Saturday, September 14, 2019

It's About Time

Most of the surveys and research in our industry focus on the shortcomings – a lack of savings, of diversity in investment, of failure to maximize the employer match, or to have access to the programs that support those opportunities. There is, however, a shortfall that doesn’t garner much attention.

I’m talking about time.

And while time is often treated as an “enemy” of retirement planning (sometimes under the “longevity” label), certainly when there is a concern about outliving one’s resources, or perhaps when too little time remains to make preparations, there is another aspect: a retirement cut short.   

This is heavy on my mind of late – not just because this week marks the anniversary of the Sept. 11 attacks, though that’s certainly a factor.

My recollections of that awful day notwithstanding, I’ve been particularly mindful of the untimely passing of three individuals of my acquaintance in recent weeks: a relative, a colleague, and an associate here. Two were not even thinking about retirement when their time came – one had been eagerly looking forward with anticipation to a retirement she’ll never have.

Now I’m not privy to the particulars of the financial plans of these individuals – the needs that their unexpected passing may present for others – or what steps, if any, they may have taken to ease the financial circumstances for those they left behind. I hope they had that opportunity, but know all too well that many don’t.

People die tragically and prematurely every day, of course. Most of them are unknown to us, and nearly all are unnamed to us. And as the recent mass shootings remind us, on any given day, any one of us could go to work, or to the store – and simply not come home.

Ironic as it sounds, death is a part of life. Thoughtful individuals prepare for the possibility of death –through faith, sacrifice and, with luck, sound financial planning. However, most don’t dwell on those realities, and that’s doubtless a good thing.

In this business, we spend a lot of time worrying about the risks of outliving our retirement savings. In fact, surveyed workers increasingly seem to rely on an assumption that they will work longer, or save more later, to make up for their current shortfalls.

However, and perhaps particularly on this anniversary eve of the Sept. 11 attacks, it’s worth remembering that we don’t always have as much time as we might think – or want.

It’s time we did.

- Nevin E. Adams, JD

Saturday, September 07, 2019

How Gen Z's Retirement Will Be Different

Those “kids” who were just dropped off at college for the first time? By their sophomore year, their generation will constitute one-quarter of the U.S. population. How will their retirement be different?

That’s according to the authors of the so-called Mindset List – now housed at Marist College, having relocated from Beloitt College – has been published each August since 1998. Originally created as a reminder to faculty to be aware of dated references, the list provides a “look at the cultural touchstones that shape the lives of students entering college.” Not to mention those who will go on to be workers and – eventually – retirees.

This fall’s college class of 2023 is the first class born in the 21st Century (2001) – and thus lack a personal memory of the September 11 attacks. According to the authors of the Mindset List:
  • This group has never used a floppy disk (heck, they’ve probably never even seen one, except at that “save” icon).
  • Their phone has always been able to take pictures.
  • They’ve always had Wikipedia as a resource.
  • Oklahoma City has always had a national memorial at its center.
  • As air travelers they’ve have always had to take off their shoes to get through security (well, unless they have TSA pre-check).
  • PayPal has always been an online option for purchasers.
  • There’s always been a headlines scrawl on TV.
  • They have always been able to fly Jet Blue.
  • Troy Aikman’s play calling has always been limited to the press booth.
  • They’ve never been able to watch Pittsburgh’s Steelers or Pirates play at Three Rivers Stadium.
  • Monica and Chandler from “Friends” have always been married (May 17, 2001).
Despite those differences, the class of 2023 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.

And yet, when it comes to retirement, the Class of 2023 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 about their 401(k). (It remains to be seen if they’ll understand it any better than their parents.)
  • There have always been plenty of free online calculators that allow them 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.)
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, access to a trusted advisor to answer their questions along the way...

- Nevin E. Adams, JD

Saturday, August 31, 2019

A Hallmark Holiday?

I don’t know about you, but I’ve always had a certain ambivalence about what are generally termed “Hallmark holidays.”

You know the ones I’m talking about – the ones that seem crafted for the sole purpose of generating sales for greeting card sellers. Of course, after a while you no longer question their existence – and if one still struggles to remember exactly when “Grandparent’s Day” is, well, we’ve pretty much got Mother’s Day, Father’s Day, and Valentine’s Day down to a science (one that might not be on your calendar is National Slap Your Irritating Co-Worker Day, October 23). Indeed, these days there are months on the calendar devoted to a whole series of acknowledgements and remembrances.

There are also a number of occasions set aside to recognize the importance of saving (America Saves Week –February ), the importance of planning for retirement (National Retirement Planning Month – July, and National Retirement Planning Week – April), and the issue of retirement security generally (National Retirement Security Week – October). There’s even a National Financial Literacy Month (April) and National Financial Planning Month (October).

While I’ve had some involvement with most of those during my career (mainly to remind folks about their occurrence) and, sadly, for many those events are often dismissed as “Hallmark holidays” – even for those of us who have made a career-long commitment to helping improve the nation’s retirement prospects.

That said, one that has stuck with me – even prior to our affiliation with the Plan Sponsor Council of America – is 401(k) Day. This year it falls on Friday, September 6 – a date chosen in acknowledgement of the fact that, as retirement follows labor, this focus on retirement follows Labor Day (fans of history or trivia may appreciate that then-President Gerald Ford signed the Employee Retirement Income Security Act (ERISA) into law on the day after Labor Day, 1974).

Of course, these days the focus has broadened, and incorporates a focus on financial wellness ahead of retirement, as well as preparations for that time yet to come. Like retirement itself, the preparations are best attended to on an on-going basis, rather than a single date on the calendar.

Readers of this publication are all too aware of the challenges that confront our nation’s retirement savings system – widespread financial illiteracy, a persistent coverage gap, and looming shortfalls in the underpinnings of Social Security. That “familiarity” with these complex issues perhaps makes it too easy to dismiss the opportunity that an occasion like 401(k) Day represents.

Sure, we’re talking about these issues every day – but as a friend reminded me long ago, even a Hallmark holiday can provide an opportunity to pay attention to the people – and things – we often take for granted.

So, this year, let’s (all) take advantage of the “occasion” – all year long. You can find out how at

- Nevin E. Adams, JD

Saturday, August 24, 2019

6 Things That People Get Wrong About Retirement

Retirement planning can be a complicated process – and surveys suggest that most workers haven’t even attempted a guess. But even those who have can overlook some pretty significant factors that can have a dramatic impact on retirement readiness.

Here are some critical factors that are easy to get “wrong.”

The Cost of Inflation

Twenty or 30 years from now, prices are likely to be different than they are today, and for many, those prices will increase – and perhaps particularly costs of critical life aspects like health care. Consider that, overall, the average inflation rate for 2018 was 1.9%. It’s not that all prices will always go up – but they often do, and might increase faster than your income. Think of it as the “magic of compounding’s” evil twin…

There’s a calculator that you might find interesting at

The Cost of Taxes

A key part of the incentive for retirement saving in a 401(k) is the ability to postpone paying taxes on those salary deferrals. The operative word there is, of course, “postpone.” Sure enough, as those retirement savings are withdrawn in retirement, you can bet that Uncle Sam will be expecting his cut – and on a frequency dictated by the required minimum distribution schedules of the IRS.

In fact, every time I see one of those reports about the average 401(k) account balances of those in their 60s, I can’t help but think that somewhere between 15% and 30%, and perhaps more – won’t go toward financing retirement, but will instead go to Uncle Sam and his state and municiple counterparts.

After all, that’s one of those pre-retirement expenses that doesn’t end at retirement. And, while it may well be at lower rates than when it was deferred pre-tax – it may not be.

