Wednesday, November 21, 2018

A ‘Retirement Ready’ Thanksgiving List

Thanksgiving has been called a “uniquely American” holiday, and though that is perhaps something of an overstatement, it is unquestionably a special holiday, and one on which it seems appropriate to reflect on all for which we should be thankful. And so…

I’m thankful that participants, by and large, continue to hang in there with their commitment to retirement savings, despite lingering economic uncertainty and competing financial priorities, such as rising health care costs and college debt.

I’m thankful that so many employers voluntarily choose to offer a workplace retirement plan – and that so many workers, when given an opportunity to participate, do.

I’m thankful that figuring out ways to expand that access remains, even now, a bipartisan concern – even if the ways to address it aren’t always.

I’m thankful that so many employers choose to match contributions or to make profit-sharing contributions (or both), for without those matching dollars, many workers would likely not participate or contribute at their current levels – and they would surely have far less set aside for retirement.

I’m thankful that the vast majority of workers defaulted into retirement savings programs tend to remain there – and that there are mechanisms (automatic enrollment, contribution acceleration and qualified default investment alternatives) in place to help them save and invest better than they might otherwise.

I’m thankful that a growing number of plan sponsors are choosing to improve on those automatic defaults, particularly by raising the starting contribution rates.

I’m thankful that more plan sponsors are extending those mechanisms to their existing workers as well as new hires.

I’m thankful for qualified default investment alternatives that make it easy for participants to create well-diversified and regularly rebalanced investment portfolios – and for the thoughtful and on-going review of those options by prudent plan fiduciaries.

I’m thankful that, as powerful as those mechanisms are in encouraging positive savings behavior, we continue to look for ways to improve and enhance their influence(s).

I’m thankful that a growing number of policy makers are willing to admit that the “deferred” nature of 401(k) tax preferences are, in fact, different from the permanent forbearance of other tax “preferences” – even if governmental accountants and certain academics remain oblivious.

I’m thankful that the “plot” to kill the 401(k)… (still) hasn’t. Yet.

I’m thankful that those who regulate our industry continue to seek the input of those in the industry – and that so many, particularly those among our membership, take the time and energy to provide that input.

I’m thankful for objective research that validates the positive impact that committed planning and preparation for retirement makes. I’m thankful for the ability to take to task here research that doesn’t live up to those objective standards – and for those who take the time to share those findings.

I’m thankful for all of you who have supported – and I hope benefited from – our various conferences, education programs and communications throughout the year.

I’m thankful for the team here at the American Retirement Association, generally, as well as all the sister associations - ASPPA, ACOPA, NTSA, NAPA and PSCA, and for the strength, commitment and expanding diversity of our membership.

I’m thankful to be part of a growing organization in an important industry at a critical time. I’m thankful to be able, in some small way, to make a difference.

But most of all, I’m once again thankful for the unconditional love and patience of my family, the camaraderie of dear friends and colleagues, the opportunity to write and share these thoughts – and for the ongoing support and appreciation of readers like you.

Here’s wishing you and yours a very happy Thanksgiving!

- Nevin E. Adams, JD

Saturday, November 10, 2018

The Birth of a Notion

"Unintended consequences” are generally a bad thing. But not always. The 401(k), for example.

This week we celebrated the birthday of the 401(k) – because it’s the anniversary of the day on which the Revenue Act of 1978 – which included a provision that became Internal Revenue Code (IRC) Sec. 401(k) – was signed into law by then-President Jimmy Carter.

That wasn’t the “point” of the legislation of course – it was about tax cuts (some things never change) – reduced individual and corporate tax rates (pulling the top rate down to 46% from 48%), increased personal exemptions and standard deductions, made some adjustments to capital gains, and – created flexible spending accounts. But it did, of course, also add Section 401(k) to the Internal Revenue Code.

That said, so-called “cash or deferred arrangements” had been around for a long time – basically predicated on the notion that if you don’t actually receive compensation (frequently an annual bonus or profit-sharing contribution in those times/employers), you don’t have to pay taxes on the compensation you hadn’t (yet) received. That approach was not without its challengers (notably the IRS) and, according to the Employee Benefit Research Institute (EBRI), this culminated in IRS guidance in 1956 (Rev. Rul, 56−497), which was subsequently revised (seven years later) as Rev. Rul. 63−180 in response to a federal court ruling (Hicks v. U.S.) on the deferral of profit-sharing contributions. Enter the Employee Retirement Income Security Act of 1974 (ERISA), which – among other things – barred the issuance of Treasury regulations prior to 1977 that would impact plans in place on June 27, 1974. That, in turn, put on hold a regulation proposed by the IRS in December 1972 that would have severely restricted the tax-deferred status of such plans. But ERISA also mandated a study of salary reduction plans – which, in turn, influenced the legislation that ultimately gave birth to the 401(k).

