Saturday, May 30, 2015

5 Investment Committee Lessons Learned From Tibble

Two things have been overlooked by many people in the days leading up to the Supreme Court’s decision in Tibble v. Edison International and the weeks thereafter: (1) most of the wrongs1 initially alleged did not survive the judgment of the district court; and (2) only a single issue — the determination as to how to apply ERISA’s statute of limitations to fund selection — was before the nation’s highest court.

While the Supreme Court rejected the notion that an initial fund review was sufficient in the absence of significant changes in circumstance to preclude the need for an ongoing assessment, the defendants in Tibble did a lot of things right that many plans don’t. Here are five:

1. They had a plan investment committee.

ERISA only requires that the named fiduciary (and there must be one of those) make decisions regarding the plan that are in the best interests of plan participants and beneficiaries, and that are the types of decisions that a prudent expert would make about such matters. ERISA does not require that you make those decisions by yourself — and, in fact, requires that if you lack the requisite expertise, you must enlist the support of those who do have it. No committee required.

2. They had regular committee meetings.

Having a committee and not having committee meetings is potentially worse than not having a committee at all. If there is a group charged with overseeing the activities of the plan and that group doesn’t convene, then one might well assume that the plan is not being properly managed, or that the plan’s activities and providers are not prudently managed and monitored, as the law requires. The Edison investment committee met quarterly to review plan investments and to review reports and recommendations from investment staff.

3. They kept minutes of committee meetings.

There is an old ERISA adage that says, “prudence is process.” However, an updated version of that adage might be “prudence is process — but only if you can prove it.” To that end, a written record of the activities of your plan committee(s) is an essential ingredient in validating not only the results, but also the thought process behind those deliberations.

More significantly, those minutes can provide committee members — both past and future — with a sense of the environment at the time decisions were made, the alternatives presented and the rationale offered for each, as well as what those decisions were. They also can be an invaluable tool in reassessing those decisions at the appropriate time and making adjustments as warranted — properly documented, of course. And they can be useful in subsequent litigation. Or not.2

4. They had an investment policy statement.

While plan advisors and consultants routinely counsel on the need for, and importance of, an investment policy statement, the reality is that the law does not require one, and thus, many plan sponsors — sometimes at direction of legal counsel — choose not to put one in place.

Of course, if the law does not specifically require a written investment policy statement (IPS) — think of it as investment guidelines for the plan — ERISA nonetheless basically anticipates that plan fiduciaries will conduct themselves as though they had one in place. And, generally speaking, you should find it easier to conduct the plan’s investment business in accordance with a set of established, prudent standards if those standards are in writing, and not crafted at a point in time when you are desperately trying to make sense of the markets. In sum, you want an IPS in place before you need an IPS in place.

Not also that, while not legally required, Labor Department auditors routinely ask for a copy of the plan’s IPS as one of their first requests. And therein lies the rationale behind the counsel of some in the legal profession to forego having a formal IPS: Because if there is one thing worse than not having an investment policy statement, it is having an investment policy statement — in writing — that is not followed.

That said, the Edison investment committee had an IPS, and by all accounts, were attentive to its terms. Terms that apparently were focused on the investment and asset allocation aspects of the fund choices, rather than on the costs and alternatives.

5. They hired an investment professional to help.

The Edison plan investment committee had access to, and relied on the services of, an investment adviser (AonHewitt’s investment consulting arm) to review/select/monitor funds. And they did make fund changes during the period in question (in fact, the district court noted that in 33 of 39 instances during the period in question, they replaced funds with others that actually decreased the revenue-sharing received by the plan).

The Tibble defendants clearly did a lot of things right in reviewing and monitoring their investment menu — so what did they do wrong?

Well, with regard to this litigation, what this $2 billion+ plan didn’t do was ask investment fund providers to waive the minimums for investment in institutional class shares, shares that were reportedly identical in every way save one (fees) to the retail class chosen. It might well be that the IPS itself and the focus of the committee didn’t consider all the factors (notably fees) that play into fund performance and suitability, and should be considered.

Following the Supreme Court’s ruling, it’s clear there is a fiduciary duty to review the funds on the retirement plan menu on an ongoing basis, though how much and how often remain to be established.
But perhaps most importantly, one lesson is now crystal clear now, if it wasn’t previously: “set it and forget it” is not an appropriate standard of review for ERISA fiduciaries.