The Cost of Long-Term Care

Long-term care is one of those retirement cost variables that can be very complicated to predict – which perhaps explains why the vast majority of retirement needs projections models fail to take it into account (the Employee Benefit Research Institute’s being a notable exception). The data suggests that most of us will have some exposure to this risk – but also suggests that only a minority will get hit with a truly catastrophic bill against their retirement savings.

The question is, which group will you fall within? And can you afford to be wrong?

What You’ll Get from Social Security

Ask any young worker today about their expectations regarding Social Security, and you’ll likely encounter a fair amount of skepticism; a recent Pew Research report notes that roughly half of Americans (48%) who are younger than 50 expect to receive no Social Security benefits when they retire. Indeed, according to the 2018 Retirement Confidence Survey published by the Employee Benefit Research Institute, today’s workers are almost half as likely to expect Social Security to be a major source of income in retirement (36%) as today’s retirees are to report that Social Security is currently a major source of income (67%).

As things stand today, Social Security’s future is far from certain, though even under a worst case scenario, retirees are likely looking at a reduction, rather than a cessation of benefits. That said, as things stand now, those who retire at full retirement age today would be looking at a maximum of….

When You’ll Retire

Perhaps the most important assumption is when you plan to quit working; today most Americans are doing so at 62, though 65 seems to be the most common assumption – and while using 70 (or later) will surely boost your projected outcomes (it both gives you more time to save, and reduces the time that you will be drawing down those savings), it may not be realistic for many individuals. The 2019 Retirement Confidence Survey found that more than 3 in 10 (34%) workers expect to retire at 70 or beyond or not at all, while only 6% of retirees report this was the case.

In fact, the RCS has consistently found that a large percentage of retirees leave the workforce earlier than planned (43% in the 2019 RCS). Many who retired earlier than planned did so because of a hardship, such as a health problem or disability (35%), and a similar number did so due to changes at their company (35%) – in other words, events not within their control, and likely not foreseeable (admittedly, 33% did so because they could afford to do so).

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

How Long Your Retirement Will Last

Needless to say, the sooner your retirement starts, the longer it might last. But the length of retirement is also a function of what the academics refer to as “longevity,” and what regular people call “life.”
Indeed, the good news we are living longer – but that means that retirements can last longer, and medical costs can run higher. And while we’re living longer, studies indicate that we tend to underestimate how much longer we will live. The Social Security Administration notes[i]that a man reaching age 65 today can expect to live, on average, until age 84; a woman turning age 65 today can expect to live, on average, until age 86.5.

But those are just averages; about one out of every three 65-year-olds today will live past age 90, and one in seven will live past age 95.

Though it’s also worth noting that the averages include a fair number of individuals who won’t make it that “far.”

Ultimately, of course, it’s not what you get wrong about life and retirement – it’s what, and how much, you get right.
- Nevin E. Adams, JD

[i]The Social Security Administration has an online calculator that, based only on gender and birth date (and there are a lot of additional factors to consider), can provide a high-level estimate.

Saturday, August 17, 2019

A Change in Providers

We really hadn’t been focused on making a change, though the subject had come up from time to time. 

In fact, considering how long we had been thinking about making a change without actually doing anything about it, the change itself felt almost accidental in its suddenness. So sudden, in fact, that, in hindsight, I found myself wondering if we were “hasty” – perhaps too hasty.

Make no mistake – we had been happy enough with our current provider, certainly at first. In fact, we had been with them for a number of years and had, over time, expanded that relationship to include a fully bundled package of services. That made certain aspects simpler, of course – though we discovered pretty quickly that the “bundle” was presented as being more seamless than it actually was. Still, net/net, we were ahead of the game financially, and certainly no worse on the delivery side; we were just a bit disappointed in the disconnect between the sale and the service levels.

And all was fine for a while – or so it seemed. Looking back, there were signs of trouble that we could have seen – if we had been looking. There were unexpected charges on the invoices, and services that we were sure had been described as being part of the bundle that turned out not to be. There was the monitoring service that was supposed to be in place that we found out wasn’t – quite by accident, and months later. Over time we cut back on the services included, but the prices just kept going up. We were, quite simply, getting less and paying more, and getting less than we thought we were paying for. And it grated on us.

In hindsight, perhaps we should have been more vocal about our discontent. I’ve wondered what might have happened if we had called up and questioned those invoice charges, or made a bigger fuss about the sporadic outages. But, in the overall scheme of things, the charges weren’t large, just not what we expected. We figured that perhaps we had been the ones to misunderstand – and didn’t want to look “stupid” by calling to complain about a charge that some fine print in some document somewhere said was perfectly legitimate. Meaning always to go check that out sometime, the time to do so never materialized. Instead, we grumbled among ourselves about how aggravating it was – and how we should do something about it… sometime.

Unfortunately, change is painful and time-consuming. The emotional and fiscal toll these changes took, while annoying, simply wasn’t enough to put change at the top of the to-do list. So, we talked about a change – and every so often asked friends and acquaintances about their experience(s). Of course, it was hard to find someone else who was in exactly the same situation – and a surprising number simply empathized with our plight, being stuck in much the same situation themselves. All of which conveyed – to us, anyway – a sense that, uncomfortable as we might be with the current service package, we were probably about as well-positioned as we could be.

Then, one day, out of the blue, an opportunity presented itself. We weren’t looking for it, as I said earlier, but the months of frustration left us open to a casual message from an enterprising salesman – one who not only knew his product, he clearly knew the problems that others like us had with our current provider.

He did more than empathize with our situation. He did not pump me for information about what I was looking for, or what I didn’t like about my current situation. Rather, he was able to speak about the features/benefits that his firm offered… and, to my ears anyway, essentially ran through the list of concerns I had – but had not articulated – with our current situation. In fact, before our conversation was done, he had pointed out to me things that his firm offered as a matter of course that the current provider hadn’t even mentioned in all the years we had been associated – things I had assumed we couldn’t get, or couldn’t get without paying a lot more.

We made the change two weeks ago – and while it’s early yet, I’m thrilled with the results.

Ultimately, our former provider set themselves up by taking our business for granted, for (apparently) caring more about attracting new customers than in attending to our concerns, and for (apparently) assuming that “quiet” meant satisfied.

Provider changes can be fraught with uncertainty, if not peril. Little wonder that it often takes a pretty serious misstep (or a consistent history of smaller missteps) on the part of an incumbent to warrant such a response. So, are your clients happy, content, and “quiet”?

Or have they just quit complaining?

- Nevin E. Adams, JD
Note: For the record, the provider change recounted above involves my cable company.

Saturday, August 10, 2019

Plan Sponsors Are From… Mars?

Do plan sponsors really know what participants want?

Back in the early 1990s, there was a very popular “self-help” book on relationships titled “Men Are From Mars, Women Are From Venus.” The basic premise, of course, was that men and women have different means and styles of communication – that, in essence, they might as well be from different planets (hence the title).

It suffers, as most such works do, from over-generalizing (to say the least – the hidden points system ostensibly maintained by each gender struck me as truly bizarre, even in the 1990s) – but it no doubt stimulated some relationship conversations, and if it opened some of those doors – well, that’s a good thing.

The relationship between plan sponsors and participants isn’t generally fraught with the same layers of complexity, but every so often a survey comes out that makes me think otherwise.

The latest was a report by American Century which surveyed (separately, but both during Q1 2019) 1,500 respondents between the ages of 25 and 65, currently working full-time outside the government and 500 defined contribution plan decision makers.

The survey found that only a small minority of plan participants (14% of those ages 25-54) wanted employers to "leave them alone" when it came to help with retirement savings – about half the number that plan sponsors thought felt that way. And, according to the survey, more than 80% of participants wanted at least a "slight nudge" from their employers (though, let’s face it, plan fiduciaries might well be reluctant to go too far).