So, how did something that became America’s retirement plan get added to a tax reform package? Rep. Barber Conable, top Republican on the House Ways & Means Committee at the time, whose constituents included firms like Xerox and Eastman Kodak (which were interested in the deferral option for their executives), promoted the inclusion which added permanent provisions to “the Code,” sanctioning the use of salary reductions as a source of plan contributions. The law went into effect on Jan. 1, 1980, and regulations were issued Nov. 10, 1981 (which has, at other times, also been cited as a “birthday” of the 401(k)).

Now, it’s said that success has many fathers, while failure is an orphan. The most commonly repeated story is that Ted Benna saw an opportunity in this new provision, recommended it to a client (which, ironically, rejected the notion), but then promoted it to a consulting firm (Johnson & Johnson), which then embraced it for their own workers. The reality is almost certainly more nuanced than that, though Mr. Benna (who now derides what he ostensibly created) has managed to be deemed the “father” of the 401(k) by just about every media outlet in existence (it may be worth noting that while I am the father of three children, their mother was much more involved in the actual delivery).

What we do know is that in the years between 1978 and 1982, a number of firms (EBRI cites not only Johnson & Johnson, but FMC, PepsiCo, JC Penney, Honeywell, Savannah Foods & Industries, Hughes Aircraft Company and a San Francisco-based consulting firm called Coates, Herfurth, & England) began to develop 401(k) plan proposals, many of which officially began operation in January 1982.

Within two years, surveys showed that nearly half of all large firms were either already offering a 401(k) plan or considering one. Two years later the Tax Reform Act of 1984 (again, among other things) interjected nondiscrimination testing for these plans – and two years after that the Tax Reform Act of 1986 tightened the nondiscrimination rules further, and reduced the maximum annual 401(k) before-tax salary deferrals by employees. And yet, despite those – and a number of other significant changes over the intervening years – employers have continued to offer – and America’s workers have continued to take advantage of these programs.

Now, it’s long been said that 401(k)s were never intended (nor designed) to replace defined benefit pensions – true enough.

However, in 1979, only 28% of private-sector workers participated in a DB plan, with another 10% participating in both a DB and a DC plan. In contrast, the Investment Company Institute notes that, among all workers aged 26 to 64 in 2014, 63% participated in a retirement plan either directly or through a spouse. As of June 2018, Americans have set aside nearly $8 trillion in defined contribution plans, and there’s another $9 trillion in IRAs, much of which likely originated in DC/401(k) plans.

Those who know how defined benefit (DB) plan accrual formulas work understand that the actual benefit is a function of some definition of average pay and years of service. Moreover, prior to the mid-1980s, 10-year cliff vesting schedules were common for DB plans. What that meant was that if you worked for an employer fewer than 10 years (and most did), you’d be entitled to a pension of … $0.00. And, as you might expect, certainly back in 1982, even among the workers who were covered by a traditional pension, many would actually receive little or nothing from that plan design. But then, certainly in the private sector those plans were funded, invested (and paid for) by the employer. Nothing ventured,1 nothing gained, right?

The reality is that the nation’s baseline retirement program is, and remains, Social Security. But for those who hope to do better, for those of even modest incomes who would like to carry that standard of living into post-employment, the nation’s retirement plan is, and has long been, the 401(k). And – despite a plethora of media coverage and academic hand-wringing that suggests they are wasting their time, the American public has, through thick and thin, largely hung in there – when they are given the opportunity to do so.

That may not have been the intent of the architects of the 401(k), or its assorted foster “parents” over the years. But these days it’s hard to imagine retirement without it.

So, happy 40thbirthday, 401(k). And here’s to 40 more!

Nevin E. Adams, JD

I know that some would argue that workers effectively bargained for lower wages in return for the pension benefit. Maybe once upon a time, certainly in labor situations where there actually was an active bargaining component. But I suspect that most non-union private sector workers post-ERISA felt no such trade-off.

Saturday, November 03, 2018

5 Things That (Should) Scare Plan Fiduciaries

Halloween is the time of year when one’s thoughts turn to trick-or-treat, ghosts and goblins, and things that go bump in the night. But what are the things that keep – or should keep – plan fiduciaries up at night?

Well, there are the things like…

Getting Sued

Plan sponsors will often mention their fear of getting sued (actually, their advisors frequently broach the topic), and little wonder. The headlines are (still) full of multi-million dollar lawsuits against multi-billion dollar plans, and if relatively few seem to actually get to a judge (and those that do have – to date – largely been decided in the plan fiduciaries’ favor), they nonetheless seem to result in multi-million dollar settlements. Oh, and not only has this been going on for more than a decade, the issues raised are evolving as well.

As a plan fiduciary, you can be sued, of course; and let’s not forget that that includes responsibility for the acts of your co-fiduciaries, and personal liability at that (see 7 Things an ERISA Fiduciary Should Know).

That said – and more than a decade after the first series was launched – those cases (still) seem to involve a relatively small group of rather large plans. If it’s (still) astounding that some of the plans do the things they are alleged to do (and not do), for those familiar with the math of contingent fee litigation, there’s little mystery to the big plan focus.

