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

Saturday, June 30, 2018

What’s (Really) Hindering Millennials’ Retirement Savings?

I’ve learned two things about Millennials over the years: first, that there are few things they find more bothersome than having Boomers tell them what they should be doing – and if there is anything more bothersome than the first, it’s being called “Millennials.”

Setting that aside, I was recently asked to participate in a forum focused on the challenges to retirement savings faced by Millennials. That event, “The Millennial Perspective: An Intergenerational Discussion on Retirement Savings,” was sponsored by Women for a Secure Retirement (WISER), centered on the organization’s iOme Challenge to develop a comprehensive proposal to address the challenges Millennials face in saving for retirement.

Of course, the definition of a Millennial has proven to be surprisingly elusive over time. But those in the forum were willing to accept the definition recently put forth by the Pew Research Center, that it would apply to those born between 1981 and 1996 – which, of course, means that the oldest in that demographic are hardly “kids” (aged 37 in 2018).


Retirement Roadblocks

My panel was tasked with discussing issues regarding financial education, savings and “retirement roadblocks” for this group. And indeed, there are a number of obstacles to savings generally, and retirement saving specifically, for this demographic. Specifically cited were:

Lack of “traditional” employment. This has manifested itself both in higher unemployment rates, and more in so-called 1099 employment in the “gig” economy. This can, of course, create an issue both in the income from which to save, and a…

Lack of access to retirement plan at work. This, of course is a significant hindrance. After all, we know 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. But even when they have access to a plan at work, they can still be hindered by a…

Lack of eligibility for a retirement plan at work. While a growing number of plans allow immediate eligibility for employee contributions (58.5%, according to the Plan Sponsor Council of America’s 60th Annual DC Survey), others don’t – and some plans still maintain a year’s wait. And that can be a problem when it comes to…

Job turnover. Millennials are widely regarded as job hoppers, and relative to their elders they may be – not so when their elders were younger. Going back to the end of the second World War, job tenure has been remarkably consistent – so yes, Millennials do change jobs, and while that doesn’t make them unusual, it can make it harder for them to save, particularly when there are…

Other priorities. Let’s face it, we talk about retirement saving as having an “accumulation” phase, but the early stages of most working careers is focused on a broader accumulation strategy – household goods, a car, a house, furniture, etc. And, for many those priorities also include paying down the debt that helped pave the way. Those obligations have, along with shorter job tenures, long been part of the earlier stages of our careers – and still are…certainly when it comes to thinking about…

Retirement. That’s right – retirement. Or more precisely the word itself, which conjures up images of a distant time and an “elder” you that – nifty little aging apps notwithstanding – isn’t something that most Millennials (or, arguably Boomers) have top of mind. In fact, our industry has long bemoaned the complexity of retirement as a savings goal – not only because it’s likely to be as variable as the individuals considering it, but also because it is so hard for an individual to picture, to imagine as a tangible goal. So, yes – we can, with a little effort – put a dollar figure on “retirement” – but juxtaposed next to that much-needed vehicle to get to work, that home with which to house a growing family, that college debt repayment… well, “retirement” is likely to be viewed more as abstract concept than tangible goal.

Perhaps a better way to think of this particular savings goal is to see it as the point at which you have financial resources sufficient to provide the freedom to pursue the avocation of your dreams, to work the hours you want (or don’t), from the location(s) you desire – or even the freedom to quit “working” altogether.

Janis Joplin once told their Boomer parents that “freedom is just another word for nothing left to lose.” But it seems to me that for Millennials, and perhaps for all of us, freedom – financial freedom – is “just” another word for everything to gain.

- Nevin E. Adams, JD
 
See also:

Saturday, June 23, 2018

Feel Lucky?

One of my favorite cinematic quotes is from that Clint Eastwood classic, “Dirty Harry.”

It comes at the very beginning of the movie – there’s a bank robbery in process, and Clint Eastwood (in the personage of Inspector “Dirty” Harry Callahan) is trying to wolf down a hot dog when the commotion starts up. Harry, clearly irritated, gets up and heads out, and proceeds to shoot it out with the robbers, and then strolls over to the one who is still breathing, who has a shotgun within reach. Harry proceeds to point out the attributes of his .44 Magnum as he wonders aloud if he still has any bullets left, as the wounded robber contemplates his chances of getting to his shotgun before Harry pulls the trigger. At that point, Harry reminds him: “You’ve got to ask yourself one question: ‘Do I feel lucky?’ Well, do ya, punk?”

When reading the various surveys of workers who seem confident about their retirement prospects – or don’t – when most haven’t even tried to figure out how much they will need – I can almost hear Harry Callahan in the background. They might not feel lucky, but they’re acting as though they will be.

Last week the nonpartisan Employee Benefit Research Institute (EBRI) published an Issue Brief highlighting some of the outcomes that EBRI’s Retirement Security Projection Model (RSPM) has projected in recent years. The RSPM was developed to help state governments figure out if their residents would run short of money in retirement – based on a concern that to the extent they did, the social safety net might have to be patched.

Now such models1 must, of necessity, rely on certain assumptions, but unlike a number of other models out there, EBRI’s has a significant advantage – being able to draw on actual, anonymized administrative data of tens of millions of 401(k) participants for the retirement savings component, whereas others lean on self-reported samplings. Moreover, rather than rely on the extrapolation of measures like replacement rates, EBRI’s RSPM considers a household to “run short of money” or experience a retirement savings “shortfall” if it doesn’t have enough money to cover actual projected expenses in retirement – including an aspect that most models completely ignore: uncovered long-term care expenses from nursing homes and home health care.

Despite what I would consider to be pretty stringent assumptions on expenses, the RSPM projects that more than half — 57.4% — of all U.S. households (not just those covered by employer-sponsored retirement plans) will not run short of money in retirement. Oh, and that’s assuming that they come up with 100% of those expenses.

But what if you wanted to assume that, confronted with those expenses in retirement, individuals cut back on their spending – say to just 90% of the projected expenses? Well, even if you leave in place the full assumptions about nursing home and home health care costs, under that scenario the percentage of households projected to have sufficient retirement resources increases to more than two-thirds (68.1%). What if you assume that retirees only spend 80% of the cohort average for deterministic expenses? At that point, 82.1% would have enough financial resources. If you are willing to ignore the potential impact of long-term care costs, three-quarters (75.5%) of households will have sufficient financial resources in retirement to meet 100% of projected expenses.

That doesn’t mean that access to a retirement plan doesn’t matter. The report notes that among Gen Xers, those who have 20 or more years of future eligibility (including years in which employees are eligible but choose not to participate) are simulated to have a 72% probability of not running short of money in retirement. Those in that same group with no future years of eligibility are simulated to have only a 48% probability of not running short of money in retirement.

