Saturday, April 23, 2016

Did We ‘Need’ a New Fiduciary Regulation?

I was recently asked by a reporter if the new fiduciary regulation was “needed.” The question caught me a bit off guard, because having been in “figure out how to deal with this” mode for most of the past year, I had long since moved past “why” and “if” to “when” and “how.”

I was reminded of our last home purchase – which we bought in a bit of a rush. Oh, it wasn’t like we didn’t know we were moving – but our ability to actually hone in on a new home was hindered by the fact that our current home had to sell first. And, as is often the case in such things (or has been for us), we had gone a long time with nary an offer, much less a viable one.

Once that offer came, of course, we had to move quickly (literally). And so, the planning that we had done mentally in anticipation of that day was thrust into overdrive. Ultimately we settled on a house that wasn’t the best we had seen, but it was the best available at the time (within the price and commuting distance restraints we placed upon it). At the time we moved in, I took some comfort from the fact that its prior residents had lived there more than a quarter century. More than enough time, I thought, to have fixed whatever ails might have arisen there.

It wasn’t long, however, before we realized that with that longevity in residence had come a certain complacency about the upkeep and maintenance; the even uglier things we found underneath the ugly pink carpet, the doors that we hadn’t opened during the inspection that fell off the hinges, the garage door opener that dropped out of the ceiling after a dozen uses…. I was later to tell folks that we spent the next several years (and no small amount of money) doing the 25 years of maintenance that the former residents had simply chosen to live without.

Was Fiduciary Regulation Needed?

So, with that experience in mind, I returned to the reporter’s question… was the new fiduciary regulation “needed”.

After a quick pause, I responded that, more than 40 years on, it certainly bore consideration. After all, the retirement savings world has changed a lot over the past generation, and if DB plans were never quite as ubiquitous as some remember them, defined contribution plans, and IRAs – which now have more assets than the DC plans which spawned many of them – increasingly are. It’s not just those individual retirement savers, either – the plan sponsor fiduciaries that play such an integral role in critical areas like plan design and outcomes measurement need all the help they can get in these increasingly complex areas.

At some point you can’t be in this business and not know that, as in all human endeavors, there are bad actors. Generally speaking, and thankfully, they are the minority. But they are out there, and every retirement plan advisor I have ever spoken with can cite examples, frequently multiple ones, of situations they have encountered, and not always been able to fix. You can’t credibly argue there aren’t problems – only whether this particular solution is well suited to, and cost effective for, the task for which it has been presented.

And yet, while all that was known and acknowledged, like the family having grown accustomed to the walls that surround our existence, there were no clarion calls for change, certainly not of the scope and scale contemplated by the Labor Department’s fiduciary regulation.

Not that I ever bought the widely cited $17 billion figure that proponents of the regulation said (and continue to say) it was costing American savers. Nobody knows the exact figure, of course (though I’m pretty sure you won’t be close if your assumptions are predicated on the notion that all active management choices are at an advisor’s direction, and only look at IRAs, even if you do cut that result in half). But let’s say it was exaggerated by a factor of two – would a $9 billion “rip-off” have been enough to warrant redress? What if it were a “mere” $1 billion?

But is the cure “proportionate” to the ills it purports to address? I’m pretty sure it will cost more than the current projections suggest – that’s the nature of such things. However, I’ve been in this business too long not to appreciate the benefits that ERISA’s oversight can bring, and those may well be understated. That said, it would be na├»ve to assume that flat fees (or flat rates) are necessarily cheaper in every situation. Or that the advice that comes with those pay structures is inherently “better.” But a shift in those directions will remove what is surely at least a temptation for some. And if fewer individuals take advice at those rates, and on those conditions – well, they will almost certainly do so with a greater appreciation for what such insight is worth, even if they are unwilling to pay for it.

Though it is less than a week old, there’s a pretty consistent sense that the final regulation is more workable than its predecessor. Indeed, many would argue, considerably so. Make no mistake, the Labor Department may not have acquiesced in every comment or suggestion made over the past year, but they were clearly taking notes.

That does not, however, mean that it doesn’t still have “bugs” that have to be worked out, provisions that need to be refined, definitions that need to be clarified. We may have known this was coming, but this new fiduciary “home” has only just come on the market.

It’s not unusual for “cures” to be worse than the disease – or to at least be more costly. The fiduciary regulation may yet turn out to have unintended consequences (count on it) – or, hard as it may be to imagine right now, we may look back in a couple of years and wonder at how quickly we adjusted.

Regardless, the waiting is over. The work begins.

- Nevin E. Adams, JD

Saturday, April 16, 2016

5 Reasons to Plan and Save for Retirement Now

As April is National Financial Literacy month, and this is National Retirement Planning Week, those who work with retirement plan participants know it’s important to do the right thing(s) when it comes to retirement planning and savings.