On target-date funds, some 40% of responding employers felt that investment risk pertaining to market movements was the most important factor in target-date investments – while a comparable number of employees were more concerned about longevity risk (in fairness, investment risk wasn’t far behind).

Speaking of investments, nearly all – 90% - who either already offered or were considering offering ESG investments thought their participants would be interested (and why wouldn’t they), while two-thirds of sponsors say their retirement plan advisor is currently or should be recommending ESG solutions.

However, only 37% of participants actually expressed some interest in ESG options – and we’ve seen plenty of industry surveys (including the Plan Sponsor Council of America’s, among others – and that interest, not surprisingly, was apparently at least somewhat dependent on performance comparable to the average product. Ultimately, American Century found that while sponsors believed that 88% of workers were at least somewhat interested in the option, fewer than 40% actually were.

Sometimes the disconnects aren’t even between different parties; the American Century survey found that 82% of plan sponsors believe it was at least “very important” to measure how ready employees are for retirement – and yet only 46% formally did so.
Over the years, we’ve seen similar “disconnects” in the benefit priorities, availability of retirement income options, and, in fairness, we’ve also seen disconnects between what individuals say they would do – and what they seem to actually do given an opportunity. Not to mention those between plan sponsors and providers – and yes, between plan sponsors and advisors.

There are, of course, any number of rational explanations for those apparent gaps. We can be reasonably sure that these surveyed plan sponsors and participants aren’t coming from the same place - literally. We also know that different industries, and different employers, and even different geographic locations seek to hire and attract different kinds of workers – who are, in turn, motivated and attracted by different things – which they may or may not choose to share with their employer.

Sometimes people are more inclined toward openness with an anonymous survey – which may present option(s) they hadn’t even considered. And sometimes, of course, they’re “led” by questions designed to produce a certain outcome. Plan sponsors glean their sense of their workforce from any number of sources with a wide range of reliability – everything from personal experience, to industry surveys to the headlines in the press…to the inevitable “squeaky wheels” that (too?) often darken the door of HR with their latest complaint and/or suggestion.

That there are different perspectives should come as no real surprise – and, if the occasional survey highlights some apparent discrepancies in priorities, well one hopes that should spur some constructive consideration and engagement.   

Because, ultimately, what matters isn’t what “planet” you’re coming from – but that you’re speaking the same language.

- Nevin E. Adams, JD

Saturday, August 03, 2019

Half A Chance

I’ve never played the lottery. But there are days…

I tell myself it’s because I know how remote the odds are, that the rules are too complicated, that they “feed” on the aspirations of people who should be spending their money on “better” things – and even that I don’t have enough “lucky” numbers to bet on consistently. But those are rationalizations.

The simple fact, despite the screaming billboards and nightly news reminders about the size of the latest “mega” jackpot, is that I simply find it inconvenient. Oh, it’s not like I never frequent the convenience stores or even grocery checkouts that these days beg for the cash/credit card that hasn’t yet been put away. I’ve never really regretted walking away from those “temptations.” And yet…    

As an industry, we spend a lot of time focused on a wide variety of considerations that impact the likelihood of having a financially satisfying retirement. But what about those who don’t have access to a retirement plan?

Now, even thoughtful industry insiders have been known to push back on the notion that people don’t have access to a retirement plan. And, in fact, you don’t have to be an industry insider (though it helps) to know that anyone who doesn’t have access to a retirement plan at work can stroll down to your local bank or financial services outlet and open an IRA – heck, these days you can just boot up your computer and do that online. And yet people don’t. This isn’t really a surprise – but even among modest income workers ($30,000-$50,000/year), we’ve seen that workers are 12 times more likely to save via a workplace retirement plan than to open that individual IRA.

Last week, we unveiled a state-by-state analysis that highlighted the coverage gap – that more than 5 million employers in the United States still don’t offer a workplace retirement savings benefit, a generation after the 401(k) plan design was first introduced. And what that means is that more than 28 million full-time workers don’t have an opportunity to save for retirement in a 401(k) – and that doesn’t include more than 23 million part-time workers who don’t have that opportunity.

That is, of course, the coverage “gap” that the so-called state-run automatic IRA programs are designed to close. And, though it’s still relatively early in that particular vein, they do seem to be having a positive effect. In Oregon (whose OregonSaves program has just commemorated its second anniversary), they’re reporting more than 6,856 employers now participating – who ostensibly didn’t offer a plan before – with some 95,704 employees – who, ostensibly, weren’t saving for retirement previously. And if the opt-out rate is high (approximately 30%) compared with the 7-9% rates typical of automatic enrollment plans administered in the private sector, well it not only lacks the support of an employer match (not to mention the support of workplace education or an advisor), but it also has a (still) relatively high 5% default contribution rate, though recent surveys suggest that the default rate standard is rising in 401(k)s.

There are, of course, issues with the emergence of multiple, and potentially contradictory, state-run versions – particularly for employers who draw workers from multiple states. But in just this last year, the program has begun offering traditional IRAs and has been opened to the self-employed, gig economy workers and cannabis businesses. The program is now more than halfway through its statewide rollout, which will be completed by mid-2020, with more new “features and improvements” in the works. Similar programs in Illinois and California are underway, or nearly so – and Rep. Richie Neal (D-MA), Chairman of the House Ways & Means Committee, has previously proposed a federal version

Much of the coverage gap can be laid at the door of smaller employers, which arguably have a different focus on such matters than larger organizations. And, sure enough, a 2013 analysis by the nonpartisan Employee Benefit Research Institute (EBRI) found that when you adjust for access to a plan – the percentage participating divided by the percentage working for employers that sponsor a plan – you find that participation rates between larger employers and smaller ones largely disappear. For example, while data indicates that just 16.9% of those full-time, full-year employees who work at smaller employers participate in a plan – that turns out to be about 86% of the 19.5% of workers in that category whose employer sponsors a plan. And that is nearly identical to the participation rate of private-sector employers with 1,000 or more employees.

A few years back I remember hearing a lottery motto, “Gotta be in it to win it.” That’s a motto that those worried about retirement finances should always take to heart.

But if they’re going to have (more than) half a chance, there’s something to be said for improving the odds – by having a chance to “play.”

- Nevin E. Adams, JD

Saturday, July 27, 2019

How Much (Should) a New Committee Member Know?

A recent federal court decision should remind us all of the importance of plan committee education.

The case involved a suit by participants in the SunTrust 401(k) plan (see Is Fiduciary Responsibility Retroactive?) that challenged the initial selection of, and subsequent acquiescence with, an ostensibly imprudent plan investment menu. The court’s decision focused on one aspect of the case: the liability of “new” plan committee members for actions that predated their involvement on the committee, but continued after their involvement. The court, in a decision that will likely be viewed favorably by new committee members, excluded them from liability for committee moves that predated their participation, at least to the extent they lack “actual knowledge” of imprudence.

Along the way to that determination, Judge Orinda D. Evans of the U.S. District Court for the Northern District of Georgia incorporated the testimony of those new committee members as to the training/information they received as they joined. While it may reflect their recollection more than the reality, they convey[1] a very strong sense of being handed reading materials, and left to their own devices to fill in the blanks.

The deposition questions were doubtless focused on the particular aspect of fund selection, and perhaps dealt with nothing beyond that. Indeed, several of the committee members did recount both an exposure to the plan document itself and some awareness of the importance of their role as a plan fiduciary.

As a baseline, I have long maintained that every plan committee member needs to know that:

You are an ERISA fiduciary.

Even if you consider yourself to be a small and relatively silent member of the committee, you direct and influence retirement plan money, and fiduciary status is based on one’s responsibilities with the plan, not a title. Simply stated, if you (or the committee you are part of) control the plan’s assets (such as choosing the investment options or choosing the firm that chooses those options), you are a fiduciary to the extent of that discretion or control.