In fact, as you might expect, eligibility for a workplace retirement plan is one of the most – if not the most – important aspects that affect retirement success.

Now, as promising as those results seem, one shouldn’t draw too much comfort. Those who come up short will do so by varying amounts, and some by quite large amounts. Indeed, when you add up all those shortfalls, it amounts to $4.13 trillion in 2014 dollars.

And yet, applying what strike me as remarkably conservative retirement expense assumptions, and drawing from real-world actual administrative savings data, it seems that a good number of us can – assuming we keep doing what we are doing – anticipate a financially successful retirement.

Which brings us back to “Dirty Harry”: “Do you feel lucky? Well, do ya?”

If you are eligible for a retirement plan at work, the answer would seem to be – yes!

- Nevin E. Adams, JD

Two of the most commonly cited projection models are the Center for Retirement Research (CRR) at Boston College and the National Institute on Retirement Security (NIRS). Both rely heavily on self-reported numbers from the Federal Reserve’s Survey of Consumer Finances (SCF), and while both track the progress of American retirement readiness by examining how individuals in the SCF did over time, they fail to acknowledge that doing so compares the balances and readiness of two completely different groups of individuals at different points in time. The NIRS analysis builds on that shaky foundation by incorporating some assumptions about defined benefit assets and extrapolating 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. But then, the math is easier.

Saturday, June 16, 2018

(Re)Solving the Retirement Crisis

Several weeks back, I was invited to participate in a group conversation on retirement and the future.

The group of 15 (they’re listed at the end of the document that summarized the conclusions) that Politico pulled together was diverse, both in background and philosophies, and included academics, think tanks, advocacy groups, and the Hill. It was conducted under Chatham House rules, which means that while our comments might be shared, they wouldn’t be specifically attributed. That latter point was helpful to the openness of the discussion, where several individuals had opinions that they acknowledged wouldn’t be supported by the groups they represent.

The conversation touched on a wide range of topics, everything from the key challenges to the current system, the private sector’s role in addressing these problems, the individual’s role (and responsibility) for securing their own retirement, government’s role and the potential for current congressional proposals to have an impact.

In view of the diversity of the group – the complexity of the topics – and the 90-minute window of time we had to thrash things about – you might well expect that we didn’t get very far. And, at least in terms of new ideas, you’d be hard-pressed to say that we discussed anything that hadn’t come up somewhere, sometime, previously. But then, this was a group that – individually, anyway – has spent a lot of time thinking about the issues. And there were some new and interesting perspectives.

The Challenges

It seems that you can never have a discussion about the future of retirement without spending time bemoaning the past, specifically the move away from defined benefit plans, and this group was no exception. There remains in many circles a pervasive sense that the defined contribution system is inferior to the defined benefit approach – a sense that seems driven not by what the latter actually produced in terms of benefits, but in terms of what it promised. Even now, it seems that you have to remind folks that the “less than half” covered by a workplace retirement plan was true even in the “good old days” before the 401(k), at least within the private sector. And while you can wrest an acknowledgement from those familiar with the data, almost no one talks about how few of even those covered by those DB plans put in the time to get their full pension.

Beyond that. there was a clear and consistent understanding in the group that health care costs and concerns were a big impediment to retirement savings, both on the part of employers and workers alike. People still make job decisions based on health care – on retirement plan designs, not so much. And when it comes to deciding whether to fund health care or retirement – well, health care wins hands down.

College debt was another impediment discussed. Oh, individuals have long graduated from college owing money – but never so many, and likely never so much (though you might be surprised what an inflation-adjusted figure from 20 years ago looks like). It is, for many, an enormous draw on current income – and one that has a due date that falls well before when retirement’s bill is presented for payment.

Women have a unique set of challenges. For many, the pay gap while they are working is exacerbated by the time out of the workplace raising children. They live longer, invest more conservatively, and ultimately bear higher health care costs – and increasingly find themselves in the role of caregiver, rather than bringing home a paycheck.

For many in the group, financial literacy still holds sway as a great hope to turn things around. There are plenty of individual examples of its impact, though the current research casts doubt on its widespread efficacy. Surely a basic understanding of key financial concepts couldn’t hurt (though don’t even get me started on the criteria that purports to establish “literacy”) – but it’s a solution that is surely at least a generation removed from the ability to have a widespread impact.

On a related note, the group was generally optimistic about the impact that the growing emphasis on financial wellness could have, both in terms of encouraging better behaviors, and a heightened awareness of key financial concepts. The involvement of employers, and employment-based programs seems likely to enhance the impact beyond financial literacy alone.

Resolving Recommendations

Ultimately, the group coalesced around four key recommendations:

The significance of Social Security in underpinning America’s retirement future – and the critical need to shore up the finances of that system sooner rather than later. The solution(s) here are simple; cut benefits (push back eligibility or means-testing) or raise FICA taxes. The mix, of course, is anything but simple politically – but time isn’t in our favor on a solution.

The formation of a national commission to study and recommend solutions. I’ll put myself in the “what harm could it do?” camp, particularly in that, to my recollection, nothing like this has been attempted since the Carter administration. We routinely chastise Americans for not taking the time to formulate a financial plan – perhaps it’s time we undertook that discipline for the system as a whole.

Requirements matter – but don’t call it a mandate. Since it’s been established that workers are much more likely to save for retirement if they have access to a plan at work (12 times as likely), but you’re concerned that not enough workers have access to a retirement savings plan at work, there was little doubt that a government mandate could make a big difference. There was even less doubt that a mandate would be a massive lift politically. And not much stomach in the group for going down that path at the present.

Expanded access to retirement accounts. While the group was hardly of one mind in terms of what kind of retirement account(s) this should be, there was a clear and energetic majority that agreed with the premise that expanding access is an, and perhaps the – integral component to “securing retirement” for future generations.

And maybe even this one.

- Nevin E. Adams, JD

p.s. I'm on the left, towards the top of the picture above.  Right next to Teresa Ghilarducci!

Saturday, June 09, 2018

So, How Much Should a 35-Year-Old Have Saved?

You may have missed it, but there was a bit of a “twitter storm” regarding retirement last week.

More specifically, a relatively innocuous post about how much a 30-year-old should have saved toward retirement got a lot of 35-year-olds stirred up. The CBSMarketwatch article quoted Fidelity as saying that you should have a year’s worth of salary saved by the time you’re 30 – but the real point of controversy appears to have been driven by the premise that by the time you’re 35, you were supposed to have twice your salary saved.1

The point, of course, is that it’s easier if you start early. But honestly, devoting 15% of your pay to retirement savings at any age is a daunting prospect, much less at a point when college debt and the prospects of a mortgage, kids and setting aside money for the kids’ college savings loom large. If this is “easy,” imagine what hard looks like!