Nevin E. Adams, JD


1. The district court cited three possible rationales for the retention of retail-class shares offered by witnesses for the defendant/employers — but found no evidence for them in the actions taken (or not taken).

2. The district court noted that witnesses for the defendant/employers offered three possible rationales for keeping the retail shares: If the retail share class of a certain mutual fund had significant performance history and a Morningstar rating, but the institutional share class did not; to avoid confusion among participants resulting from frequent changes in the fund; or if there were certain minimum investment requirements. But Judge Stephen V. Wilson noted that, “None of these explanations is supported by the facts in this case.”

Saturday, May 23, 2015

3 Things You Should Know About Automatic Enrollment

One of the most celebrated plan design features of the 401(k) era is automatic enrollment. Nearly as old as the 401(k) itself, once upon a time it was called a “negative election.” But regardless of the name, the concept has been extraordinarily effective at not only getting, but keeping, workers saving via their workplace retirement plans.

However, adoption of the design, after a surge in the wake of the passage of the Pension Protection Act of 2006, now seems to have plateaued. Moreover, current data suggests that, while automatic enrollment adoption has certainly had a positive impact on retirement outcomes, we’re not getting as much mileage from it as we might.

So, here are three things that plan sponsors — and others — should know about automatic enrollment.

1. You don’t have to default contributions at 3%.

Three percent was the standard default contribution rate for automatic enrollment plans long before the Pension Protection Act of 2006 incorporated it as part of its auto-enroll safe harbor. Originally cited in a now-obscure IRS regulation years before the advent of the PPA, in the years to follow, it was largely embraced because it was seen as little enough that it wouldn’t spur massive opt-outs by automatically enrolled participants.

With more than a couple of decades of experience under our belts (a third of that under the auspices of the PPA), we know a couple of things. First, that 3% is indeed too small an amount to spur most auto-enrollees to opt out. In fact, there have been any number of studies — and some real-world experience — suggesting that a defaulted contribution rate twice as high would produce very nearly the same result.

What many plan sponsors may not know is that while that the auto-enrollment safe harbor of the PPA calls for a minimum starting deferral of 3%, it is a floor, not a ceiling.

But another, and more important, thing that we’ve all known from the very beginning is that a 3% rate of deferral is not enough.

2. If you are going to default at 3%, make sure you accelerate the contribution rate.

Automatic enrollment and contribution acceleration have always been separate things: the former a decision made by the plan sponsor, with the participant having the ability to opt-out; the latter a voluntary decision by the participant, facilitated by the plan sponsor.

These two traditionally separate concepts were wedded in the PPA’s automatic enrollment safe harbor, and for a very sound reason: As noted above, a 3% deferral is not enough.

Current survey data suggests that plan sponsors continue to separate these two design choices, and that tells me two things: 
  • most plan sponsors who adopt automatic enrollment designs aren’t doing so with an eye toward taking advantage of the PPA safe harbor; and
  • while many plan sponsors are willing to make one monetary decision on behalf of their workers, they apparently aren’t nearly as willing to make two, however integral it might be to retirement security. 
3. Automatic enrollment isn’t just for new hires.

Despite our extended history with automatic enrollment, and the PPA’s safe harbor that contemplates its extension to all eligible workers, to date most plans — roughly two-thirds — that have adopted automatic enrollment have done so only for new hires. Over the years, I have heard a variety of explanations for this trend — anything from a hesitation to “suddenly” take contributions from long-time workers (who have ostensibly declined to take advantage of previous opportunities to join) to a general resistance to running the risk of stirring up trouble with existing workers.

However, to me, the most logical explanation is economic: Just take the likely increase in participation rate (generally from 70% to 95% or so) resulting from automatic enrollment, and then figure out the increase in matching dollars that would result, particularly for an employee population that is likely more tenured and highly compensated.

Little wonder that so many decide to “let sleeping dogs lie.” Though in all my years of experience working with 401(k) plans, I have never heard of even a single participant who objected to being automatically enrolled. On the other hand, I’ve heard dozens of stories of long-tenured workers who had, for a variety of reasons, put off signing up for their 401(k) — but who, when they finally were enrolled, were oh-so-very-grateful for that “start,” however delayed.

