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

Saturday, September 01, 2018

Reference ‘Points’

Several years back, I was talking with a colleague about the current state of the U.S. economy – and as a comparison point, I pointed to the mid-1980s. “I wasn’t even born then,” she said. At which point I realized that what I considered to be a relevant point of comparison was, to my coworker, ancient history.

That memory comes back to me every year with the release of Beloit College’s annual “Mindset List.” As that coworker discussion reminds me, a lot can change in (just) 18 years, but these same 18 years also make up the mindset – or “event horizon” ­– of today’s entering college students.

The kids many of you just dropped off at college – the Class of 2022 – were (for the most part), born in 2000, the first year of the new millennium. The folks that compile this list know that those differences in experience and points of reference have an impact on the (perceived) relevance of the points we might try to make in college teaching – and even in terms of financial matters, saving, and, yes – retirement.

For example, those students that were just dropped off at college:
  • Have always been able to refer to Wikipedia.
  • Have always known a world where U.S. troops were stationed in Afghanistan.
  • Will never fly TWA or Swissair airlines (much less Eastern Airlines or Piedmont Airlines).
  • Have always seen Priuses on the highways.
  • Have never used a spit bowl in a dentist’s office.
  • Have never had to deal with “chads,” be they dimpled, hanging or pregnant.
  • Have always used lightbulbs that were shatterproof.
When it comes to retirement, the Class of 2022 also stands to have a different perspective. For them:
  • There have always been 401(k)s.
  • There has always been a Roth option available to them (401(k), 403(b) or IRA).
  • They’ve never had to sign up for their 401(k) plan (since, particularly among larger employers, their 401(k) automatically enrolls new hires).
  • They may never have to make an investment choice in their 401(k) plan. (Their 401(k) has long had a QDIA default option to go with that auto-enroll feature.)
  • They’ve always had access to target-date funds, managed accounts, or similar vehicle that automatically allocates (and, more significantly, re-allocates) their retirement investments.
  • They’ve always had fee information available to them on their 401(k) statement. (It remains to be seen if they’ll understand it any better than their parents.)
  • They’ve always been able to figure out how much they need to save for a financially secure retirement (though they may not be any more inclined to do so than their parents).
  • They’ve always been able to view and transfer their balances online and on a daily basis (and so, of course, they mostly won’t).
  • They’ve always worried that Social Security wouldn’t be available to pay benefits. (In that, they’re much like their parents at their age.)
  • Many have never had to wait to be eligible to start saving in their 401(k). (Their parents typically had to wait a full year.)
Despite those differences, the class of 2022 will one day soon be faced with the same challenges of preparing for retirement as the rest of us. They’ll have to work through how much to save, how to invest those savings, what role Social Security will play, and – eventually – how and how fast to draw down those savings.

But perhaps most importantly, they’ll have the advantage of time, a full career to save and build, to save at higher rates, and to invest more efficiently and effectively.

And, with luck, have an advisor available to answer their questions along the way.

- Nevin E. Adams, JD

Saturday, August 25, 2018

‘Automatic’ Transmission: Does Auto-Enrollment Create Leakage?

Most people view automatic enrollment in a 401(k) as a good thing1 – but apparently it has a heretofore unappreciated “dark” side.

At least that was the focus of a headline in a recent Wall Street Journal article (subscription required) that asked (and answered) the provocative question: “401(k) or ATM? Automated Retirement Savings Prove Easy to Pluck Prematurely.”

That is at least how the Journal chose to position its coverage of a study based on a single firm’s experience with automatic enrollment. That study, according to the Journal, serves to “answer a question that has long concerned employers that put workers into 401(k) plans and give them the option to drop out, rather than requiring them to sign up on their own: Will auto-enrolled workers treat their 401(k)s like automated-teller machines?”

Now, I’ve heard a lot of questions over the years from plan sponsors about automatic enrollment – but never that one.