I’ve been a consistent saver over my working career – never missed an opportunity to save in a workplace retirement plan, never worked for an employer that didn’t offer one, and always contributed at least enough to warrant the full employer match. And yet, I went a long time in my working career before I was able – having, among other expenses, law school debt, a mortgage, and three kids to help get through college – to set aside 15% for retirement (sadly, by the time I could afford to save at that level in my 401(k), the IRS “intervened”).

I don’t know how my 35-year-old self would have reacted to the article, or the twitter post, though I suspect I, like many of those who responded to the “tweet,” would have been a tad incredulous.

Ultimately, of course, the answer to how much you “should” set aside for retirement – regardless of your age – is largely dependent on what kind of retirement you plan to have, and when you plan to start having it. And, regardless of age, taking the time to do even a rough estimate on what you might need to quit working (or start retiring) is going to be time well spent.

Because while it’s possible to “catch up” later – it can be hazardous to count on it.

- Nevin E. Adams, JD

Footnote

Controversial as this premise clearly was to those in the targeted demographic, it’s really just math. To get there, Fidelity assumed that a individual starts saving a total of 15% of income every year starting at age 25, invests more than 50% of it in stocks on average over his or her lifetime, and retires at age 67, with an eye toward maintaining their preretirement lifestyle – but you might be surprised at what even these arguably aggressive goals produced in terms of a replacement ratio at age 67.

Saturday, June 02, 2018

Life’s Lessons

Life has many lessons to teach us, some more painful than others – and some we’d just as soon be spared. But as graduates everywhere look ahead to the next chapter in their lives, it seems a good time to reflect on some of the lessons we’ve learned.

Here are some nuggets I’ve picked up along the way….
  1. Be willing to take all the blame – and to share the credit.
  2. There actually are stupid questions.
  3. Shun those who are cruel – and don’t laugh at their “jokes.”
  4. Never say you’ll never.
  5. Be on time.
  6. “Bad” people eventually get what’s coming to them. But you may not be there to see it.
  7. Always sleep on big decisions.
  8. Sometimes the grass looks greener because of the amount of fertilizer.
  9. Never email in anger – or frustration. And be extra careful when using the “Reply All” button.
  10. If your current boss doesn’t want to hear the truth, it may be time to look for a new one.
  11. Never pass up a chance to say “thank you.”
  12. If you wouldn’t want your mother to learn about it, don’t do it.
  13. Never assume that your employer (or your boss) is looking out for your best interests.
  14. Bad news doesn’t generally age well.
  15. There can be a “bad” time even for good ideas.
  16. Your work attitude often affects your career altitude.
  17. When you don’t have an opinion, “what do you think?” is a good response. And sometimes even when you do.
  18. You can be liked and respected.
  19. Comments that begin “with all due respect” generally don’t include much.
  20. Sometimes the questions are complicated, but the answer isn’t.
Remember as well that that 401(k) match isn’t really “free” money – but it won’t cost you a thing.
And don’t forget that you’ll want to plan for your future now – because retirement, like graduation, seems a long way off – until it isn’t.

Got some to add? Feel free to add in the comments.

Congratulations to all the graduates out there. We’re proud of you!

- Nevin E. Adams, JD

Saturday, May 26, 2018

First-Hand Experience


Picture of a view inside Super Bowl XLVII
Our view during Super Bowl XLVII.

There are some things in life that have to be experienced first-hand.
Several years back, my daughter won an all-expenses-paid trip to the Super Bowl for two – and, to my delight, she chose to invite me to go with her.

Now, I’m sure some of you have been to a Super Bowl, but it was my first (and, considering ticket prices, I’m guessing my last). And while I’m sure the view from the comfort of home and a big screen TV offered a “better” view of Beyonce’s halftime show, there are things (and people) you see when you are at the event that don’t make a TV producer’s selection (particularly when you happen to be at the Super Bowl where the field lights went out for 34 minutes). Let’s face it, it’s one thing to say you watched the Super Bowl – and something else altogether to say you were there!

Photo of tickets to Super Bowl XLVIIYou wouldn’t know it from the headlines, but there’s actually a lot going on here in our nation’s capital. Like a smoldering ember, in no time at all, and with little warning, things can go from (apparent) nothingness to regulation or legislation that can have a dramatic impact on our lives and livelihoods (remember Rothification?). It’s a dynamic that’s easy to miss when you “swing by” for a visit – but one that our Government Affairs team works very hard all year long to keep up – and to keep NAPA members up-to-date and informed.

We’re fast approaching our sixth annual DC Fly-In Forum. I remember attending the first one as a “special guest,” and being struck even then by the quality of the program and speakers. More importantly, the room was full then – as it continues to be – of the nation’s leading retirement plan advisors, networking and engaging not only with each other, but with some of the most influential voices in Washington.
This year – with the ink not quite dry on the SEC’s Regulation Best Interest proposal, and with the status of the Labor Department’s fiduciary proposal unresolved (for the moment), we are slated to have SEC Commissioner Hester Peirce, and have invited Assistant Secretary of Labor Preston Rutledge to join us. We’ve lined up a special session on advisor-focused litigation with the Wagner Law Group’s Tom Clark. And Rep. Richie Neal (D-MA) – a long-time proponent of retirement savings, ranking member of and a potential Chairman of the Ways and Means Committee (should the House “flip”), and author of a “game-changing” retirement plan proposal – will also be part of this year’s Fly-In. We’ll also have what promises to be a highly interactive and engaging discussion about a new proposal to shore up retirement security via mandatory add-on savings accounts.

And that’s not all.

The 2018 mid-term elections are just around the corner — and the keynote speaker at the NAPA DC Fly-In Forum will help approved delegates understand what it might bring. We’re talking about CNN Chief National Correspondent John King, anchor of “Inside Politics.”

And that’s (still) not all.

For me – and for dozens of advisors who have participated over the past five years – the most impressive aspect of our Fly-In Forum is the second day, where delegate-advisors have an opportunity, assisted (and prepped) by the NAPA GAC team, to meet with legislators and their staff on Capitol Hill, to share your perspectives, ideas and concerns, based on your front-line, real-life experiences working with retirement plans, plan sponsors and participants.

Whether you’ve done this a dozen times, or have never had the opportunity, the NAPA DC Fly-In Forum is an amazing “first-hand” experience. For those ready to get off the sidelines and contribute to a real difference in retirement policy, you won’t find a better “ticket” than the NAPA DC Fly-In Forum.