And that, perhaps as much as anything else, is something plan sponsors should know.

- Nevin E. Adams, JD

Saturday, May 16, 2015

The “New” Math?

One of my more frustrating memories of parenthood was trying to help my kids with their homework. Not because I hadn’t covered the territory once upon a time myself, or because I couldn’t manage to refresh my recollection(s) of the subject. It wasn’t enough to teach my kids a method sufficient to arrive at the correct answer, and to help them understand how we got there. No, it didn’t “count” unless I could arrive at the answer by adhering to what struck me as a weirdly inefficient and complicated regimen upon which their teachers insisted.

If this was the “new math,” I remember thinking at the time, I fear for the sanity of the next generation.

This past weekend The New York Times ran an article aptly, if somewhat awkwardly, titled, “New Math for Retirees and the 4% Withdrawal Rule.” The focus of the article, like the 4% rule itself, was how to pace withdrawals in retirement so that you don’t run out of money before you run out of retirement. However, like so many other things these days, it’s apparently not as simple as it once was, complicated by the low interest rate environment and the current high stock market values.

Though a lot of time, thought and attention has been paid to the 4% rule (and its progeny), to me it’s basically just math. After all, once you stipulate certain assumptions about the length of retirement, portfolio mix/returns, and inflation, a guideline like the 4% “rule” is really just a mathematical exercise.

‘Drawing’ Board

But if those rules purport to tell us how much we can draw from our retirement savings without running out, how does that compare with what people are actually withdrawing? The Employee Benefit Research Institute (EBRI) has previously examined withdrawal patterns in their IRA database, and found that the median IRA individual withdrawal rates amounted to 5.5% of the account balance in 2010, though among those 71 or older (when required minimum distributions kick in) were much more likely to be withdrawing at a rate of 3-5%.

Those median numbers don’t tell the whole story, of course. A separate EBRI analysis, this one based on data from the University of Michigan’s Health and Retirement Study (HRS), found that lower-income workers were withdrawing money from their individual retirement accounts in much greater numbers, earlier, and at much larger percentages, than other workers. In fact, the report noted that nearly half (48%) of the bottom-income quartile of those between the ages of 61 and 70 had made such an IRA withdrawal, and that their average annual percentage of account balance withdrawn was 17.4% — higher than the rest of the income distribution. In sum, a number of individuals, again, notably lower-income workers, were withdrawing more from their retirement savings accounts than those in higher income groups — and apparently more than the 4% “rule” would suggest would allow them to avoid running out of money in retirement.

Will these drawdown rates create a problem down the road? Will these individual run short of funds in retirement? Will those withdrawals, along with other resources that may be available, be sufficient to live on? The answers, of course, depend on the individuals, their circumstances, health, needs, expectations — and preparations.

Those ultimate realities may be new for some — but the “math” won’t be.

- Nevin E. Adams, JD

Saturday, May 09, 2015

13 Things About Work You Probably Didn’t Learn in School

This weekend our youngest will graduate from college. It’s a big day for him, of course, and a big deal for us, having for some part of the past eight years had either one, two — and for one interesting year, all three — of our children in college at the same time.

Life has many lessons to teach us, some more painful than others. But as my son — and graduates everywhere — look ahead to the next chapter in their lives, it’s a natural time for the rest of us, particularly those of us who are parents, to reflect on the lessons we’ve learned along the way.

So, for my son — and all the other graduates out there — here are some things I wish I had known when I entered the workforce:
1. If you don’t speak up, people will assume you’re happy with the way things are.
2. If you wouldn’t want your mother to learn about it, don’t do it.
3. Never assume that your employer (or your boss) is looking out for your best interests.
4. You can be liked and respected.
5. Be very careful when using the “Reply All” button.
6. Never miss an opportunity to tell someone “thank you.”
7. Be willing to take all the blame — and to share the credit.
8. Know at least a little about sports and the weather.
9. Never assume that “senior management” knows what they’re doing.
10. Watch your language. People notice people who don’t curse.
11. Sometimes the questions are complicated, but the answers aren’t.
12. That 401(k) match isn’t really “free” money — but it won’t cost you a thing.
13. Plan for your future now because retirement, like graduation, seems a long way off — until it isn’t. 

Congratulations to my son — and all the graduates out there. We’re proud of you!

- Nevin E. Adams, JD