Of course, most plan sponsors won’t ever get sued, much less get into trouble with regulators. And those who do are much more likely to drift into trouble for things like late deposit of contributions, errors in nondiscrimination testing, or not following the terms of the plan.

Still worried about getting sued? As one famous ERISA attorney once told me, they might as well worry about getting hit by a meteor.

Plan Costs

Whether you feel that the aforementioned wave of litigation has been a force for good or ill, it has certainly contributed to a heightened awareness of fees by plan sponsors – and one that finally seems to be moving beyond squeezing that extra pound of flesh from recordkeepers (though there’s still plenty of that).

These days it’s as likely to show up in questions about shifting to passive options, or at least an inquiry about a different share class. Questions are good – actions potentially better.

Regardless, it would seem to be difficult to live up to ERISA’s fiduciary admonitions to ensure that the fees and services provided to the plan are reasonable if you don’t know what you’re getting, or how much you’re paying.

Target Date Fund Glidepaths

Remember 2008 – when so many discovered for the first time that target-date funds and their glide paths really are  different? Over the last decade, the sheer amount of money that has been invested in these QDIAs (most defaulted along with the expansion of automatic enrollment) – nearly $2 trillion at the end of 2017 – means that participants are likely better diversified than ever before, with portfolios that are regularly and professionally managed and rebalanced.

With luck, things like the 2008 financial crisis won’t recur in our lifetime. On the other hand, on the offhand chance that that – or something like it – does, this might be a good time to look under the bed – er, glidepath – and make sure that the assumptions incorporated there are consistent with expectations.

Personal Liability

Most of the aforementioned concern about being sued seems borne from a concern about the damage – both reputational and financial – to the organization that sponsors the plan. While that is certainly a well-founded and rational concern, plan fiduciaries, particularly plan sponsors, often seem oblivious to the reality that their liability as an ERISA fiduciary is… personal.

You can, of course, buy insurance to protect against that personal liability — but that’s likely not the fiduciary liability insurance that most organizations have in place. And it may not be enough.

Failing to Engage the Knowledge of a Prudent Expert

ERISA’s “prudent man” rule is a standard of care, and when fiduciaries act for the exclusive purpose of providing benefits, they must act at the level of a hypothetical knowledgeable person and must reach informed and reasoned decisions consistent with that standard.

The Department of Labor notes that “[l]acking that expertise, a fiduciary will want to hire someone with that professional knowledge to carry out the investment and other functions.”


Because, when it comes to the former, most people do – and as for the latter, many still don’t.

- Nevin E. Adams, JD

Saturday, October 27, 2018

5 Steps to Retirement Security

While it might not be on your calendar, this happens to be National Retirement Security Week – and in the spirit of the week, here are five things that can provide just that.

Retirement security – or more precisely, preparing so that you do have retirement security – is a year-long activity, of course. But this week is devoted to making employees more aware of how critical it is to save now for their financial future, promoting the benefits of getting started saving for retirement today, and encouraging employees to take full advantage of their employer-sponsored plans by increasing their contributions.

So, for those looking to shore up your own retirement security – or those you may work with – here are some things to keep in mind.

Don’t default to the plan default.

While most education materials provided with your 401(k) emphasize the benefit of the employer match (generally referencing that you don’t want to leave “free money” on the table), a growing number try to make it easier for you by automatically enrolling you in the plan. That’s the good news.

The bad news? That default savings rate (generally 3%) will almost certainly be less than you need to save to get the full employer match (see above). And it will almost certainly be less than you need to achieve your retirement goals/needs. So, if you do take advantage of the convenience of the default, make sure that you remember to make the change to the savings rate at the first opportunity.

You should save to at least the level of the employer match.

Many employers choose to encourage your decision to save for retirement by providing the financial incentive of an employer matching contribution. That match is often referred to as “free money” because you get it just for saving for retirement. That match is not actually “free” of course – but it is free for you. If it’s 25 cents for every dollar you save, it’s like getting a 25% return on your investment.

You can save more than the match.

A lot of people save only as much as they need to receive the full employer match. As noted above, while that’s certainly a good starting point, it may not be the right amount for you. There are a number of factors that go into determining the amount and level of the match – however, the amount you need to set aside for your own personal retirement goals is almost certainly not one of those factors. You certainly don’t want to leave any of that match on the table by not contributing to at least that level. But if that’s where you stop saving, you’re probably going to come up short.

Older workers can save (even) more.

Thanks to a provision in the tax code, individuals who are age 50 or older at the end of the calendar year can make annual “catch-up” contributions. In 2018, up to $6,000 in catch-up contributions may be allowed by 401(k)s, 403(b)s, governmental 457s, and SARSEPs (you can do this with IRAs as well, but the limits are much smaller).

The bottom line: If you haven’t saved enough over your working career, these catch-up provisions can help you… well, “catch up.” You can find out more here.

You can save for retirement even if you don’t have a plan at work.