I can’t promise it will be quite like going to the Super Bowl – but then, you never know.

p.s.: Seats are filling up fast for the NAPA DC Fly-In Forum, July 24-25.
PLEASE NOTE: Delegates to the Forum must:
  • be a NAPA member;
  • be responsible for $100M+ in plan assets, 10+ plans and 2,000+ participants; and
  • have 5+ years of experience servicing retirement plans.
You can apply today at http://napadcflyin.org.



- Nevin E. Adams, JD

Saturday, May 19, 2018

Crisis ‘Management’

Rarely a week goes by that a headline, survey or academic paper doesn’t proclaim the reality of a retirement crisis with the certainty generally reserved for topics like the existence of gravity, or the notion that the sun will rise in the east.

And certainly based on the data cited, there would seem to be a compelling case that trouble lies ahead for many. That said – as was pointed out by Andrew Biggs at the recent Plan Sponsor Council of America conference – the reality is that good, reliable data is hard to come by. Indeed, many of the reports cited in those headlines rely on what you would expect to be a reliable source; the Census Bureau’s Current Population Survey, or CPS.1 Unfortunately, that reliable source turns out to be not-quite-so-reliable. It suffers from relying on what people tell the survey takers, but perhaps more significantly, Biggs, resident scholar at the American Enterprise Institute, pointed out that the survey only counts as income in retirement funds that are paid regularly – like a pension. “Irregular” withdrawals from retirement accounts – like IRAs and 401(k)s – aren’t included.

In fact, when you compare what retirees report to the IRS with what they report to the Census Bureau, only 58% of private retirement benefits are picked up, according to Biggs. Now, who do you suppose gets a more accurate read; the IRS2 or the Census Bureau? And yet, the CPS data serves as the basis for a huge swath of academic research on retirement savings.

Social ‘Security’

Biggs noted that IRS data also draws into question some of the “common wisdom” on things such as dependence on Social Security. Consider that the Social Security Administration – who arguably has “skin” in the game – claim that a third of retirees are heavily dependent – to the tune of 90% or more of their income – on Social Security. However, a study based on IRS data found that only 18% of retiree households are heavily dependent on Social Security, and just one in eight retirees receive 90% or more of their income from Social Security. Don’t get me wrong – Social Security is clearly a vital and essential component of our nation’s retirement security – but the IRS data indicates that, for most, it isn’t a primary source at present.

Pundits have long worried that retirees wouldn’t have accumulated enough to live on in retirement, but data suggests that most retirees aren’t exactly burning through their retirement savings. Not that some aren’t drawing down too rapidly, mind you – and that’s a valid concern. But many, perhaps most – aren’t.

Data suggests that today’s retirees are actually in pretty good shape. In addition to the IRS data cited above, that sentiment is borne out by any number of surveys (perhaps most notably the Retirement Confidence Survey, published by the nonpartisan Employee Benefit Research Institute (EBRI) and Greenwald Associates) that continue to find that those already in retirement express a good deal more confidence about their financial prospects than those yet to cross that threshold. And certainly, the objective data available to us suggests that today’s retirees are better off than previous generations, though their retirement – and potential health issues – may at some point take a toll.

Still, in 2014, EBRI found that current levels of Social Security benefits, coupled with at least 30 years of 401(k) savings eligibility, could provide most workers — between 83% and 86% of them, in fact — with an annual income of at least 60% of their preretirement pay on an inflation-adjusted basis. Even at an 80% replacement rate, 67% of the lowest-income quartile would still meet that threshold — and that’s making no assumptions about the positive impact of plan design features like automatic enrollment and annual contribution acceleration.

Not that there isn’t plenty to worry about; reports of individuals who claim to have no money set aside for financial emergencies, the sheer number of workers entering their career saddled with huge amounts of college debt, the enormous percentage of working Americans who (still) don’t have access to a retirement plan at work (though not as enormous as some claim)…

That said, I shudder every time I hear an industry leader or advisor stand up in front of an audience and proclaim that there is a retirement crisis – because, however well-intentioned – they are almost certainly providing “aid and comfort” to those who would like to do away with the current private system as a failure, not a work in process.

What seems likely is that at some point in the future, some will run short of money in retirement, though they may very well be able to replicate a respectable portion of their pre-retirement income levels, certainly if the support of Social Security is maintained at current levels.

However, what seems even more likely is that those who do run short will be those who didn’t have access to a retirement plan at work.

- Nevin E. Adams, JD
 
Footnotes
  1. Nor is that the only shortcoming in that widely utilized source. The nonpartisan Employee Benefit Research Institute (EBRI) has pointed out that a change in survey methodology in 2014 has produced some questionable plan participation results from the CPS – a finding subsequently validated by the Investment Company Institute.
  2. Not that IRS data can’t be misapplied.

Saturday, May 12, 2018

Means 'Tested'

Pundits have long worried that retirees wouldn’t have accumulated enough to live on in retirement, but the data suggests that most retirees aren’t exactly burning through their retirement savings.

I remember my one and only conversation with my father about retirement income. He had already decided to quit working, and had gathered his assorted papers regarding his savings, insurance, etc. for me to review. Determined to “dazzle” Dad with my years of accumulated financial acumen, I proceeded to outline an impressive array of options that offered different degrees of security and opportunities for growth, the pros and cons of annuities, and how best to integrate it all with his Social Security.

And when I was all done, he looked over all the materials I had spread out before him, then turned to me and said – “so how much will I have to live on each month?”

See, my dad, like many in his generation, were accustomed to living within their means. And, according to new research, he isn’t the only one.

The study shows that retirees generally exhibit very slow decumulation of assets. More specifically, the nonpartisan Employee Benefit Research Institute (EBRI) found that within the first 18 years of retirement, individuals with less than $200,000 in non-housing assets immediately before retirement had spent down (at the median) about one-quarter of their assets; those with between $200,000 and $500,000 immediately before retirement had spent down just 27.2%. Retirees with at least $500,000 immediately before retirement had spent down only 11.8% within the first 20 years of retirement at the median.

Those with pensions were much less likely to have spent down their assets than non-pensioners. During the first 18 years of retirement, the median non-housing assets of pensioners (who started retirement with much higher levels of assets) had declined just 4%, compared with a 34% decline for non-pensioners.

The median ratio of household spending to household income for retirees of all ages hovered around 1:1, inching slowly upward with age – a finding that the EBRI researchers said suggests that majority of retirees had limited their spending to their regular flow of income and had avoided drawing down assets, which explains why pensioners, who had higher levels of regular income, were able to avoid asset drawdowns better than others.