Regardless, the Journal says that the study provides an affirmative response to the question – but (and you can almost hear the disappointed sigh) “…not to the extent that the workers spend all their gains from auto-enrollment.” Nor is it the first time that the Journal has taken aim at automatic enrollment.2

Now the researchers themselves – John Beshears, David Laibson and Bridget Madrian of Harvard, and James Choi of Yale – have solid retirement plan researcher “cred.” And, comparing employees hired in the 12 months after the introduction of automatic enrollment to those hired in the 12 months prior, they find that automatic enrollment increases total potential retirement system balances by 7% of starting pay eight years after hire.

On the other hand, they also find that leakage “in the form of outstanding loans and withdrawals that are not rolled over into another qualified savings plan” (more on that in a minute) also increase – by 3% of starting pay, which they say offsets approximately 40% of the potential increase in savings from automatic enrollment. Of course, even then, they acknowledge that the “net effect is that automatic enrollment increases retirement system balances by 4-5% of first year pay eight years after hire.”

‘Ample’ Turnover?

Here’s the thing: This is the experience at a single firm. Granted, it’s described as a large (approximately 7,500-participant), Fortune 500 financial services firm – but it’s one that the researchers concede has high turnover. It’s also, based on the salary information provided, one with relatively modest income workers. And automatic enrollment did “work” – transforming the plan’s participation rate from 62% to 98%.

So, this employer adopts automatic enrollment in a plan of modest income workers – creating more, albeit arguably smaller account balances – for a workforce that has high turnover – and since they have smaller balances, more likely to be below the cashout thresholds, and thus resulting in a higher number of termination payout “leakage.”

Cash Out ‘Cache’?

The Journal tries to craft a picture that automatically enrolled participants are more likely to cash out than other participants – and arguably they may well be less committed to the savings proposition. In fact, the study found (and the Journal article notes) that more than half of the auto-enrolled participants – 59% – cashed out their savings (largely driven by terminations), while among those who signed up for the plan on their own, the figure was 43%.

But was it automatic enrollment – or the smaller balances that resulted from a 3% default contribution rate at termination – that produced that result? I think we can all sense what the answer is – but the researchers note that a greater proportion of the automatically enrolled workers had balances below the $1,000 cashout threshold. Lest we need any further affirmation, even then, the researchers note that those net results “mask substantial differences across those who remain employed at the firm versus those who separate” – with the former seeing relatively little impact from leakage.

Change ‘Ranges’

And while the researchers don’t make much distinction in the impact of different types of leakage, the nonpartisan Employee Benefit Research Institute (EBRI) has previously considered the issue, and found that cashouts at job change were found to have a much more serious impact on 401(k) accumulation than either plan loan defaults or hardship withdrawals (even with the impact of a six-month suspension of contributions included). How much more? Well, cashouts at termination were approximately two-thirds of the leakage impact.

Even the best researchers are limited by the amount and quality of the data. While they are careful to outline those factors in the study, the coverage of such things tends to gloss over the details that might impact the broad-based applicability of the results – things like the fact that these results are from a single employer, with high turnover and modest-incomes, a combination that may well mean that the amount – and impact – of the leakage is exacerbated.

Ultimately, the point of the study might well be a call to make it easier for individuals with smaller balances to leave their employer without cashing out their savings.

That’s hardly the fault of a plan design that helped a third more workers who weren’t saving do better. But it seems that if there’s the slightest possibility of a potential downside, the negative coverage is… automatic.

- Nevin E. Adams, JD

  1. There are some administrative issues with automatic enrollment – see Why Your Recordkeeper Might Not Be an Automatic Enrollment Fan.
  2. Earlier this year the Journal, in an article plainly titled, “Downside of Automatic 401(k) Savings: More Debt” (subscription required), cited another academic study noting that automatic enrollment has “pushed” millions of people who weren’t previously saving for retirement into those plans – but quickly cautioned that “many of these workers appear to be offsetting those savings over the long term by taking on more auto and mortgage debt than they otherwise would have.” And back in 2013, the Journal had an article titled, “Mixed Bag for Auto-enrollment,”  claiming that “employees who are automatically enrolled in their workplace savings plans save less than those who sign up on their own initiative.” That article, in turn, built on – and cited – a 2011 article that suthoir Anne Tergesen jaw-droppingly titled, “401(k) Law Suppresses Saving for Retirement.” In the case of the latter, Tergesen glommed on to one of 16 possible scenarios, and focused on the notion that some workers would simply rely on the mechanics of automatic enrollment’s 3% default, rather than picking the higher rate that they might if they filled out an enrollment form (encouraged by things like education meetings and incentivized by things like a company match).