Discussions about the retirement coverage “gap” often focus on the number of workers who don’t have access to a retirement plan at work (though the oft-repeated notion that “more than 50%” of workers who ostensibly don’t is a bit exaggerated). Not having a plan at work can be a hindrance to saving – there’s no employer match, ease of payroll deduction, or workplace education and access to advisors, for starters. And data suggests that workers are significantly more likely to save if they have the opportunity to do so via a workplace retirement plan like a 401(k) – 12 times more likely, in fact.

All in all, when it comes to building retirement security, there’s little question that saving for retirement at work is the way to go – there are tax advantages, the support of the employer matching contributions, and access to investment choices that are screened and reviewed on a regular basis by the plan fiduciaries.

But you can save for retirement on your own – open an IRA at your local bank or financial institution. And you can probably set it up for regular payroll deduction at work as well. It’s not as convenient as having a plan at work, but it can be done.

Don’t forget that while the steps above provide a way to achieve retirement security, saving for retirement without some idea of how much you’ll actually need for retirement is like heading out on a long trip with a broken fuel tank gauge. Take the time this week to do a retirement needs calculation. It doesn’t have to take long or be complicated. If you have a retirement plan at work, there’s probably a calculator available for that purpose – or you can check out the BallparkE$timate® online at

It’ll be good for your peace of mind – will likely improve your retirement security prospects and confidence – and, who knows – you might even enjoy it.

- Nevin E. Adams, JD

Saturday, October 20, 2018

Multiplication ‘Fables’

Did you hear the one about loan defaults adding up to $2.5 trillion in potential retirement savings shortfalls over the next 10 years? How about the “$210 Billion Risk in Your 401(k)”?

Those reports were based on an “analysis” by Deloitte that claims to find that “…more than $2 trillion in potential future account balances will be lost due to loan defaults from 401(k) accounts over the next 10 years…” That’s right, $2 trillion lost “due to loan defaults” (the Wall Street Journal apparently picked the figure that matched the impact on a “typical 401(k) borrower” – more on that in a minute).

Now, when you see headlines putting a really big number on what you already suspect is a problem – in this case “leakage” – roughly defined as a pre-retirement withdrawal of retirement savings – well, you could hardly be blamed for simply accepting at face value the most recent attempt to quantify the impact of the problem.

A closer look at the assumptions behind that analysis, however, puts things in a different light.
The Deloitte paper leads with the question “How can we keep loan defaults from draining $2 trillion from America’s 401(k) accounts?” – but despite the positioning of the premise that this is a leakage issue, the loan default turns out to be only a small part of the problem.

The Deloitte authors outline the assumptions underlying their conclusions in the footnote of the 12-page document. Specifically, they draw many of their starting points from a 2014 study, “An Empirical Analysis of 401(k) Loan Defaults,” which found that with 86% of the participants that terminated employment with loans outstanding defaulted on those loans – and took their entire account balance out at the time of loan default. That report also noted that the average age1 of the loan defaulter was 42. The Deloitte authors also draw from Vanguard’s “How America Saves 2018” that the average loan default was approximately 10.1% of the total account balance.

And then, with that as a foundation, the Deloitte authors begin to build.

The Deloitte modeling assumption relies on the notion that the vast majority of participants who default on these loans take their whole balance out of the plan. Rather than using the 86% assumption from the 2014 study, they scaled it back to a more conservative assumption that (only) 66% of participants that defaulted on their loan also took their entire account balance. They then back into the total account balance that those individuals would ostensibly have ($47.8 billion, assuming that their loan is 10% of their total balance) that they claim, based on the earlier assumptions, would be withdrawn in addition to the outstanding loan amounts. They then project growth in those totals assuming that everyone in that group is 42 (the average age of a loan defaulter) all the way out to age 65, assuming a 6% return over that period – and wind up with $2.5 trillion!

Now, there are so many assumptions imbedded in that calculation – and so many that act as multipliers on the original assumptions – it’s hard to know where to start.

To put it in individual terms, the Deloitte analysis assumes that every borrower is 42 years old, that two-thirds of these that default not only do so on a loan of $7,081 (the average outstanding loan amount), but go on to cash out their remaining account balance of $70,106 (assuming, of course, that the loan amount is approximately 10% of the balance). They then assume – and this is the assumption based on complete speculation – that there was no subsequent rollover, nor any renewal of contributions anywhere over the rest of their working lives – while also assuming that they could have attained a 6% return on those monies over that extraordinary period of time if only they hadn’t cashed out.

Still with me?

What’s obvious is that the bulk – indeed, the vast majority – of that projected impact comes not from the highlighted loan defaults – which are, in fact, a mere fraction of the terminating participants’ 401(k) balance – but from what the Deloitte authors term the “leakage opportunity cost” – basically it’s the “magic” of compounding applied to both the defaulted loan and the other 90% of the participant account balance… at a 6% rate of return over nearly a quarter century.

They say that two “wrongs”2 don’t make a right – and that’s particularly true when multiplication is involved.

It’s not that the math isn’t accurate. It’s just that the answer doesn’t “figure.”