Not that that’s necessarily a heartening result, since those pensioners, arguably having guaranteed income for life, such as a pension, doesn’t lead them to spend down their assets. Indeed, of all the subgroups studied, pensioners have the lowest asset spend-down rates – though one might well expect that, with that pension “cushion” they might be more inclined to dip into their savings and “splurge.”

Why are retirees not spending down their assets? The EBRI report offers a number of reasons:
  • People don’t know how long they are going to live or how long they have to fund their retirement from these assets.
  • Uncertain medical expenses that could be catastrophic if someone has to stay in a long-term care facility for a prolonged period.
  • A desire to pass along assets to heirs.
  • A lack of financial sophistication – people don’t know what is a safe rate for spending down their assets, and are thus erring on the side of caution.
  • A behavioral impediment – after building a saving habit throughout their working lives, people find it challenging to shift into spending mode.
Now, the EBRI research was based on government data from the U.S. Health and Retirement Study to track retirees born between 1931 and 1941 with assets ranging from stocks, bonds, mutual funds, real estate and CDs to savings and checking accounts (individual homes were excluded). That’s “greatest generation” territory – retirees who were, as my father, accustomed to living within their means. Even then, it’s not all sunshine and unicorns; some retirees are indeed running out of money in retirement – though, at the same time, instead of spending down, a large – and to my ears, largely unacknowledged ­– number of retirees are continuing to accumulate assets throughout retirement.

But I’d still argue that the question “how much will I have to live on each month” winds up being a lot easier to answer at retirement – if you’ve been thinking about it pre-retirement.

- Nevin E. Adams, JD

Saturday, May 05, 2018

The Chicken or the Egg?

It is a question that has puzzled philosophers and scientists for centuries: which came first – the chicken or the egg? Similarly, an updated version of a classic survey of retirement confidence finds some interesting attributes among those who are more confident about their prospects – but are those attributes a result of that confidence, or is it the confidence that preceded them?

The 28th annual Retirement Confidence Survey (RCS) from the non-partisan Employee Benefit Research Institute (EBRI) and Greenwald Associates found that Americans are feeling a bit better about their retirement prospects.
However, the RCS also found – as it has in previous years – that certain factors are tied to higher confidence, specifically if they have access to a defined contribution plan, are relatively free from debt, are already retired – or, in a new finding from this year’s RCS – that they are healthy.

Now, the connection between access to a retirement plan and savings is well established. An updated analysis by EBRI finds that even those with modest incomes – those making between $30,000 and $50,000 – are nonetheless a dozen times more likely to save if they have access to a retirement plan at work.

More intuitive is the negative impact that debt, particularly heavy debt, can have on retirement savings, not to mention the impact on confidence about that savings, or more precisely, the lack thereof.

As for the new finding in this year’s RCS, 6 in 10 workers who are confident about their retirement prospects say they are in excellent or good health. As for those who are not confident about retirement, only 28% report such good health. The same is true for retirees: 46% of confident retirees are in good health, compared to just 14% who are not confident. What’s less clear is whether they are confident because they are healthy, or healthy because they are confident (or have a reason to be).

In fact, those of us still looking ahead to retirement can draw some comfort that those in retirement are – and have consistently been – more confident about retirement. Indeed, in this year’s RCS, a full three-quarters of retirees are very or somewhat confident they will have enough money for retirement – and that’s as high as that metric has been going all the way back to 1994 (except for last year, when 79% were that confident).

Of course, retirees were also more than twice as likely (39% versus 19%) as workers to have tried to calculate how much money they would need to cover health care costs in retirement – and those who had were less likely to have experienced higher-than-expected health costs and are more likely to say that costs are in line with their expectations.

Ultimately, there’s nothing like actually living in retirement to provide a solid sense of what it costs to live in retirement. When it comes to retirement confidence, it may not always be obvious as to whether the chicken or the (nest) egg came first.

But it seems to me that a "bird"
in the hand is nearly always worth two in the bush…

Saturday, April 28, 2018

(Too) Great Expectations?

My schedule – and aversion to crowds – means that I rarely see a new movie the first weekend it comes out (a rare exception – Avengers: Infinity War this weekend).

While this means that there are times when I’m the only one in the office the following Monday who hasn’t seen the latest blockbuster (and thus can’t offer an opinion), more often than not, it’s also spared me the time, money (and potential aggravation) of rushing out to see a movie that is more likely to be up for a “Razzie” than an Oscar.

However, I’ve also found myself in situations where the hype surrounding a new blockbuster is so compelling that it builds up my expectations beyond the reality – leaving me… underwhelmed.

Doubtless that was the sense of many in reading the Best Interest Regulation proposal published by the Securities and Exchange Commission last week. Those who had hoped that a uniform fiduciary standard might emerge were surely disappointed, as were those who might have anticipated that the SEC’s proposal might step up and fill a gap potentially created if the 5th Circuit’s ruling was unchallenged. There is, of course, an irony in a Regulation Best Interest that doesn’t define “best interest,” and understandable concerns that a standard that leans so heavily on “reasonable” tests is portrayed as an objective standard.

On the other hand, all will surely find comfort in the acknowledgement that “cheapest” isn’t deemed equivalent with “best,” and some will certainly be reassured by the “principles-based” emphasis, not to mention the acknowledgement of the Labor Department’s fiduciary rule and Best Interest Contract Exemption (BICE) and the latter’s stated objectives as consistent with Regulation Best Interest, even if the latter doesn’t create fiduciary status.

Odds are, if you liked the Labor Department’s fiduciary rule and its structures, you won’t be satisfied with the SEC’s take. On the other hand, if you thought the DOL went too far, the SEC’s proposal might well be more in line with your expectations. And yet, the lingering uncertainty as to the when – or if – of the SEC’s response – and the (at last until lately, relative) certainty of the Labor Department’s approach has led many firms to institute processes and procedures suited for the latter, not the possibility of the former.

Arguably, the vast majority of advisors committed to serving workplace retirement plans were well along the path of satisfying ERISA’s compensation strictures, and the Best Interest Contract Exemption (BICE) – with all its shortcomings – provided a means for the rest to work their way there. What many found most confounding about the Labor Department’s fiduciary rule was its extension of oversight to IRAs, notably the enormous IRA rollover market – and, in that regard at least, the SEC proposal seems to be reasserting its authority. Will that be an area of “compromise” between the agencies? Time will tell.

Ultimately, the current SEC proposal – and bear in mind, this is really just a starting point – is bound to disappoint more than it pleases, if only because it introduces an element of uncertainty at a particularly critical time. Many, having waited nearly a decade for the proposal to emerge, doubtless hoped it would be more proscriptive in scope and/or detail. Indeed the industry commentary thus far seems to be a sense that it feels half-finished, rushed to press, perhaps even opportunistic in its timing, what with the ink on the 5th Circuit’s decision still damp. Let’s face it, even the SEC commissioners who supported its publication did so with cautioning commentary, if not outright reluctance.