Saturday, August 04, 2018

‘Multiple’ Choices: All MEPs Not Created Equal

Delegates to last week’s NAPA DC Fly-In Forum had a lot to learn and say about a wide array of topics – but multiple employer plans (MEPs) dominated the discussion.

The reason, as has been noted in previous coverage on NAPA Net, is the Small Business Employees Retirement Enhancement Act, introduced earlier this month by Sen. Tom Cotton (R-AR), which includes provisions regarding so-called “open” MEPs, a type of employee benefit plan that can be maintained as a single plan in which two or more unrelated employers participate. This is a concept that has received bipartisan support on Capitol Hill, and of which the American Retirement Association has been largely supportive, viewing it as a device that could broaden coverage by encouraging employers to offer a plan.

However, under this bill, employers that have 100 or fewer employees who earned at least $5,000 during the preceding year and that participate in a pooled employer plan (PEP) registered with the Labor Department (though exactly what, if any, validation would occur as part of this registration is currently unclear) would not be considered a fiduciary to that plan – including with respect to the selection and monitoring of any plan service provider or any investment under the plan.

That’s right – for the first time since the passage of ERISA in 1974, the employer – in what remains an employment-based retirement system – would basically have no fiduciary role.

Barriers ‘Riff’

The proponents of this approach apparently think this level of involvement is a barrier to small employer adoption of these plans. There’s just one problem; that doesn’t seem to be the case when you actually survey employers who aren’t offering a plan as to why that’s the case.

For example, consider a 2017 survey of employers by Pew Charitable Trusts. Among those employers, 37% cited “too expensive to set up” as a “main” reason, and 71% as a reason. A lack of resources to administer the plan was cited by 22% as a main reason, and 63% as a reason. “Employees not interested” was a reason for half the respondents, and a main reason for 17%. Nearly a quarter (22%) noted they hadn’t even thought about it. Concerns about fiduciary liability? Not even on the list.

These trends have been pretty consistent over time. As far back as 2003 in the Small Employer Retirement Survey published by the nonpartisan Employee Benefit Research Institute, employers cited uncertain revenue (27%) as a top reason, costs of setting up/running a plan (16%), employees not interested (12%), and a concern that too much of the plan’s benefit would go to short-term workers (also 12%). Where did fiduciary concerns rank? Once again, they weren’t even on the list.

One place where fiduciary concerns were mentioned was a 2015 survey by the Transamerica Center for Retirement Studies. However, that survey found that concerns about fiduciary liability was cited by just 13% of employers – the very last item on their list of reasons (except for “other”). It was dwarfed by reasons like company is not large enough (58%), cost concerns (50%), employees not interested (32%), company/management not interested (27%), and concerned about administrative complexity (19%).

In sum, the issues that are holding employers back – and that have long held employers back – don’t have anything to do with fiduciary liability.

The good news is that when you look through those survey results to the things that are actually holding employers back, there are things that an open MEP could help solve, issues like cost and administrative complexity.

What Could Go Wrong?

Indeed, those who fail to appreciate the importance of employer involvement would be well advised to recall the case of Matt Hutcheson, who, after years of lecturing the industry on the importance of fiduciary standards, was sentenced to 17 years in prison by a federal judge in Boise, ID on 17 counts of a wire fraud scheme to steal $5 million of pension funds he oversaw to enrich himself and his family as well as buy a cash-strapped resort. An estimated 250 people lost money as part Hutcheson’s misconduct, with one person losing $950,000.