You are responsible for the actions of other plan fiduciaries.

All fiduciaries have potential liability for the actions of their co-fiduciaries. For example, the Department of Labor notes that if a fiduciary knowingly participates in another fiduciary’s breach of responsibility, conceals the breach, or does not act to correct it, that fiduciary is liable as well. So, it’s a good idea to know who your co-fiduciaries are – and to keep an eye on what they do, and are permitted to do.

As an ERISA fiduciary, your liability is personal.

If they didn’t hear this message out the outset, the onset of litigation surely brought this reality home to the committee members. A committee member may be required to restore any losses to the plan or to restore any profits gained through improper use of plan assets. Now, you can obtain insurance to protect against that personal liability – but that’s probably not the fiduciary liability insurance you may already have in place, or the fidelity bond that is often carried to protect the plan against loss resulting from fraudulent or dishonest acts of those covered by the bond. If you’re not sure what you have, find out. Today.

The plan’s investment policy matters.

Note that I didn’t say the plan’s investment policy statement. The law (ERISA) doesn’t require that you have a written investment policy statement, but that same law does expect that the plan’s investments will be monitored as though one was in writing. Indeed, the vast majority of plans do have a written IPS – more than 90%, according to the Plan Sponsor Council of America’s 61st Annual Survey of Profit Sharing and 401(k) Plans.

More than that, generally speaking, you should 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, and not crafted at a point in time when you are desperately trying to make sense of the markets. In sum, you want an IPS in place before you need an IPS in place.

And a suggestion for you: have a formal “on-boarding” process for plan committee members.

Every plan, and every plan committee is unique. But the responsibility, and the prudent expert standard to which those responsibilities must be held applies uniformly – and it has been called “the highest known to the law.” In forming and conducting the committee it’s imperative not only that the members be selected wisely, but that they be informed and engaged so that they can adequately and fully discharge those responsibilities.

One recent court decision (Wildman v. Am. Century Servs.) in favor of the plan committee defendants explains that the committee met regularly three times a year, and had “special meetings if something arose that needed to be discussed before the regularly scheduled meetings.” Moreover, the defendants testified that those meetings “were productive and lasted as long as was needed to fully address each issue on the agenda. On average, the meetings lasted an hour to an hour and a half.”

The plan provided “training and information about their fiduciary duties, including a ‘Fiduciary Toolkit,’ which outlined their duties as fiduciaries, as well as a summary plan document, and articles regarding fiduciary duties in general.” That kit included a copy of the current Investment Policy Statement, and the court noted that “the Committee members read these materials and took their responsibilities as fiduciaries seriously.”

Arguably the personal interests of the new plan committee members in the SunTrust case were, at least at this stage, “well-served” by their lack of education (more specifically, the lack of “actual knowledge”) regarding the background of the decisions made prior to their appointment. However, this is only one set of issues, and they may yet be held to account for their subsequent affirmation (be it active or passive) in the continuance of those decisions.

And that’s when ignorance of your duties as a plan fiduciary can be really expensive.

- Nevin E. Adams, JD

1. Defendant Jerome Lienhard stated in his deposition that he received binders describing the funds in the Plan “presumably” containing documents describing fiduciary standards, that he spoke with Defendants Donna Lange and Ken Houghton about being a Benefits Plan Committee member and, upon becoming a member of the Benefits Plan Committee in August of 2006, familiarized himself with the Plan document. However, he did not recall taking action to determine whether previous breaches of fiduciary responsibility had been committed.

Defendant Christopher Shults said that he received training regarding the funds in the Plan when he became a Benefits Plan Committee member, and that he was “directed… to meet with an investment consultant representative "to become more educated about the investment decisions made by the Benefits Plan Committee.” However, he did not "remember any of the details of specificity around what we discussed" and he did not recall discussing previous investment decisions by the Benefits Plan Committee with the representative. Nor did he recall learning about selection decisions made by the Benefits Plan Committee prior to his becoming a member.

Defendant Mimi Breeden remembered that she “would have talked to subject matter experts and [her] staff and others to come up to speed on what the committee’s work was” and “what key priorities were,” that she “probably” had knowledge of the history of the Plan before 1997 but could not recall it or any information about the 1996 selection of Affiliated Funds, and that she could not recall whether she ever knew about the initial selection of Plan funds in 1996.

Defendant Mary Steele was sure she had read the Plan document at some point while a member of the Benefits Plan Committee and that Defendant Donna Lange briefed her regarding her fiduciary responsibilities as a Benefits Plan Committee member and “the most important things that [she] need[ed] to know about the committee,” and that while she did not remember how the SunTrust proprietary funds first came to be offered in the Plan, but that the 1996 change in the Plan from common trust funds to mutual funds “sound[ed] familiar.”

Defendant Thomas Kuntz did not recall whether he received any training regarding his duties as a Benefits Plan Committee member or whether he reviewed prior meeting minutes, though he recalled that the Benefits Plan Committee, “[a] s a matter of course,” “reviewed all the funds in the plan ... for appropriateness.” In a disposition he explained that he believed the proprietary funds in the Plan were appropriately included because “[t]hey looked to be reasonable choices based on assessments that [he] might have had at the time,” though he did not recall what those assessments were.

Defendant Donna Lange said that she was not aware of the process used in initially selecting the Affiliated Funds in 1996, just that “the approved funds were in place when [she] arrived.” As for that 1996 fund selection, Lange went on to say that she did not "recall studying this other than being aware “this is the plan, this is what we started with.” She did state, however, that she knew the Plan was only using proprietary funds when she arrived.

Defendant Aleem Gillani stated in his deposition that he does not recall ever being briefed or “brought up to speed” on the Benefits Plan Committee's decisions prior to becoming a member, and that he had no knowledge of them when appointed to the Benefits Plan Committee.

Finally, Defendant William H. Rogers, Jr. stated in his deposition that he has no knowledge of the initial Affiliated Funds selection in 1996, 1999, and 2001.

Saturday, July 20, 2019

A Giant Leap for Mankind…

While I am sure there was a period in my youth when I wanted to be a fireman, a cowboy, or maybe even a professional athlete, my earliest memories are of wanting to be an astronaut.

Never mind that my odds of becoming a professional athlete were, even then, considerably better than those of joining the nation’s elite group of astronauts. It was evident even to me early on that I lacked the athletic acumen for a career in sports – but it took years for me to appreciate what would have been required for me to satisfy NASA’s requirements (and be able to rationalize that the “real” reason was that I was too tall).

It was a magical time for our nation’s space program. There was a plan, three separate programs (Mercury, Gemini and Apollo) to help us get there, and a vision – as President John F. Kennedy said in May 1961 – of “achieving the goal, before this decade is out, of landing a man on the Moon and returning him safely to the Earth.” There was also a sense of national urgency (the so-called “Space Race” with the Soviets, which was a lot less scary than the arms race), and, while throughout its life the program was remarkably bereft of injury, the tragedy of the February 1967 fire on Apollo 1 that took the lives of Gus Grissom, Ed White and Roger Chaffee reminded us of the stakes involved.

And then, after years of watching Americans enter space, circle the planet, exit their craft while circling the planet (at unimaginable speeds), and then leave Earth’s orbit to touch the lunar sky, I can still remember the grainy black-and-white images of Neil Armstrong’s “one small step for man” flickering across the screen of my family’s small black-and-white television (replete with its aluminum foil-festooned rabbit ears) on that Sunday evening in 1969. An experience that was, in some form or fashion, replicated around the world that special July evening 50 years ago in a rare planetary unanimity of experience as we got that report of a successful landing at “Tranquility Base.”