That said, having waded through the 1,000-plus pages twice and half again, one can’t be help but be struck by the amount of space in those 1,100 pages dedicated to questions from the proposal’s authors – questions that merit consideration and thoughtful response.

The work may be unfinished, it may be unsatisfying in scope or clarity, but we now have a window (albeit a short one) – and an invitation – to comment, inform, and yes, perhaps even remedy those shortfalls.

- Nevin E. Adams, JD

Saturday, April 07, 2018

College ‘Intuition’

Much remains unsettled – and, as yet, largely unadjudicated – in the large, and growing series of excessive fee litigation directed at university 403(b) plans. However, certain trends in the litigation have emerged – some very different than 401(k)s, others not. Here’s what to look (out) for.

The list of these so-called university 403(b) suits – the first were filed in August 2016 – now includes plans at Cornell University, Northwestern University, Columbia University and the University of Southern California, as well as Yale. Meanwhile, some of the earlier suits are just getting to hearings on motions to dismiss, specifically Emory University and Duke University – both of which are currently proceeding to trial – and the University of Pennsylvania, which recently prevailed in a similar case. Another – involving Princeton University’s 403(b) plans – is on hold awaiting an appeal in the University of Pennsylvania litigation.

By my reckoning, here are the grounds upon which the university 403(b) plans that have been sued thus far have in common.

They have more than one recordkeeper.


While not every university 403(b) plan against which a lawsuit has been filed employed the services of more than one recordkeeper, they all seem have done so at one point in their history.

Indeed, a couple of lawsuits filed against university plans that have consolidated to a single recordkeeper have pointed to the consolidation decision as proof that the plan fiduciaries knew that the multiple provider approach was inefficient and costly – and should have acted sooner.

They offer a “dizzying array” of funds (generally from each of the aforementioned recordkeepers).

In the 401(k) world, large fund menus have long been considered a nuisance, if not downright unproductive. We’ve even got a behavioral finance study involving jams to back up the sense that, given too many choices (whatever that may be – with jams, it’s apparently more than 6), people tend not to decide.

With university 403(b) plans – certainly the ones that have found themselves sued – the “norm” seems to be in excess of 100. And frequently they approach that number with each recordkeeping provider.

That said, at least one court presented with the issue has said “Having too many options does not hurt the Plans’ participants, but instead provides them opportunities to choose the investments that they prefer.” And a second one has just held that “plaintiffs have neither alleged that any participant experienced confusion nor stated a claim for relief.”

They offer “duplicative” investments.

One of the reasons the fund menus, at least in total, seem to be so large is that each recordkeeping provider seems to put forth their own optimal menu of choices – and if you have more than one recordkeeper – well, you apparently wind up with “duplicates” in what the plaintiffs frequently claim are “in every major asset class and investment style.”

And in numerous of these cases, the only funds offered are the proprietary offerings of those recordkeepers.

Their recordkeeper choice “tethered” them to certain fund options.

Many, though not all, of the lawsuits involve plans that had TIAA-CREF as recordkeeper, and those all cite how the choice of TIAA-CREF as recordkeeper bound (“locked” and “tethered” are other terms employed to describe the arrangement) the plan to include certain (allegedly inferior) TIAA-CREF investment options on the menu, notably the CREF Stock Account and Real Estate Fund. Other issues unique to some TIAA-CREF investments are certain transfer restrictions, and some differences in their loan account processing.

Share ‘Alike’

There are, of course, elements that these programs share with their 401(k) brethren.

They use retail class mutual funds and/or active when passive would “do.”

Yes, not only are those fund options “duplicative,” they are often retail, rather than institutional class. Or actively managed when passive varieties were available. And thus more expensive, so the argument goes.

They pay for those (multiple) recordkeepers via asset-based, rather than per participant fees.

This wasn’t always an issue in excessive fee litigation, but in recent years – well, it’s become something of a regular “feature” of this type litigation – and it’s been part and parcel of the fabric or 403(b) university plan litigation.

The argument, of course, is that recordkeeping is about keeping up with individual records, and whether that individual account balance is $100 or $100,000, the cost of keeping up with the balance is the same. However, not content to argue with the method of calculation, these days the plaintiffs nearly always take the next step – and proffer what they consider to be a reasonable per-participant fee – on their way to alleging that the fees being charged – are not.

They are big plans.

Nearly all of the 401(k) excessive fee lawsuits filed since 2006 (when the St. Louis-based law firm of Schlichter, Bogard & Denton launched the first batch) have been against plans that had close to, or in most cases in excess of, $1 billion in assets. There’s no real mystery here. Willie Sutton robbed banks for the same reason.

And if you’re a class action litigator, that also happens to be where a large number of similarly situated individuals can be found; a.k.a. plaintiffs.

Less cynically, the plaintiffs generally charge that, despite the plan’s large (“jumbo”) size, rather than “leveraging the Plans’ substantial bargaining power to benefit participants and beneficiaries, Defendant caused the Plans to pay unreasonable and excessive fees for investment and administrative services.”

Where does this leave your “average” multibillion dollar 403(b) university plan? Well, they say that forewarned is forearmed. However, the reality is that corrective actions now may not be enough to keep the plan out of “cite” – but it might be enough to keep your plan out of court.

- Nevin E. Adams, JD
 
Note: It bears acknowledging that the reason that so many of these suits allege the same things is not only that the plans have similar structures and characteristics, but that many of the suits have been filed by the same firm (Schlichter Bogard & Denton) – or by firms that have taken pages (literally in some cases) from the suits filed by that firm.


Saturday, March 31, 2018

Parental Guidance


Photo of Nevin and his mom.
Nevin and his mom.

This weekend will mark the 12th anniversary of my father’s passing. There’s sadness associated with that date, of course, but he left behind a rich legacy in friends, family, and his life’s ministry that manages in the oddest ways to touch me at least once a month, even now.

At 76, Dad lived longer than I think any of the men on his side of the family had to that point (as a lineal descendant, I’m happy to note that on my mother’s side, my grandfather and great-grandfather made it past 90). Ultimately, he was with us longer than he expected to be – but a lot less time than I ever anticipated. However, for all the good that Dad did in this life for others, as I have thought about my father this week, it’s my mother that is more often in my thoughts. Because she, like many women, have spent longer in retirement than their husbands.