Nevin E. Adams, JD
  1. There are always potential problems with extrapolating conclusions from averages. That said, the 2014 study from which those averages are drawn note that participants who defaulted on their loan were more likely to have larger loan balances than those who repaid, and to have lower household incomes and smaller 401(k) balances – in sum, not exactly “average.”
  2. The paper also makes some curious comments about loans and fiduciary liability – but we’ll deal with those in a future post.

Saturday, October 13, 2018

The ‘Storm’ of Your Lifetime

The tail end of hurricane season — and more specifically the disastrous flooding of Hurricane Florence — brings to mind my last serious brush with nature’s fury.

It was 2011, and we had just dropped our youngest off for his first semester of college in North Carolina, stopped off long enough in Washington, DC to check in with our daughters (both in college there at the time), and then sped home up the east coast to Connecticut with reports of Hurricane Irene’s potential destruction and probable landfall(s) close behind. We arrived home, unloaded in record time, and rushed straight to the local hardware store to stock up for the coming storm.

We weren’t the only ones to do so, of course. And what we had most hoped to acquire (a generator) was not to be found — there, or at that moment, apparently anywhere in the state.

What made that situation all the more infuriating was that, while the prospect of a hurricane landfall near our Connecticut home was relatively rare, we’d already had one narrow miss with an earlier hurricane and had then, as on several prior occasions, been without power, and for extended periods. After each I had told myself that we really needed to invest in a generator — but, as we know, inertia is a powerful force, and reasoning that I had plenty of time to do so when it was more convenient, I simply (and repeatedly) postponed taking action. Thankfully my dear wife wasn’t inclined to remind me of that at the time, but the regrets loomed large in my mind.

Retirement Ratings?

People often talk about the retirement crisis in this country, but like a tropical storm still well out to sea, there are widely varying assessments as to just how big it is, and — to borrow some hurricane terminology — when it will make “landfall,” and with what force. Most of the predictions are dire, of course — and while they often rely on arguably unreliable measures like uninformed levels of confidence (or lack thereof), self-reported financials and savings averages — it’s hard to escape a pervasive sense that as a nation we’re in for some rough weather, particularly in view of the objective data we do have — things like coverage statistics and retirement readiness projections based on actual participant data.

Life is full of uncertainty, and events and circumstances, as often as not, happen with little if any warning. Even though hurricanes are something you can see coming a long way off, there’s always the chance that they will peter out sooner than expected, that landfall will result in a dramatic shift in course and/or intensity, or that, as with some (like Florence) — the most devastating impact is what happens afterward. In theory, at least, that provides time to prepare — but, as I was reminded when Irene struck, sometimes you don’t have as much time as you think you have.

Doubtless, a lot of retirement plan participants are going to look back at their working lives as they near the threshold of retirement, the same way I thought about that generator. They’ll likely remember the admonitions about (and their good intentions to) saving sooner, saving more, and the importance of regular, prudent reallocations of investment portfolios. Thankfully — and surely because of the hard work of advisors and plan sponsors — many will have heeded those warnings in time. But others, surely — and particularly those without access to a retirement plan at work — may find those post-retirement years (if indeed they can retire) to be a time of regret.

As retirement advisors are well aware, the end of our working lives inevitably hits different people at different times, and in different states of readiness. But we all know that it’s a “landfall” for which we need to prepare while we still can.

- Nevin E. Adams, JD

Saturday, October 06, 2018

'Puzzle' Pieces

Academics have long agonized over something they call the annuitization puzzle.

Simply stated, the thing academics can’t quite understand is the reluctance of American workers to embrace annuities as a distribution option for their retirement savings. Some of that is because they assume workers are “rational” when it comes to complex financial decisions, specifically because “rational choice theory” suggests that at the onset of retirement, individuals will be drawn to annuities because they provide a steady stream of income and address the risk of outliving their income.

Compounding, if not contributing to that belief, are surveys – albeit surveys generally published, if not conducted by, annuity providers (or supporters) that consistently find support from participants for the notion of reporting benefits as a monthly payout sum, if not the notion of providing a retirement income option. And yet, despite those assertions, in the “real” world where participants actually have the option to choose between lump sums and annuity payments, they pretty consistently choose the former.

That said, a study by the non-partisan Employee Benefit Research Institute (EBRI) also supports the notion that plan design matters, and matters to a large extent, in those annuitization decisions.

Over the years, a number of explanations have been put forth to explain this reluctance: the fear of losing control of finances; a desire to leave something to heirs; discomfort with entrusting so much to a single insurer; concern about fees; the difficulty of understanding a complex financial product; or simple risk aversion. All have been studied, acknowledged and, in many cases, addressed, both in education and in product design, with little impact on take-up rates.

Yet today the annuity “puzzle” remains largely unsolved. And, amid growing concerns  about workers outliving their retirement savings, a key question – both as a matter of national retirement policy and understanding the potential role of plan design and education in influencing individual decision-making – is how many retiring workers actually choose to take a stream of lifetime income, versus opting for a lump sum.