Of course, it wasn’t all about developing “Tang,” magical space walks, and those incredible images of our astronauts bounding across the lunar landscape. It was about knowing where we wanted to be; putting together a detailed, comprehensive plan to get there; having any number of contingencies and backups “just in case”; the tenacity, dedication, and intellect to work around the inevitable problems that arise that you didn’t anticipate with those contingency plans (just watch Apollo 13); and – perhaps the most critical element in the successful completion of any project – a deadline.

It doesn’t take much imagination to draw a correlation between the planning for a landing on the moon and a successful arrival in retirement (OK, so maybe it takes a little imagination). It requires a notion of what constitutes a successful arrival, an idea of the steps that will be required to get there, the tenacity and ingenuity to deal with the inevitable bumps along the way – and the specificity of a date certain to give some structure to those plans.

Students of history know that one of the contingency plans for the Apollo 11 mission was a presidential statement if those astronauts had crashed (they got pretty low on fuel before landing), or if they hadn’t been able to return to Earth (some engineer actually forgot to put a handle on the outside of the lunar module door – and if they hadn’t noticed that and left the door open while they were on the surface, they might not have been able to get back inside the LEM). Fortunately, those contingencies are now simply interesting historical anecdotes. Still, it’s worth recalling that the ultimate mission was not only to get men to  the moon, but to return them safely home.

As we ponder the accomplishments and planning that helped our nation put men on the moon, it’s worth remembering that our “mission” is not only to get tomorrow’s retirees safely to retirement, to take those “small steps” along the way – but ultimately to position them and their finances to carry them safely through  retirement… to their “tranquility base.”

- Nevin E. Adams, JD

Saturday, July 13, 2019

The Biggest Retirement Assumption

There have been many different solutions put forth over the years to remedy the nation’s retirement ills, but regardless of your perception of the coming crisis (including those who believe such notions are overblown), there is a constant in every estimation of our retirement future.[1]

Yes, I’m talking about Social Security. Indeed, we rely on the inevitability of those benefits with a certainty generally accorded only to death and taxes (both of which play a significant role in Social Security eligibility and claiming, as it turns out).

And yet, for all its centrality in planning, Social Security faces its own funding crisis, or is projected to, according to the trustees of the program, in a report formally titled, “The 2019 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. ” That the program will run short of funds is no secret, with the only variable being at what exact point in the future will benefits have to be reduced (it changes modestly from year to year, depending on a couple of variables).

Not only is the funding crisis well-known, the aforementioned trustees’ report acknowledges, and routinely outlines a “broad continuum of policy options that would close or reduce Social Security's long-term financing shortfall,” along with cost estimates.

Years back, when the future crisis was no less real, but somewhat less large, I had the opportunity to hear former Federal Reserve Chairman Alan Greenspan speak on the subject of “fixing” Social Security. Greenspan, who had led a commission in the early 1980s charged with solving was then a more immediate crisis of the program (believe it or not), outlined the two core elements of any serious attempt to resolve the funding shortfall:
  • increasing funding (generally either by raising the withholding rates or the compensation level to which they are applied, or both); and
  • reducing benefits (by raising the claiming age) or what’s euphemistically referred to as “means testing,” which effectively reduces the benefits to higher income recipients. 
So, the answer to the problem is, as the actuaries remind us, “just math,” and we needn’t choose one solution or the other; rather, some combination – as it was in 1983 – is the approach that seems the most likely outcome.

Except, of course, the answer isn’t “just” math, it’s money. And fixing it – while not hard to figure out – will cost money that those who would make that call would “rather” spend on other things. It’s also fraught – as it was in the 1980s – with political hot buttons. Social Security has long been considered a “third rail” of American politics, and politicians have been burned for merely suggesting the need for change, much less putting forth specific proposals. 

That said, if there’s any aspect of this that is as widely known as the fact that there is a looming financial shortfall, it’s that the longer we put off taking steps to do so, the more difficult – the more expensive – it will be.

Yes, Social Security is most certainly the biggest retirement assumption – by individuals, retirement planners, and legislators alike. Today as we stand at the brink of the biggest retirement reform legislation in a decade – as we consider a growing number of state retirement savings mandates, and contemplate a federal expansion – we also know that as valuable, even essential, as those steps might be in broadening and deepening the success of the private retirement system – they won’t be “enough” if we don’t shore up the baseline foundation upon which the nation’s retirement security is currently predicated.

It’s time, in short, for an adult conversation about – and some adult action – to make sure that that most fundamental of retirement planning assumptions remains something we can count on.

- Nevin E. Adams, JD
1. A notable exception is the Employee Benefit Research Institute's Jack VanDerhei, who routinely includes an assessment of the impact of the projected reductions in Social Security benefits if the current funding status remains unchanged. In a March 2019 Issue Brief, he notes that "when pro rata reductions to Social Security retirement benefits are assumed to begin in 2034, the aggregate retirement deficit increases by 6 percent to $4.06 trillion."

Saturday, July 06, 2019

5 Fiduciary Fundamentals: A Founding Fathers Perspective

This week we’ll commemorate Independence Day – but with all of freedom’s lessons, there are certain things that plan committees (still) have in common with the Second Continental Congress.

Certainly anyone who has ever found their grand idea shackled to the deliberations of a 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 commemorate this week.

Consider these similarities:

Committee members should understand their obligations – and the risks.

Those 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. True, many were merchants (some wealthy, including President of Congress John Hancock) already chafing under the tax burdens imposed by British rule, and perhaps they could see a day when their actions would (eventually) 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.

It’s not quite that serious for plan fiduciaries. However, as ERISA fiduciaries, they are personally liable, and may be required to restore any losses to the plan or to restore any profits gained through improper use of plan assets. Moreover, fiduciaries have potential liability for the actions of their co-fiduciaries. So, it’s a good idea to know who your co-fiduciaries are – and to keep an eye on what they do, and are permitted to do.

Indeed, plan fiduciaries would be well advised to bear in mind something that Ben Franklin is said to have remarked during the deliberations in Philadelphia: “We must, indeed, all hang together or, most assuredly, we shall all hang separately.”

Money can be a sticking point.

Before it declared independence, the Second Continental Congress created the Continental Army, named a Commander-in-Chief (George Washington), and authorized the first printing of American money ($1 million in bills of credit). Indeed in the months (and years) that followed, the costs of (and means of funding) that army would be a constant source of contention between the Congress and the leaders of the Continental Army, even after the fighting on the battlefields was over.

The costs of running a retirement plan are varied, and these days many are borne – directly or indirectly – by the plan and participants themselves. But if the American Revolution was fought over “taxation without representation,” ERISA charges plan fiduciaries with an unequivocal obligation to ensure that every action taken, every service or service provider enlisted, be done for the exclusive benefit of retirement plan participants and their beneficiaries.

It’s not all about money, of course. But – as the Labor Department has noted, and as the plaintiffs’ bar clearly knows – fees and expenses paid by the plan can have an impact on retirement savings and security. Plan fiduciaries should be no less attentive.

It can be hard to break with the status quo.

By the time the Second Continental Congress convened, the “shot heard round the world” at Lexington and Concord was more than a year old, but many of the representatives there still held out hope for some kind of peaceful reconciliation, even as they authorized an army and put George Washington at its helm. 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 what was then the world’s most accomplished military force.

As human beings we are largely predisposed to leaving 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, in the absence of a compelling reason for change, inclined instead to rationalize staying put.

As a consequence, you often see new fund options added, while old and unsatisfactory funds linger on the plan menu, a general reluctance to undertake an evaluation of long-standing providers in the absence of severe service issues, and an overall inertia when it comes to adopting potentially disruptive 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 can’t defer that responsibility to others (see 5 Things Your Plan Committee Members Need to Know). Rather, their decisions are bound by an obligation that those 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.