As is the case in many families, “Mom” was our family’ CFO. She was the one who encouraged me to start saving in my workplace retirement plan as soon as I was eligible (and I did), and over her lifetime she has continued to practice what she preached.

Now nearly 88, Mom’s still independent, vibrant, financially self-sufficient – and that’s no accident. On top of the expenses of rearing four kids, Dad, a minister, considered self-employed for most of his working life, funded both the employer and employee portions of Social Security withholding and still found a way to set aside money in a tax-sheltered account (he also tithed “biblically,” for those who can appreciate that financial impact).

Mom, a school teacher, took a fairly significant (and unpaid) “sabbatical” so that she could stay at home with her four kids until the youngest was ready to head off to school. When she returned to work she was covered by a state pension plan, albeit one that required from her paycheck a much more significant contribution than most defer into 401(k)s). On top of that she saved diligently to buy back the service credits she had forgone during the years she worked in our home without a paycheck – and then set aside money in her 403(b) account (over Dad’s objections, I might add). Somehow, despite all those draws on their modest incomes during their working lives, they managed to accumulate a respectable nest egg – and bought a long-term care policy before such things were “cool” so as not to be a burden on their kids. Don’t tell me those of modest incomes can’t and won’t save.

Indeed, generally speaking, women face many more challenges regarding retirement preparation than men. They live longer (and thus are likely to have longer retirements to fund), tend to have less saved for retirement (lower incomes, more workforce interruptions, both when children are young, and as their parents age), and in addition to longer retirements, those longer lives mean that they are also more likely to have to fund what can be the catastrophic financial burden of long-term care expenses.

Sadly, because we all know how much difference it can make in retirement savings, women are less likely to work for an employer that offers a retirement plan at work (or to be part-time workers, and thus less likely to be eligible to participate). Only one in three women use a professional financial advisor to help manage their retirement savings and investments.

Oh, and like my mother, they tend to outlive their spouses –often by far more than the variance in average life expectancy tables suggest.

March has been designated Women’s History Month, and it seems a good time, even as it draws to a close, to acknowledge not only the special challenges that women face, but the amazing women out there – like my Mom, and perhaps yours – who are not only overcoming those challenges, but passing on the good habits of a lifetime to a new generation of savers, to boot.

- Nevin E. Adams, JD

Saturday, March 24, 2018

‘End’ Adequate? Are We Getting an Accurate Read on Retirement Readiness?

The title of a new report by the Society of Actuaries poses an intriguing question: “Retirement Adequacy in the United States: Should We Be Concerned?”

When all is said and done, the answer from the report’s authors seems to be “it depends.”

And, as it turns out, it depends on a lot of things: who is asking the question, who you are asking the question about, and what you think the answer should be. And that doesn’t even take into account the questions about the assumptions one makes to come up with the answers.

The SOA report draws some conclusions:
  • The current system of voluntary employment-based retirement plans has been largely successful from the perspective of companies sponsoring plans for individuals with long-term employment covered by such plans.
  • The mandatory Social Security system has done much to reduce poverty in old age, though adequacy studies using replacement ratios may overstate the success of this safety net for those in the lowest-income groups, because too many rely solely on Social Security as their sole source of support. Moreover, for households that don’t have access to employer-sponsored retirement plans, Social Security alone will not allow them to maintain their preretirement standard of living.
  • There is a need for future research that delves into the retirement challenges of particularly vulnerable populations, such as those who are widowed, divorced, long-term disabled or long-term unemployed.
But when it comes to answering the question posed in the title – well, the report’s authors concede that “significant differences in methodologies that are used in retirement adequacy research makes direct comparisons of results more difficult.” Specifically that most studies:1
  • do not adequately account for major unexpected expenses or shocks, such as poor investment performance, long-term care, death of a spouse and unexpected out-of-pocket medical expenses;
  • assume that the adequacy objective is to maintain pre-retirement living standards (surveys indicate retirees are willing to live more conservatively);
  • assume that people retire at a “normal” retirement age; and
  • differ significantly in their treatment of housing wealth (if housing wealth is accessible to meet retirement needs, overall adequacy is higher).
The report also offered some cautionary notes, specifically that:
  • You need to consider the source(s). “Different stakeholder groups are asking different questions, offering different solutions and measuring success in different ways.”
  • Reliance on replacement ratios can be misleading. While they are easily explained, can be compared over time, and may be used for individuals, groups of individuals or the entire retiree population, “there is no universally agreed-upon definition or consensus on what constitutes an adequate replacement ratio or on how to adjust for differences in individual circumstances.”
  • Post-retirement spending patterns can, and do, vary. Lifetime spending needs are also highly dependent on the length of the retirement period, changes that occur over time and whether a household experiences a spending shock during retirement. On the one hand, focus group and survey data show that most retirees are frugal and are satisfied with a lower standard of living in retirement than what is considered adequate in most research studies. However, large expense shocks “have a significant negative effect on retiree finances,” and many models ignore those impacts.
Ultimately, they conclude that some studies conclude that there is a retirement crisis in the United States and while others conclude that the system is in good shape – inconsistent outcomes that the authors say can be shown to be due to differences in research objectives, methodology, assumptions, definition of adequacy and population studied.

“The truth is that our retirement system has both successes and failures.”

Here’s to maximizing the first, and whittling away at the second – and not getting distracted by headlines in the meantime.

- Nevin E. Adams, JD
 
Footnote
  1. However inconsistent current reports are, things might be worse when it comes to considering the current state versus future retirements. The report notes that many of the current studies fail to take into account the impact of changes in retirement ages, phased retirement and work during retirement. And that most studies focus on the retirement adequacy of current and near retirees, although retirees of the future may face more difficulty than today’s retirees “because of demographic issues, high debt load, lower likelihood of being married and owning a home, potential future reforms to Social Security, shifts in employment, and changes in the structure of employee benefit plans.”

Saturday, March 17, 2018

'Missing' Inaction

While it’s hardly a new topic, the subject of missing participants is much in the news today – and arguably a growing concern for plan sponsors, particularly with the expansion of automatic enrollment.

Earlier this year the Government Accountability Office published a report – and some recommendations – on the subject of (re)connecting participants with their “lost” account balances. That report noted that from 2004 through 2013, more than 25 million participants in workplace plans separated from an employer and left at least one retirement account behind, “despite efforts of sponsors and regulators to help participants manage their accounts.” The report acknowledged that there are costs involved in searching for these “lost” participants, going on to note that there are no standard practices for the frequency or method of conducting searches.

Once upon a time the IRS provided letter-forwarding services to help locate missing plan participants, but with the Aug. 31, 2012, release of Revenue Procedure 2012-35, the IRS stopped this letter forwarding program. Moreover, while the Labor Department has provided guidance to plan sponsors of terminated DC plans about locating missing participants and unclaimed accounts, they have yet to do so regarding ongoing plans.