See, it wasn’t a regulator that detected Hutcheson’s criminal acts, and it sure wasn’t the MEP he was running – it was a plan sponsor.

Doubtless, those looking to insulate the plan sponsor from fiduciary liability are focused on removing what they think – or have been told – is a barrier to plan adoption, and thus see the elimination of that role as a step on the path to increasing retirement plan coverage. Doubtless there are MEP providers willing to assume the “transfer” of that responsibility.

The result, however, is more likely akin to removing a barrier between a fox and the henhouse.

- Nevin E. Adams, JD
Note: A 2012 GAO report notes that the Labor Department has said the potential for inadequate employer oversight of the MEP is greater because employers have passed along so much responsibility to the entity controlling the MEP, and that potential abuses might include layering of fees, misuse of the assets, or falsification of benefit statements. One pension expert also observed that small businesses do not extensively research retirement plans or actively seek them out. As a consequence, marketing may be the biggest determinant of MEP growth.

Saturday, July 21, 2018

7 Reasons Retirement Income Solutions Stall

A recent report suggests that participants are “clueless” about decumulation. And who can blame them?

Actually, the issue is perhaps more basic than a decumulation strategy. The report – by Cerulli Associates – based that conclusion on a survey that merely asked 401(k) investors who were at least 45 what they planned to do with those savings when they retired. In response, a quarter said they didn’t know, and another quarter said they planned to consult with an advisor – an alternative that Cerulli characterized as “a marginally more prepared version” of the same response.

I’ve long noted that while workers love pensions, they hate (or are at least ambivalent about) annuities – and while there’s a bit of hyperbole there, at least as things stand today, writ large, plan sponsors still seem to be keeping retirement income options at arm’s length – and by that I mean outside the plan’s distribution options. Participant interest and takeup is even less enthusiastic – which only serves to affirm the plan sponsor reluctance.

The provider community is nonplussed, and no wonder. There are plenty of surveys out there suggesting that participants want lifetime income options (though, let’s face it, many of those are sponsored or conducted by providers of those options), no shortage of academic studies that suggest participants would benefit from their availability (if not their mandate), the occasional legislative proposal to expand and/or mandate them as a distribution default, and even ongoing, if modest, support from regulators who also clearly favor the option.

And yet the reality is that when actually given the choice (and in fairness, most DC plans don’t offer anything remotely resembling a true retirement income option), the vast majority of participants don’t avail themselves of the option. Even those in defined benefit plans seem inclined to “take the money and run” given the chance.

Here are some thoughts on why – and what might have to change.

They don’t know how much they’ll need.

For more than 25 years, the nonpartisan Employee Benefit Research Institute (EBRI) has, in its Retirement Confidence Survey, chronicled just how few individuals have even hazarded a guess as to how much income they will need in retirement.

Let’s face it, if you don’t know how much you’ll need, it’s pretty hard to get comfortable that the amount you’re quoted as a monthly payment amount will be “enough.”

They don’t know how much they can get from what they have saved.

Back in May 2013, the U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) published an advance notice of proposed rulemaking focusing on lifetime income illustrations. Under that proposal, a participant’s pension benefit statement (including his or her 401(k) statement) would show his or her current account balance and an estimated lifetime income stream of payments based on that balance.

That proposed rulemaking hasn’t gone any further, although a number of recordkeepers have undertaken to provide an estimate on statements based on certain assumptions. What that means today is that some participants at least have the opportunity to get at least a rough approximation of what their current balance might produce in terms of monthly income. Some have gone so far as to project what that might look like at retirement age.

But that’s not all participants, or all plans – and it’s generally limited to a projection based on the balance on that particular recordkeeper’s platform. And for some at least, it’s perhaps a disquieting number.1

They’re afraid they’ll lose out.

