I’m honest, because I don’t like those tasks, I put off doing them—as long as humanly possible.

One of the most common information requests I get from advisers is help in proving to sceptical plan sponsors that they should hire an adviser. While I don’t always know the particulars, the vast majority of these situations don’t arise where an adviser is already involved. Rather, these tend to be situations in which the plan sponsor has not previously hired an adviser and is questioning why he or she needs to undertake that additional expense to do something they (still) feel perfectly capable of doing themselves.

In truth, by the time you take into account the types of programs many providers now make available, with screened investment menus, pre-packaged investment policy statements, automatic enrollment and contribution acceleration campaigns, not to mention an expanding array of qualified default investment alternative (QDIA) choices and materials that tout the support of a large, sophisticated financial institution, you can hardly fault a plan sponsor for wondering why he or she needs an adviser.

To me, the reason is simple: because, while a plan sponsor probably can fulfill his/her fiduciary duties without the assistance of an independent financial adviser, IMHO, left to their own devices, they are, quite simply, less likely to do so. They are more likely (perhaps much more likely) to be beholden to a limited investment menu and “standard” fee structures, less likely to have regular and productive investment committee meetings, less likely to renegotiate their current arrangements on a regular basis, less likely to undertake needed change, and far less likely to exercise the discipline of a consistent process in doing so. Like those “distasteful” household chores, even among the most committed plan sponsors, these complicated decisions tend to drift to the back burner of life.

Hiring an adviser is no panacea for a plan sponsor who is not willing to own up to its fiduciary obligations—but, with the right adviser, that decision can go a long way toward helping ensure that those fiduciary obligations are met.

—Nevin E. Adams, JD

Sunday, April 03, 2011

Mixed Messages

We had wrapped up a very successful half-day adviser event ahead of our annual Awards for Excellence dinner last week. As we closed up the session, a co-worker of mine commented to me as an aside, “Nobody ever told me I needed to be saving 12% before.”

Now, this co-worker has nothing to do with our magazines, or the content that fills our Web sites and newsletters. He just happens to work at a company that, among other things, publishes information about retirement plans. He’s a participant in our benefit plans, of course—and so he has probably been exposed to all the same types of education and savings materials as anyone (perhaps more). He’s a smart guy (he’s pursuing his MBA at night), tech-savvy, and he pays attention. And yet, it wasn’t till he was effectively sitting there as a fly on the wall in a room full of the nation’s best retirement plan advisers that he overheard someone put forth a specific savings-target figure.

Now, like any good plan sponsor, I can explain that. I don’t know his individual financial circumstances (I’d have to “work” even to find out how much he’s saving at present), have no idea when he plans to retire, and can’t possibly guess at the viability of Social Security or other resources at that date. He may marry “well,” he may have a rich uncle—heck, he might even win the Lottery. I can tell you that his employer offers a solid 401(k) plan, with a robust investment menu (reviewed on a regular basis with our financial adviser), a generous match, access to both managed accounts and target-date funds, and the opportunity for him to sit down with a financial adviser (paid for by his employer, I might add) or get a consult via the phone, as well as through an assortment of Web-based tools. Looking over the plan’s structure, administration, and fees, it’s hard not to feel that (in the words of the Lone Ranger), “Our work here is done.”

Except, of course, it obviously isn’t.

Now, I don’t know that 12% is the right answer in his individual case. For all I know, that’s still not going to be “enough”—or, based on the combined results of the aforementioned individual circumstances yet to be discerned, it might be way too much. Obviously, there are many logistical impediments to us divining with precision what the “right” amount is for every individual situation (including our own).

That said, IMHO, any number of plan design features convey a different message to participants. A significant number of plans still don’t provide for an automatic (or even immediate) enrollment. Those who do generally default employees into these programs at a mere 3% of pay, which, in most plans, isn’t even enough to qualify for the full match. Many plans match those deferrals only up to 6% (or less), auto-accelerate at just 1% increments, and—if we’re rigidly adhering to the outline provided in the Pension Protection Act—probably cap those automatically accelerated deferrals at 10% of pay.

We all know that the motivations for those plan designs are nearly as varied as the plans that employ them: They represent the plan sponsor’s sense of a competitive benefit structure, they match the expectations of their current workforce, or perhaps they are simply what the employer can afford at any particular time. Yet, we all see evidence every day that participants read into these structures a kind of “code” that these are the “right” answers to provide them with a financially secure retirement, rather than representing decisions made for reasons that, while generally sound, are completely unrelated to ensuring individual retirement security.

We’ve long held off giving people a specific target for savings, for a host of real and legitimate reasons. I wonder if the time hasn’t come to put a target out there for participants—one that might not be precisely the “right” number for every individual situation, but one that will give them something to aim for, rather than continue to duck the issue and hope for the best.

It’s a message that I think participants are ready for—and there’s no time like the present.

—Nevin E. Adams, JD