It’s important to put it in writing.

While the Declaration of Independence technically had no legal effect, its impact not only on the establishment of the United States, but as a social and political inspiration for many throughout the world since is unquestioned, and perhaps unprecedented. Putting that declaration – and the sentiments behind it – in writing gave it a force and influence far beyond its original purpose.

As for plan fiduciaries, 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.

They also 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.

Big change takes time – and effort.

Congress may have declared independence that July, but the reality took considerably more time and effort. Though before the year was out, Washington’s troops would cross the Delaware under unimaginable conditions and win a stirring victory at Trenton, on their way to a series of impressive, but largely unappreciated victories against the British army in New Jersey – but less than a year later Washington’s troops would winter at Valley Forge.

Independence may have been declared in 1776, but it was not won until the victory in Yorktown, Virginia in 1781, and not official for two years more.

We do, of course, have much to be thankful for this Independence Day; for those who had the courage to stand up for the principles and ideals on which this nation was founded, for those who were willing then to take up arms to defend those principles and ideals against overwhelming odds, and those who continue to do so to this day.

Plan fiduciaries who are doing their duty and fulfilling their obligations aren’t exactly putting their lives on the line - but in their own special way(s), they’re working to help assure American worker retirement freedoms – their financial independence – every day.

- Nevin E. Adams, JD

Saturday, June 29, 2019

'Special' Treatment

Our industry has long disparaged the apparent “overindulgence”1 of participants in the stock of their employer as a retirement investment. However, for plan fiduciaries – and those who advise them – there may be a more pressing concern.

Anyone who has been paying attention to 401(k) plan litigation these past several years knows that a common trigger – perhaps the most common trigger – for litigation is the presence of company stock in the plan; more specifically, the presence of company stock that has sharply declined in value. In fact, these days no sooner does some big earnings surprise or unanticipated business calamity make the headlines than the plaintiffs’ bar is out “trolling” for potential clients. And let’s face it, a 401(k) plan is a class action litigant’s dream – potentially thousands of similarly situated and comparably injured plaintiffs in one place (so to speak).  

But if the instances of litigation have been numerous, the odds of success – for plaintiffs – have been anything but.

Prudent ‘Presumptions’

For a long while, these claims failed to clear a “presumption of prudence.” Now, one needn’t scour ERISA’s text to discern the boundaries of this legal construct; indeed, that would be a futile effort. Rather, it is a concept gleaned by the courts (and subsequently enshrined in legal precedent) from their understanding of the black letter of the law. It is a concept that found its footing in a 1995 case called Moench v. Robertson. Now, in that case, as in many of the new generation of “stock drop” cases (drawing their name from the fact that the action arises after the value of the stock drops), a plan participant sued a plan committee for breaching its fiduciary duty based on its continued investment in employer stock after the employer’s financial condition “deteriorated.” In the aftermath of the Moench ruling, nearly every court district court that considered the issue of prudence of employer stock holding had rejected plaintiff claims based on this so-called “presumption of prudence.”

That was the “law of the land” in such matters until 2014 when the Supreme Court seemed truly concerned that the “presumption of prudence” standard basically established a standard that was effectively unassailable by plaintiffs outlined a new standard – a “more harm than good” standard that emerged with Fifth Third Bancorp v. Dudenhoeffer. The notion here was that a plan fiduciary might be excused from taking action with regard to company stock in the retirement plan – such as removing it as an option, or forcing a liquidation of those investments – if doing so would do “more harm than good.”

More Harm?

“Inspired” by this new standard, many of the so-called “stock drop” suits which hadn’t passed muster under the “presumption of prudence” threshold refiled. But ironically, those too had generally come up short of the new standard – though they did at least routinely get past the summary judgment stage. Which, of course, meant more time and expense for the fiduciary defendants – but no recovery for the plaintiffs (or the plaintiffs’ attorneys, who generally work on a contingent fee basis in these class actions).

At least that was the case until a recent district court decision (Jander v. Ret. Plans Comm. of IBM) was overturned by the U.S. Court of Appeals for the Second Circuit, which concluded that, in fact, the plaintiffs plausibly alleged facts showing that a prudent ERISA fiduciary “could not have concluded” that a corrective disclosure of an allegedly overvalued IBM business would have done “more harm than good to the fund.”

In fact, the plaintiff in that case – recently accepted by the Supreme Court – argued that no duty-of-prudence claim against an ESOP fiduciary has passed the motion-to-dismiss stage since the 2010 decision in Harris v. Amgen, nothing that “imposing such a heavy burden at the motion-to-dismiss stage runs contrary to the Supreme Court’s stated desire in Fifth Third to lower the barrier set by the presumption of prudence.”

What’s Next?

And yet, that same Second Circuit Court of Appeals whose decision teed up the issue that the nation’s highest court will now consider – within a week of that decision – found that a similar case lacked the “special circumstances” necessary to overcome the more harm than good bar.

As for what lies ahead, the forthcoming review by the U.S. Supreme Court could bring a new, more relaxed pleading standard to the fore. Or it might establish a “new” standard that doesn’t do anything more to improve plaintiffs’ prospects than the “more harm than good” did beyond the “presumption of prudence.”

In any event, plan fiduciaries who still maintain company stock as plan investment option (and according to the Plan Sponsor Council of America’s 61st Annual Survey of Profit Sharing and 401(k) Plans, 12% of plans allow company stock as an investment option for both participant and company contributions, and 4% restrict it to company contributions only) might well want to spare themselves the cost and aggravation of litigation that seems inevitable when (if?) the value of that stock holding goes down.

In this day and age, a plan fiduciary unable to see the potential for employer-security-related litigation is perhaps unworthy of the role, and a dual-role plan/corporate fiduciary unable to appreciate the potential for a conflicted duty vis-à-vis his or her fiduciary responsibility to the retirement plan is surely living in a state of active denial.

Because while “special” circumstances may seem to warrant such consideration, ultimately, perhaps inevitably, the end result seems to eventually be putting not only prospective plaintiffs, but the plan fiduciaries, between a rock and a hard place.
- Nevin E. Adams, JD
1. Participants given an option to invest in company stock have long invested what professionals would deem an inappropriately large percentage of their portfolio there ( Vanguard’s How America Saves 2019 report notes that 4% of participants with the option to invest in company stock have more than 20% of their balance so invested) – arguably the least diversified investment option on the menu, and one that is inextricably tied to the success of their employer’s business (meaning that when the business slips, so might the prospects of their continued employment). On the other hand, an investment in their employer is seen by many as a mark of confidence and loyalty – and, for many, it’s doubtless the investment on that menu that they best understand. 

Saturday, June 22, 2019

(Not) Standing Still

A recent headline screamed that 401(k) savings rates have “stagnated” – but that’s missing the point. Several of them, actually.

“Stagnated” in this case apparently means that the average savings rate in 2018 — both employee and employer contributions — was 10.6%, roughly the same as the 10.4% rate reported in the survey in 2004. The point seems to be that, despite roughly a decade of automatic enrollment and other plan design enhancements, Americans aren’t saving any more.

That’s a perfectly obvious point to draw from those two datapoints – in this case from the recent 2019 How America Saves report from Vanguard which, while it only covers plans recordkept by Vanguard, the experience of 1,900 plans and 5 million participants in the survey always provides some interesting insights.

First a couple of basics; what do you suppose the odds are that we have the same plans (and participants) in the 2004 and 2019 surveys? Exactly. So, while it may not be apples to oranges, it’s clearly not pure apples to apples, either. The Vanguard authors themselves at one point acknowledge that there has been an impact to the report averages due to bringing on new plans with lower account balances. Secondly – and I’ve written about this previously – averages are mathematically simple, but can gloss over individual details.