‘Avail’ Ability

Some of that surely can be attributed to the lack of availability. Even today, industry surveys indicate that only about half of defined contribution plans provide an option for participants to establish a systematic series of periodic payments, much less an annuity or other in-plan retirement income option. Indeed, I’ve never met a plan sponsor who felt that the official guidance on offering in-plan retirement income options was “enough.”

Enter the bipartisan Retirement Enhancement and Security Act (RESA), which includes a provision to require lifetime disclosures – and while its prospects seem bright, it remains only a prospect. Closer to a current reality is Tax Reform 2.0, but the retirement component of the legislation approved by the House Ways and Means Committee on Sept. 13 did not address the subject – or at least didn’t until the Chairman Kevin Brady introduced a Managers’ Amendment that largely, if not completely, mirrors RESA’s.

That 8-page addition outlines a “fiduciary safe harbor” for the selection of a lifetime income provider, which, as its name suggests, binds the liability to a consideration “at the time of the selection” that the insurer is financially capable of satisfying its obligations under the guaranteed retirement income contract. It also clarifies that there is no requirement to select the lowest cost contract, and that a fiduciary “may consider the value of a contract, including features and benefits of the contract and attributes of the insurer” in making its determination. Moreover, there is language that notes that “nothing in the preceding sentence shall be construed to require the fiduciary to review the appropriateness of a selection after the purchase of a contract for a participant or beneficiary.”

At this point, it’s impossible to say whether this legislation will be signed into law, much less whether it will prove sufficient to assuage the concerns that have continued to give most plan sponsors pause in adopting this feature.

A couple of things seem clear, however. First, as long as plan fiduciaries continue to feel vulnerable to a generation of potential liability for provider selection beyond the initial selection, they aren’t likely to provide the option.

And participants who are not given a lifetime income choice as a distribution option will surely not (be able to) take it.

- Nevin E. Adams, JD

See 5 Reasons Why More Plans Don’t Offer Retirement Income Options

Saturday, September 29, 2018

Data "Minding"

Just when you thought retirement plan projections couldn’t get any worse…

Last week the National Institute on Retirement Security released a report – “Retirement in America | Out of Reach for Most Americans?” that claimed that the median retirement account balance among all working individuals is… $0.00. Moreover, that same report claims that “57 percent (more than 100 million) of working age individuals do not own any retirement account assets in an employer-sponsored 401(k)-type plan, individual account or pension.”

It’s not the first time the NIRS has produced reports finding significant problems with the nation’s private retirement system. Indeed, this report “builds on previous NIRS research published in 2015,” though the conclusions presented here seem unusually stark.
Then, as now, the NIRS conclusions rely heavily on self-reported numbers from the Federal Reserve’s Survey of Consumer Finances (SCF) and the U.S. Census Bureau’s Survey of Income and Program Participation (SIPP). The report’s authors acknowledge that the latter “oversamples” lower-income household which, as the report notes, are less likely to be covered by, or to participate in, an employer-sponsored retirement plan.

‘Self’ Sufficient?

The issues with self-reporting have been well-documented – so much so that even the report’s authors acknowledge (albeit in a footnote) that it “…can be problematic for the reporting of account balances and participation in particular types of retirement plans, such as DB pension plans.” In fact, previous research by Irena Dushi, Howard M. Iams and Jules Lichtenstein using SIPP data matched to the Social Security Administration’s (SSA’s) W-2 records found that the DC pension participation rate was about 11 percentage points higher when using W-2 tax records compared with respondent survey reports, “suggesting that respondents either do not understand the survey questions about participation or they do not recall making a decision to participate in a DC plan.” Those authors also found inconsistencies between the survey report and the W-2 record regarding contribution amounts to DC plans. In fact, those researchers found that about 14% of workers who self-reported nonparticipation in a defined contribution (DC) plan had, in fact, contributed (per W-2 records), while 9% of workers self-reported participation in a DC plan when W-2 records indicated no contributions.

Supplementing SIPP survey reports with actual information on tax-deferred contributions in W-2 records, the researchers found that the percentage of employees who were offered a retirement plan increased from 72% in 2006 to 75% in 2012, whereas the participation rate in any retirement plan among all private-sector workers increased from 58% to 61% over this period (a difference that may seem small, but is statistically significant at the 5% level).

Participation, Rated

Compounding the issues, for participation data, the NIRS draws on the Current Population Survey (CPS), even though the report’s own footnotes acknowledge that “the 2014 redesign of CPS produced much lower participation rates for working Americans in years after 2014 (participation in 2014 was at 40.1% but at 31.7% in 2017), which has not been fully explained.” They aren’t the only ones to take note of this aberration (see CPS Needs a New GPS and Commonly Cited Participation Gauge Misses the Mark, Study Says), but decide, for reasons not fully explained, to rely on the data there anyway. Indeed, a June 2018 report on the impact of the changes in the CPS by the nonpartisan Employee Benefits Research Institute (EBRI) cautions that “the estimates from the most recent surveys could easily be misconstrued as erosions in coverage, as opposed to an issue with the design of the survey.”

