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