There is, however, much more going on behind the scenes than the average conveys[i]. The reality is that automatic enrollment, while it boosts participation, actually – initially – depresses average savings rates. Why? Because while it generally lifts the participation rate from 70% or so to 90% or so, at the same time it “creates” a whole new group of people saving at a default rate (typically 3%)[ii], whereas those who signed up voluntarily save at rates more than double that. Consequently, you might well expect that a decade of automatic enrollment plan designs might have done good things for participation, they might well have depressed savings rates – and yet, they haven’t.

Some of that can be attributed to improvements in those automatic designs; in 2018, echoing results from the Plan Sponsor Council of America’s 61st Annual Survey of Profit Sharing and 401(k) Plans, slightly more than half of plans chose a default rate of 4% or higher, whereas in 2008 only about a quarter (27%) of plans did. The report also notes that in 2018 23% of plans chose a default rate of 6% or more – more than double the percentage that did so in 2009. And while it has long been the “norm” to apply automatic enrollment provisions to new hires only, the newest Vanguard report finds that it has now been applied to all non-participants in half the plans.

Better still, two-thirds of the plans with automatic enrollment have now implemented automatic annual deferral rate increases, and as of 2018 that has served to narrow the spread between deferral rates for participants in voluntary enrollment plans and those with automatic enrollment to just 0.4 percentage points!

Not that there isn’t room for “improvement”; just one-in-five had a deferral rate of 10% or higher in 2018, and – to the point above, 3 in 10 had a deferral rate of less than 4%. Moreover, only 13% of participants capped out at the 402(g) limit ($18,500), and in plans that allow catch-up contributions for those aged 50 and more, only 15% took advantage of that opportunity in 2018. And – even among the highest paid workers, 6% of those eligible aren’t (yet) taking advantage of that opportunity.

The dictionary defines “stagnant” as “showing no activity; dull and sluggish.” Well, while one number may make it seem that retirement savings has been standing still, the reality is quite different – and not at all "stagnant". 

[i] To their credit, the Vanguard report authors take pains in the space of the 112-page report to not only provide median, as well as average figures, but to break data down by tenure, salary, and in some cases, age, as well as for participants who have been consistently in their database over a period of time.
  • [ii] The Vanguard report notes that even among individuals earning less than $30,000 in plans with automatic enrollment have a participation rate more than double that of those in plans with voluntary enrollment.

Saturday, June 15, 2019

A Not-So-SECURE ‘Act’?

The headline in a recent New York Times piece cautions that “Confusing Options May Be Coming to Your 401(k). It Could Cost You.”

Those “confusing options”? Retirement income. And, ironically, they might undermine support for the most significant piece of pro-retirement legislation in a decade.

In fairness, the article begins by acknowledging to its readers that there might soon be some “welcome changes to the rules governing their retirement savings plans,” but quickly moves on to take to task the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, which not only brings with it those welcome changes, but a key element that has some consumer advocates all atwitter (literally) – a fiduciary safe harbor for the selection of a lifetime income provider.

For years the retirement industry has bemoaned the lack of a lifetime income option in defined contribution plans. Indeed, for all the vaunted talk of the so-called “DB-ification” of DC plans, the latter has largely steered clear of embracing what is arguably one of the most compelling elements of DB plan design (aside from the completely employer-funded and managed aspects) – providing a pension, a stream of lifetime income.

Of course, in a DB plan, the cost and risk is on the employer, not only for the funding, but also for the provision of that pension benefit. DC plans have a very different dynamic, and DC plan sponsors have – largely – seen little upside in signing on for a decision that they see as carrying with it a liability that extends well beyond the employment relationship. Indeed, there have been any number of real and perceived reasons to avoid doing so (see 5 Reasons Why More Plans Don’t Offer Retirement Income Options).

The SECURE Act attempts to resolve some of that resistance – creating a legislative “safe harbor” in place of the one articulated by the Labor Department in 2008 and expanded upon in a 2015 Field Assistance Bulletin. Arguably, a legislative safe harbor is “safer” than one staked out by regulators, but plan fiduciaries hoping to find a fiduciary “free pass” won’t find one here, despite the concerns expressed in the Times.

‘Financially Capable’

The legislation states that a fiduciary is expected to engage “in an objective, thorough, and analytical search,” and that they must consider the financial capability of the insurer to satisfy its obligations, consider the cost (including fees and commissions) of the guaranteed income contract “in relation to the benefits and product features of the contract and administrative services to be provided under such contract,” and determine “at the time of the selection, the insurer is financially capable of satisfying its obligations under the guaranteed retirement income contract…”.

Now, unlike the regulatory safe harbor, the SECURE Act outlines some pretty specific criteria as to what would satisfy the financial capability tests, specifically that the fiduciary gets written confirmation from the insurer that they:
  • are licensed to offer such products; 
  • have operated under a certificate of authority from their state insurance commission at the time of selection, and for the immediately preceding seven years; 
  • have filed audited financial statements in accordance with the laws of that state; 
  • maintain reserves that satisfies those state requirements;
  • have undergone, at least every five years, a financial examination (in accordance with those state requirements); and
  • that they will “notify the fiduciary of any change in circumstances occurring after the provision of the representations” detailed above that “would preclude the insurer from making such representations at the time of issuance” of the contract. 
The SECURE Act goes on to clarify that while fees are a consideration, there is no requirement to select the lowest cost, and that the fiduciary may consider the value of the contract, including features and benefits and attributes of the insurer. It also states that the fiduciary will be deemed to have conducted the required “periodic” review if they receive the written representations from the insurer on an annual basis, unless they receive a contrary notice, or are aware of “facts that would cause the fiduciary to question such representations.”

Limit ‘Ed’

If all of those conditions are met, the SECURE Act goes on to limit the liability of the fiduciary for any losses “that may result to the participant or beneficiary due to an insurer’s inability to satisfy its financial obligations under the terms of such contract.”

While the fiduciary obligations to review and evaluate the insurer resonate with ERISA’s fiduciary admonitions, the concerns raised in the Times article seem to be twofold: that the mere existence of this new safe harbor will be touted as the free pass it most surely isn’t – and that the relative specificity of the conditions deemed to satisfy the financial capability test will result in a mere checkbox review – and that the checkbox – basically doing business in a state (and let’s remember that various states have varying requirements) while avoiding running afoul of those same state regulators – will serve as a back door for the annuity pitching “foxes” to enter the 401(k) “hen house” and those participant accounts to which they have long effectively been denied access.

Now, if in fact those results do flow from the SECURE Act’s implementation (and its integration with the Senate’s Retirement Enhancement and Savings Act (RESA)), there would be cause for concern. Certainly SECURE’s lifetime income provider fiduciary safe harbor is a more secure mooring for plan fiduciaries than the current landscape, if only because it provides some structure for the assessment of the financial capability of the product provider. That said, you could hardly be faulted, however it’s ultimately pitched, for not seeing a ton of daylight between that new safe harbor and the current fiduciary landscape. And the legislation, to my eyes, anyway, minces no words in reminding plan fiduciaries of the existing obligations under ERISA to assess, monitor, and review the conditions underlying the suitability of the lifetime income option as a prudent plan investment. 

Unless, of course, you’re reading the Times (instead of the actual legislation) – and you are concerned enough at the potential abuse that you’d consider withholding your support for the legislation, legislation it’s worth remembering passed the House by the kind of margin generally reserved for the naming of post offices.

Now, what the Times article gives voice to is a seed of distrust – viewing the safe harbor language not as a relatively modest means to encourage consideration of an option that experts have long said was needed, for which participants routinely express interest (in surveys, if not actual take-up rates), but that plan fiduciaries have nonetheless been reluctant to embrace. 