That said, the GAO reported that they had been informed by DOL officials that they are conducting investigations of steps taken by ongoing plans to find missing participants under their authority to oversee compliance with ERISA’s fiduciary requirement that plans be administered for the exclusive purpose of providing benefits.1

In fact, the Labor Department’s Employee Benefit Security Administration’s Chicago Regional office adopted a “missing participant” regional initiative in fiscal year 2017, and – working with the PBGC, has reportedly recovered nearly $6.3 million for 133 participants, according to Bloomberg Businessweek.

More recently Sens. Elizabeth Warren (D-MA) and Steve Daines (R-MT) reintroduced the bipartisan Retirement Savings Lost and Found Act, noting that many Americans leave their jobs each year without giving their employers directions with what to do with their retirement accounts – a trend the bill’s sponsors say has increased with the expansion of auto enrollment. The legislation calls for the creation of a national online lost and found for Americans’ retirement accounts – and claims to leverage data employers are already required to report to do so (though the devil may lie in the details). The legislation also purports to clarify the responsibilities employers and plan administrators have to connect former employees with their neglected accounts.

Indeed, in such matters, plan sponsors often feel trapped between the proverbial rock and the hard place – pressed hard on the one hand by regulators to locate these former participants (and potential beneficiaries) – on another by state agencies with an avid interest in the escheatment of those funds – and often squeezed by the growing costs not only of trying to locate these participants, but the costs of distributing a wide assortment of plan notices, not to mention the ongoing costs of maintaining these accounts in potential perpetuity.

Little wonder that among its recent recommendations, the GAO recommended that the Secretary of Labor “issue guidance on the obligations under the Employee Retirement Income Security Act of 1974 of sponsors of ongoing plans to prevent, search for, and pay costs associated with locating missing participants.”

Said another way, what’s “missing” is more than former participants – it’s some safe harbor guidance that would provide some comfort and structure to those trying to reasonably fulfill their duties as plan fiduciaries – an ongoing concern for plans2 that are an ongoing concern.

- Nevin E. Adams, JD
 
Footnotes
  1.  Speaking of missing participants, the headlines of late have focused on issues regarding defined benefit participants. Most notably perhaps, MetLife disclosed last year that it failed to locate some group annuity clients that had likely moved or changed jobs. Nor was this a recent problem – the issue, which the firm said involved some 13,500 pension clients, was attributed to a “faulty system” that the firm had been using for a quarter century – a system that assumed that if the firm was unsuccessful in contacting participants twice that the individual would never respond, and that therefore weren’t going to claim benefits. In fact, the Labor Department’s push for companies sponsoring pension plans to find missing participants cited above reportedly influenced MetLife’s decision to conduct the review. Enter Secretary of the Commonwealth William F. Galvin, who just announced that his office discovered “hundreds of Massachusetts retirees” who are owed pension payments by MetLife. Galvin noted that the regulator planned to look into what MetLife had done in the past to locate and pay the retirees. 
  • He also said his office’s investigation has been expanded to look into other firms who provide  retirement payments, including Prudential, Transamerica, Principal Financial, and Mass Mutual.
  1. You may recall that last fall the Pension Benefit Guaranty Corporation (PBGC), the nation’s private pension plan insurer, announced the expansion of its Missing Participants Program beyond its historical focus on PBGC-insured single-employer plans as part of the standard termination process to cover defined contribution plans (e.g., 401(k) plans) and certain other defined benefit plans that end on or after Jan. 1, 2018. However, this only deals with terminating defined contribution plans.

Saturday, March 10, 2018

‘False’ Start?



There’s a new proposal being floated that proponents say would “increase retirement income security and reform Social Security.” And yes, a mandate is involved.

The proposal involves something tagged “Supplemental Transition Accounts for Retirement” (a.k.a. “START”), and it’s being touted by AARP. The proposal is the work of Jason Fichtner of George Mason University, Bill Gale of the Brookings Institute and Gary Koening of AARP’s Public Policy Institute. The basic concept is to help people postpone claiming Social Security benefits (the most common age to start claiming remains 62) since – as an executive summary of the proposal indicates – between the ages of 62 and 70, monthly Social Security benefits increase by about 7% to 8% for each one-year delay in claiming.

This is accomplished by creating the aforementioned START accounts, which are funded by a new layer of mandated withholding: 1% each from workers and employers (2% combined) up to the annual maximum subject to Social Security payroll tax (self-employed individuals pay both parts, as they currently do with Social Security). Worker contributions are post-tax and employer contributions are pre-tax – oh, and there is a federal government contribution for lower income workers (up to 1% for married filing jointly with adjusted gross income less than $40,000) as well.

Individuals wouldn’t be directing these investments. Rather, they would be “professionally managed in a pooled account with an emphasis on keeping administrative fees as low as possible,” with the oversight of an “independent board” that would “select the private investment firm(s) responsible for managing START assets” and setting the investment guidelines.

So, what would this mean for retirement security? Well, START’s proponents claim that the proposal would “reduce poverty significantly for people ages 62 and over “under current law’s scheduled benefits,” raising the net per-capita cash income the most for older Americans with the lowest lifetime earnings by 10% on average and 15% at the median in 2065 compared to scheduled benefits under current law.

Now, it’s not hard to imagine that an additional 2% mandated savings would improve outcomes – certainly postponing drawing on Social Security benefits alone would serve to increase the monthly benefits by some factor (though actuarially speaking, it shouldn’t have much impact on the fund itself). Not to mention those who aren’t currently saving at all (we’ll just assume they can come up with the 1% mandate) – and there’s that additional government “match” for lower income workers to add to the outcome mix.

And yet, the proposal’s authors would appear to claim more. While they make their comparison to “scheduled benefits under current law,” which would seem to infer a comparison of the additional mandate and timing to that available under Social Security, the executive summary of the proposal notes that the Urban Institute analyzed the proposal based on assumptions ranging from one where employees reduce their contribution either to zero or by the amount of the START contributions, whichever is smaller.

Said another way, the analysis – and those rosy outcomes – assumes that workers confronted with the mandate will not reduce their workplace contributions by an amount larger than the mandate. Nor is it clear from the report that the analysis makes any allowance for the reduction in employer matching contributions that might accompany reductions by workers in their 401(k) savings – not to mention employers who might well see a need to reduce their workplace savings plan match because they are now required to put an additional 1% into these new mandatory accounts.

As retirement income security projections go, that doesn’t seem like a very good place to… start.

- Nevin E. Adams, JD