But for those you are trying to help encourage, here are five reasons to plan and save for retirement now, and as an integral part of that financial plan.

Because you don’t want to work forever.

Seriously, no matter how much you love your job, if you want to stop working one day – and trust me, you will – you are going to have to think about how much income you will need to live after you are no longer working for a paycheck.

Because living in retirement isn’t “free.”

Many people assume that expenses will go down in retirement – and, for many, perhaps most, they do. On the other hand, there are changes in how we spend in retirement as well – and they aren’t always less. A recent report by the nonpartisan Employee Benefit Research Institute (EBRI) notes that health-related expenses are the second-largest component in the budget of older Americans, and a component that steadily increases with age. Health care expenses capture around 10% of the budget for those between 50–64, but increase to about 20% for those age 85 and over,” EBRI notes. And those spending shifts don’t take into account the possibility of a need or desire to provide financial support to parents and/or children.

Because you may not be able to work as long as you think.
In 1991, just 11% of workers expected to retire after age 65. Twenty-five years later, in 2016, 37% of workers report that they expect to retire after age 65, and 6% say they don’t plan to retire at all, according to the 2016 Retirement Confidence Survey. At the same time, the percentage of workers who say they expect to retire before age 65 has decreased, from 50% in 1991 to 24% in 2016.

However, the RCS has consistently found that a large percentage of retirees leave the workforce earlier than planned – nearly half (46%) in 2016, in fact. Many who retired earlier than planned say they did so because of a hardship, such as a health problem or disability (55%), or changes at their employer such as downsizing or closure.

The bottom line: Even if you plan to work longer, the timing of your “retirement” may not be your choice.

Because you don’t know how long you will live.

People are living longer, and the longer your life, the longer your potential retirement, especially if it begins sooner than you think. Retiring at age 65 today? A man would have a 50% chance of still being alive at age 81 (and a woman at age 85); a 25% chance of living to nearly 90; a 10% chance of getting close to 100. How big a chance do you want to take of outliving your money in old age?

Because the sooner you start, the easier it will be.

As recently as the 2015 RCS, fewer than half (48%) of workers report they and/or their spouses have tried to calculate – even a single time – how much money they will need to have saved by the time they retire so that they can live comfortably in retirement, a level that has held relatively consistent over the past decade.

Whether or not you feel fully financially “literate” now, you need to have a plan for your retirement. And there’s no time like the present to start.

- Nevin E. Adams, JD

Friday, April 01, 2016

The Choices of a Lifetime

It was 10 years ago today – a Saturday morning as I recall.  I had just wrapped up my weekly column when I got a call from my sister. My father, who had been battling cancer for several years now, had suffered a series of heart attacks. By the end of the day, he had passed.

As the family converged, my siblings and I tried as best as we could, together with Mom, to deal with the tasks that required our attention, and divvied up the ones that seemed to call out for individual attention. Having spent my entire professional career in financial services, and having picked up a law degree along the way, my “job” was to organize the will and assets.
The estate wasn’t complicated.  My parents each chose careers of service to others; Dad as a minister, and then a director of missions where he helped other ministers until his “official” retirement several years ago (far as I could tell, Dad’s only retirement was from the receipt of a regular paycheck), while Mom was a school teacher – a teacher who took a fairly significant (and unpaid) “sabbatical” so that she could stay at home with her four kids until the youngest was ready to head off to school. They both loved what they did, but those aren’t professions that tend to make one wealthy (in a monetary sense, anyway).
Despite that, my Depression-era reared parents saved what they could. On top of the expenses of rearing four kids, Dad, considered self-employed for most of his working life, funded both the employer and employee portions of Social Security withholding and still found a way to set aside money in a tax-sheltered account (he also tithed “biblically,” for those who can appreciate that financial impact). Mom, covered by a state pension plan, saved diligently to buy back the service credits she had forgone during the years she worked in our home without a paycheck, and also set aside money in her 403(b) account. Somehow, despite all those draws on their modest incomes, they managed to accumulate a respectable nest egg (don’t tell me those of modest incomes can’t and won’t save).
Today, ten years later, and cruising toward 86, Mom is still self-sufficient (though nervous about what the politicians in her state may yet do to her pension, into which she, as many teachers do, contributed mightily over the years), thanks to the choices they made along the way over the course of a lifetime. 
I’ve always been proud of my parents, who sacrificed so much along the way to give us the best they could. I’m also proud – and more than a little impressed – of how committed they were to saving what they could, when they could, and the results of that commitment. So often – perhaps too often, IMHO - I think we are inclined to excuse inadequate savings rates as the product of strained finances, a tight economy, or the simple human inclination to indulge in short-term pleasures.
On this, the anniversary of my Dad’s passing, my parents’ example reminds me – and hopefully you – that the decision to save is just that – a decision, a choice.
Here’s hoping more of us make the right one - while we still can.
- Nevin E. Adams, JD