When all is said and done, this safe harbor may not be “enough” – but it is a step, and fear-mongering notwithstanding – it is arguably a step along a path to a retirement that is, indeed, more secure.

- Nevin E. Adams, JD
See also: Retirement Plans and Retirement Income: It’s Complicated.

Saturday, June 08, 2019

'Lesson' Plans

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 lessons learned along the way.

It’s handy to know at least a little about sports and the weather.

Paying the minimum due on your credit cards is dumb.

Be willing to take all the blame – and to share the credit.

Know that there actually are stupid questions. Try not to be the one asking them.

Shun those who are cruel to others – and don’t laugh at their “jokes” – sooner or later, you’ll be a target.

Never say you’ll never.

“Bad” people eventually get what’s coming to them, though you may not be around to see it.

Always sleep on big decisions.

When it seems too good to be true, it’s generally not good nor true. 

Never let your schooling stand in the way of your education.

Sometimes the grass on the other side looks greener because of the amount of fertilizer applied.

Never email in anger – or frustration. And be extra careful when using the “Reply All” button.

If your current boss doesn’t want to hear the truth, it may be time to look for a new one.

Never miss a chance to say “thank you.”

Hug your parents – often.

If you wouldn’t want your mother to learn about it, don’t do it.

Bad news generally doesn’t age well.

There can be a “bad” time even for good ideas.

Your work attitude often affects your career altitude.

Comments that begin “with all due respect” generally aren’t.

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.

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

- Nevin E. Adams, JD
Got some to add? Feel free to comment below....

Saturday, June 01, 2019

5 Things Your Retirement Can (Still) Learn From Game of Thrones

Whether you are a Game of Thrones aficionado – or haven’t watched a single episode – there are lessons to be learned nonetheless.

Last week I recounted some fiduciary admonitions from the HBO series. Turns out there are words of wisdom for individual retirement savers as well. Check these out.

“When you play the game of thrones, you win or you die. There is no middle ground.”

All the way back in Season 1, Cersei Lannister explained what has certainly been a theme for the series as a whole. That said, retirement isn’t a game of thrones, nor is it precisely a “win or die” scenario. We all die, eventually of course (no “wights” here), but there are those who “win,” at least if you consider those who have sufficient resources to fund retirement as “winning.”

The non-partisan Employee Benefit Research Institute (EBRI) has previously 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.

When EBRI recently looked at an individual basis, the average Retirement Savings Shortfall for those ages 60–64 ranges from $12,640 per individual for widowers to $24,905 for single males and $62,127 for single females. Those looking for a big boost in the odds of success could find it in eligibility for a defined contribution plan. Consider that the average retirement deficit for individuals ages 35-39 with no future years of eligibility in a defined contribution plan is $78,046 per individual – more than five times the average retirement deficit for those fortunate enough to have at least 20 years of future eligibility in a defined contribution plan (where the average retirement deficit is $14,638).

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 – and the enormous percentage of working Americans who (still) don’t have access to a retirement plan at work… and those important years of eligibility.

“A Lannister always pays his debts.”

While the official motto of the Lannister house is “Hear me roar!”, at several points throughout the series, the Lannisters are able to trade on their reputation for, by hook or by crook, fulfilling their debt obligations (though note, such “debts” are not always monetary in nature).  

Debt of any kind – and these days student debt seems to loom largest – certainly weighs on thinking, if not saving, for retirement. While younger workers’ balance sheets are clearly hurt by student debt, researchers have noted preliminary results that indicate that they do not substantially reduce retirement saving to compensate. Good news for their long-term prospects, anyway.

However, note that nearly two in three workers (63%) say debt is a problem for them, and the Employee Benefit Research Institute’s (EBRI) Retirement Confidence Survey has consistently found a relationship between debt levels and retirement confidence. In 2018, just 2% of workers with a major debt problem say they are very confident about having enough money to live comfortably in retirement, compared with a third (32%) of workers who indicate debt is not a problem – while 37% of workers with a major debt problem are not at all confident about having enough money for a financially secure retirement, compared with 6% of workers without a debt problem.

Now, confidence is one thing; reality is another. Paying off debt – or avoiding racking up serious amounts of it in the first place – is the wisest course when it comes to retirement preparations. But, as Tyrion Lannister observed in Season 3, “I’m quite good at spending money, but a lifetime of outrageous wealth hasn’t taught me much about managing it.”

”If you think this has a happy ending, you haven't been paying attention.” 

Ramsay Bolton’s Season 3 admonition to Theon Greyjoy (soon to be Reek, several seasons ahead of his eventual redemption) predicated what was surely one of the more uncomfortable sequences (certainly for Theon) – and proved to be prescient for viewers as well.

It is an observation that many retirement industry professionals would surely direct at the individuals that any number of consumer surveys suggest have set aside little or worse – nothing – not only for retirement, but for the relatively commonplace financial emergencies that seem to be part and parcel of life. Granted, some doubtless are living “paycheck to paycheck” not by choice, but necessity.

And yet, there’s plenty of evidence to suggest that these behaviors aren’t always constrained by economic reality, but by a very human inclination to sacrifice the long-term view for the exigency of today’s pleasure(s), if not an unhealthy confidence that the future will bring opportunities to remediate today’s decisions.

“The Lannisters send their regards.”

Game of Thrones may not have invented the notion of surprisingly (if not randomly) killing off key characters, but the series has arguably taken it to a whole new level. For my money, even in a series well-known for its plot twists, unanticipated shifts of loyalty and sheer mayhem, there’s nothing quite like the episode titled “The Rains of Castamere,” but more commonly known to fans as the “Red Wedding.”

We’ve all been to at least one wedding where the underlying tensions between families threatened to undermine the happiness generally associated with such proceedings, but I think it’s fair to say that the wedding of Edmure Tully and Roslin Frey had a conclusion far more dramatic than its participants (or viewers) anticipated (unless, of course, you read the book). That said, it’s not as though the Starks didn’t have a premonition about the trouble that would ultimately befall them. It’s just that, ultimately, they relied upon a certain amount of social decorum to prevail. Suffice it to say that the “decorum” that accompanied Roose Bolton’s infamous quote above wasn’t what the Starks had in mind.

The lesson for retirement savings is, of course, that it’s always prudent to be prepared in case planned events take an unexpected turn. That could come in many forms: an unexpectedly early retirement, a sudden illness or disability, a need to provide parental support, or even a sharp, sustained downturn in the markets.  

It might be a good time to check out “6 Things that Can Wreck a Retirement."

“Winter is coming.” 

This is perhaps the most iconic phrase from GoT, and while those who live in climates where the arrival of winter can mean significant change – snarled commutes, cancelled flights, or perhaps trips to the ski slopes – in the Game of Thrones it’s unequivocally a bad thing, though – as in making retirement preparations – there are some who think that arrival is further off than it actually turns out to be.

Retirement – or perhaps more precisely, the end of a full-time working career – though it’s often depicted with scenes of warmth and beaches – is “winter” of a sort, or might be if adequate preparations aren’t made. While there are varying degrees of concern about that impact, and the timing of that impact, it seems fair to note that Americans know that retirement, like winter in GoT, is coming.

Those who haven’t are well advised to bear in mind Tyrion Lannister’s caution, “The day will come when you think you are safe and happy, and your joy will turn to ashes in your mouth.”

Better counsel comes from Petyr Baelish, who in Season 6 noted, “The past is gone for good. You can sit here mourning its departure, or prepare for the future.” Because, as that same Petyr Baelish explains in Season 4, “a lot can happen between now and never.”

And here’s hoping it does – because it certainly can.

- Nevin E. Adams, JD