Perhaps the most common aversion workers have to committing to retirement income is the pervasive sense that they’ll hand over this big lump sum – which is for many, the most money they have seen in their lives, a sum they may have spent their whole career accumulating – to some large insurance company, and then run out of life before they get (all) their money “back.”

Though the alternative – running out of money before you run out of life – is surely no less disconcerting.

There are some “reframing” alternatives to this behavioral finance impediment – things like allowing workers to buy into the annuity over time, rather than all at once, and studies have suggested that a consumption framework (rather than a focus on investments and return) might have an impact.

They’re afraid that the annuity provider will go out of business.

The annuity industry is quick to point out that this has never happened, that the industry has a robust state oversight structure, and that in the unlikely event that at some point in the distant future, if the firm you’ve chosen to do business with does fall upon hard times, there’s a good chance that other firms would, as part of a managed reorganization, pick up the pieces (including your monthly payment).

They feel like it’s “all or nothing.”

For participants, the annuity decision has traditionally been presented as either/or; either take a lump sum, or take that lump sum in the form of an annuity. Enter Qualified Longevity Annuity Contracts, or QLACs.

Though widely touted as a viable alternative by regulators, the take-up rate on the alternative to “all or nothing” appears to be largely in the latter category. Arguably, the lack of availability in workplace retirement plans isn’t helping any – and for some, if trying to figure out the “right” answer for a monthly payment can be complicated, figuring out how much to do as a partial solution is likely to be almost as much of a problem.

It’s (really) complicated.

The good news is, there are a lot of options when it comes to buying an annuity. The bad news is, there are a lot of options when it comes to buying an annuity.

There’s little question that participants need help structuring their income in retirement – and little doubt that a lifetime income option could help them do that. That said, the biggest impediment to adoption may simply be that (industry surveys notwithstanding) participants don’t seem to be asking for the option. And when they do have access, most don’t take advantage. Even when DB plan participants have a choice, they opt for the lump sum.

Not that those dynamics can’t be influenced by plan design or advisor input, but justifiable concerns remain about fees, portability and provider sustainability. Moreover, there are significant behavioral finance impediments, be it the overweighting of small probabilities, mental accounting – or simply the fear of losing control of finances, a desire to leave something to heirs, or simple risk aversion. It’s often not just one thing. It’s… complicated.

They don’t know how to find help.

As an industry, we bemoan worker inattentiveness to the sufficiency of their retirement savings accumulations – and that’s with the aid and assistance of workplace retirement savings education, defaults for decisions like contribution amount and investments, and increasingly the availability of a retirement plan advisor.

Let’s face it: When it comes to making a decision about a lifetime income option, or even evaluating the option, most workers are – still – literally on their own.

- Nevin E. Adams, JD
  1.  While the so-called “common wisdom” might be that participants might be put off by the small numbers, in its 2014 Retirement Confidence Survey, EBRI found that, presented with a projection based on their balances and assumptions similar to those proposed by the Labor Department at the time, more than half (58%) thought that the illustrated monthly income was in line with their expectations.

Tuesday, July 03, 2018

5 Plan Committee Lessons from the Second Continental Congress

As we prepare to celebrate the Declaration that marks the birth of this nation, it seems a good time to reflect on some lessons from that experience that hold true even today.

Inertia is a powerful force.

By the time the Second Continental Congress convened, the “shot heard round the world” had already been fired at Lexington, but many of the representatives in Philadelphia still held out hope for some kind of peaceful reconciliation. Little wonder that, even in the midst of hostilities, there was a strong inclination on the part of several key individuals to put things back the way they had been, to patch them over, rather than to take on the world’s most accomplished military force.

As human beings we are largely predisposed to leave things the way they are, rather than making abrupt and dramatic change. Whether this “inertia” comes from a fear of the unknown, a certain laziness about the extra work that might be required, or a sense that advocating change suggests an admission that there was something “wrong” before, it seems fair to say that plan sponsors are, generally speaking, and in the absence of a compelling reason for change, inclined to rationalize staying put.