Moreover, when it comes to assessing retirement readiness, the NIRS analysis extrapolates target retirement savings needs based on a set of age-based income multipliers – income multipliers, it should be noted, that have no apparent connection with actual income, or with actual spending needs in retirement, although this year the report’s authors acknowledge that those are “rule-of-thumb multipliers and are not based on detailed projections of the income needs of individuals,” all of which, in the authors’ words means that their “analysis in aggregate terms, is broadly suggestive rather than definitive.”

Median, Well…

However, much of the data – and key elements, such as wealth, income, participation and retirement savings – that underlie the conclusions is “self-reported” which, as noted above, even the report’s authors acknowledge “…can be problematic…”. It is perhaps a necessary “evil” when seeking to draw broad-based conclusions from limited samplings, but – particularly when sweeping generalizations are posited based on the medians of such samplings, when labels like “typical” are affixed and assumed without explanation – well, let’s just say that caution in applying the conclusions seems well-advised.

Not that the report is completely off the mark; it points out that those with access to retirement plans are significantly better off than those who lack that access, but also that retirement plan coverage has languished at about the 40% level in the private sector for some time now. Clearly solutions that help work to close this coverage gap, and provide more workers with an easier opportunity to save (let’s face it, nothing stops folks from walking down to their local financial services institution and opening an IRA, but the data suggests that those with access to a plan at work are 12 times more likely to do so) are needed.

Ultimately, the recommendations put forth by the NIRS report authors – to strengthen social security, expand access to workplace retirement plans, and expand the saver’s credit – should serve to narrow the gaps in retirement plan access and adequacy.

Even if the data that outlines the situation – and purports to justify those actions – leaves something to be desired.

- Nevin E. Adams, JD

Saturday, September 22, 2018

Misbehavioral Finance

It’s hard to believe it’s now been 10 years since the 2008 financial crisis. Let’s face it — no matter how busy or hectic your week has been, I’m betting it’s been a walk in the park compared to those times.

Yes, it was just 10 years ago this week that Lehman Brothers filed for bankruptcy — the same day that Bank of America announced its plans to acquire Merrill Lynch, and a day on which, not surprisingly, the Dow Jones Industrial Average closed down just over 500 points. That, in turn, was just a day before the Fed authorized an $85 billion loan to AIG — and that on the same day that the net asset value of shares in the Reserve Primary Money Fund “broke the buck.” This was made all the more surreal to me because it was going on while I — and several hundred advisers — were in the middle of an adviser conference. Not that the folks on the panels were getting much attention.

The funny thing is, looking back (and armed with the prism of 20/20 hindsight), there were lots of signs of the trouble that eventually cascaded like a set of dominos, resetting not only the structures of the financial services industry, but also disrupting the businesses and lives of thousands (if not tens of thousands) of advisers, not to mention the retirement plans of millions of workers worldwide.

The question that many of us have been asking ourselves (or perhaps been asked by our clients) since is — why didn’t we do something about it — before it happened?

Now, doubtless, some of you did. And those of you who didn’t can hardly be faulted for not fully appreciating the breadth, and severity, of the financial crisis we with which we were “suddenly” confronted. Still, having lived through a number of other “bubbles” during the course of my career, “afterwards” I’m always wondering why so many wait so long — generally too long — to get out of the way.

Greed explains some of it: As human beings, we may later disparage the motives of those who, with leverage and avarice, press markets to unsustainable heights (from which they inevitably fall) — though we are frequently willing to go along for the ride. Some of that can surely be explained by our human proclivity to stay with the pack, even when it seems destined for trouble, and some surely by nothing more than an inability to recognize the portents that precede the coming fall. When it comes to retirement plan participants, mere inertia surely accounts for most, though some are doubtless waylaid by bad, or inattentive, counsel.

There is, of course, a behavioral finance theory called “prospect theory,” which claims that human beings value gains and losses differently; that we are more afraid of loss than optimistic about gain. An extension of that theory, the “disposition effect,” claims to explain our tendency to hold on to losing investments too long: to avoid acknowledging our investing mistakes by actually selling them. It is, of course, an attribute rationalized every time someone says that the losses in our portfolios are “unrealized.” Unfortunately for investors planning for their retirement, unrealized and unreal are not the same thing.

We all know that markets move up and down, of course, and we must do the things we do without the benefit of a crystal-clear view of what lies just over the horizon. We also know that “staying the course” is the inevitable (and generally wise) counsel provided in the midst of the markets’ occasional storms. And, unlike 2008, other than the markets’ dizzying heights, and a fair amount of economic uncertainty regarding trade policies and the like, to this admittedly untrained eye there doesn’t seem to be the same sort of “bubble” that led to the 2008 crisis.

That said, with the markets at all-time highs, and as we stand at the 10-year anniversary of the 2008 tumult, it seems a good time to ask: Are you looking out for trouble — as well as opportunity?

- Nevin E. Adams, JD

Tuesday, September 11, 2018

Never Forget

Early on a bright Tuesday morning in September, I was in the middle of a cross-country flight, literally running from one terminal to another in Dallas, when, much to my dismay, my cell phone rang.

It was my wife. It was September 11, 2001.  I had been on an American Airlines flight heading for L.A., after all — and at that time, not much else was known about the first plane that struck the World Trade Center. I thought she had to be misunderstanding what she had seen on TV. Would that she had…

It’s been 17 years since then – and yet every year on September 11, I can’t help but recall the events of that day.  How on that day in particular, when family and friends were so particularly dear and precious, I spent stranded in a hotel room in Dallas. It was perhaps the longest day — and loneliest night — of my life.

In fact, I was to spend the next several days in Dallas — there were no planes flying, no rental cars to be had — I was literally separated from home and family by hundreds of insurmountable miles for three interminably long days. As that long week drew to a close, I finally was able to acquire a rental car and begin a long two-day journey home. During that long, lonely drive, I had lots of time to think, to pray, and yes, to cry.  Most of that drive is a blur to me now, just mile after endless mile of open road.

There was, however, one incident I will never forget. Somewhere in the middle of Arkansas, a large group of bikers was coming up around me. A particularly scruffy looking guy with a long beard led the pack on a big bike — rough looking – the kind you generally aren’t happy to see coming up behind you on a lonely deserted highway. But unfurled behind him on his Harley was an enormous American flag. And at that moment, for the first time in 72 hours, I felt a sense of peace — the comfort you feel inside when you know you are going…home.

Seventeen years later, I can still feel that ache of being separated from those I love — and yet, even amidst the acrimony of our current political climate, I’m still able to recall the warmth I felt when I saw that biker gang pass by me flying our nation’s flag.

On not a few mornings since that awful day, I’ve thought about how many went to work, how many boarded a plane – as many will today - not realizing that they would not get to come home again. How many sacrificed their lives so that others could go home. How many put their lives on the line every day still, here and abroad, to help keep us and our loved ones safe.

We take a lot for granted in this life, perhaps nothing more cavalierly than that there will be a tomorrow to set the record straight, to right inflicted wrongs, to tell our loved ones just how precious they are. On this day – as we remember that most awful of days - let’s all take a moment to treasure what we have — and those we have to share it with still.


Saturday, September 08, 2018

Will the Administration’s Executive Order ‘Work’?

Over the coming weeks, a question that you’re likely to see posed (again and again) about the President’s Executive Order is – “will it work?”

“Work” in this case means to expand access to workplace retirement plans, for that is the stated policy of the Trump administration in issuing the order.

The answer, of course, will depend in no small part on what emerges as a result. While it’s hard to argue with the underlying principle, and even less with the foundational arguments (“Enhancing workplace retirement plan coverage is critical to ensuring that American workers will be financially prepared to retire” and “Regulatory burdens and complexity can be costly and discourage employers, especially small businesses, from offering workplace retirement plans to their employees”), at this point the order is no more than a directive to the Labor and Treasury Departments to consider and recommend some alternatives.

That said, the directives are reasonably specific – to look into ways to expand access to multiple employer plans (MEPs), and even more specifically, to look into ways to expand access to workplace retirement plans by those with “non-traditional employer-employee relationships,” to review ways to make retirement plan disclosures more “understandable and useful,” including a consideration of a “broader use” of electronic disclosures, and to at least look into and consider changes to the life expectancy assumptions imbedded in current required minimum distribution calculations.

As for the MEP directive – it’s well established that access to a workplace retirement plan has a significant positive impact on retirement security, and on the likelihood that individuals will save for retirement, and so anything that expands access to those programs is a good thing. As for the impact of MEPs, well, providers have long touted the ability of a multiple employer plan structure to expand coverage – and since plans at the smaller end of the market are unarguably sold, and not bought, at a minimum it should make it easier to profitably support and provide services to that market. But again, and as I’ve noted before, all MEPs are not created equal in terms of the security they offer retirement savings – and so, the ability to deliver on those promises will depend on the final recommendation.

While open MEPs – certainly a version that permits non-related employers to join together, and that addresses the “one bad apple” concern – are clearly the big deal in this particular order, the potential impact of the other two initiatives have the potential to be significant. For example, a recent study (underwritten by the American Retirement Association and the Investment Company Institute) of the impact of a shift in e-delivery assumptions found that participants could save more than $500 million per year, assuming about eight participant mailings per year across more than 80 million 401(k) account holders.

As for the impact of a change in the RMD calculations – well, for some people at least, that could provide some relief as well. A new study by the nonpartisan Employee Benefit Research Institute (EBRI) finds that the withdrawal amounts taken by those 71 or older are generally no greater than the RMD. In fact, in 2016, more than three-quarters of those 71 or older took only the amount they were required to take – and so, if they were required to take less, that might well mean savings that would last longer.

So, with any luck at all, this might well add up to more retirement plans, more retirement plan savers, and retirement plan savings that might last longer.

Here’s hoping.

- Nevin E. Adams, JD