Little wonder that we often see new fund options added, while old and unsatisfactory funds linger on the plan menu, a general hesitation to undertake an evaluation of long-standing providers in the absence of severe service issues, and reluctance to adopt potentially disruptive (and, admittedly, often expensive) plan features like automatic enrollment or deferral acceleration.

While many of the delegates to the Constitutional Convention were restricted by the entities that appointed them in terms of how they could vote on the issues presented, plan fiduciaries are bound by a higher obligation – that their decisions be made solely in the best interests of plan participants and their beneficiaries – regardless of any other organizational or personal obligations they may have outside their committee role.

Selection of committee members is crucial.

The Second Continental Congress was comprised of representatives from what amounted to 13 different governments, with delegates selected by processes ranging from extralegal conventions, ad hoc committees, to elected assemblies – with varying degrees of voting authority granted to them, to boot. Needless to say, that made reaching consensus even more complicated than under “ordinary” circumstances.

Today the process of putting together an investment or plan committee runs the gamut – everything from simply extrapolating roles from an organization chart to a random assortment of individuals to a thoughtful consideration of individuals and their qualifications to act as a plan fiduciary. But if you want a good result, you need to have the right individuals – and, certainly in the case of ERISA fiduciaries, if those individuals lack the requisite knowledge on a particular issue, they need to access that expertise from individuals who do.

Know that there are risks.

The men that gathered in Philadelphia that summer of 1776 came from all walks of life, but it seems fair to say that most had something to lose by signing on to a declaration of independence. True, many were merchants (some wealthy, including President of Congress John Hancock), and perhaps they could see a day when their actions would accrue to their economic benefit. Still, they could hardly have undertaken that declaration of independence without a very real concern that in so doing they might well have signed their death warrants. As Ben Franklin is said to have commented just before signing the Declaration, “We must, indeed, all hang together, or most assuredly we shall all hang separately.”

It’s not quite that serious for ERISA plan fiduciaries. However, there is the matter of personal liability – not only for your actions, but for those of your fellow fiduciaries – and thus, you might be required to restore any losses to the plan or to restore any profits gained through improper use of plan assets. So, it’s a good idea not only to know who your co-fiduciaries are – but to keep an eye on what they do, and are permitted to do.

It’s important to put it in writing.

While the Declaration of Independence technically had no legal effect, with the possible exception of the Gettysburg Address (which was heavily inspired by the former), its impact not only on the establishment of the United States, but as a social and political inspiration for many throughout the world is unquestioned, and perhaps unprecedented. Putting that declaration – and the sentiments expressed – in writing gave it a force and influence far beyond its original purpose.

Plan fiduciaries are sometimes cautioned (often by legal counsel) about committing to writing certain decisions, notably an investment policy statement. In fairness, the law does not require one, though ERISA basically anticipates that plan fiduciaries will conduct themselves as though they had one in place. And, generally speaking, plan sponsors (and the advisors they work with) 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 – rather than being crafted at a point in time when you are desperately trying to make sense of the markets. That said, and in the defense of caution, if there’s something worse than not having an IPS, it’s having an IPS that isn’t followed.

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 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.

Those might not serve to inspire future generations – but they can be an invaluable tool in reassessing those decisions at the appropriate time(s) in the future and making adjustments as warranted – properly documented, of course.

Actions can speak louder than words.

As dramatic and inspiring as the words of the Declaration of Independence surely were (and are), if they never got beyond the document in which they appeared, it’s unlikely we’d be talking about them today. Indeed, it’s likely that, without the actions committed to in that Declaration, their signatures on the document would have only ensured that they wound up on the gallows.

Anyone who has ever had a grand idea shackled to the deliberations of a moribund committee, or who has had to kowtow to the sensibilities of a recalcitrant compliance department, can empathize with the process that produced the Declaration of Independence we’ll commemorate this week.

While plan committee meetings may sometimes seem like little more than obligatory (and tedious) reviews of arcane information, it’s worth remembering that those decisions affect people’s lives – and, ultimately, their financial independence.

- Nevin E. Adams, JD