Saturday, February 23, 2019

Unforget Able?

A recent headline in The Wall Street Journal started off: “Forget the 401(k).” And then, unintentionally, proceeded to explain why that would be… nuts.

Not that the author (Jason Zweig) didn’t throw in some digs at the subject, making a glancing reference to what he termed “the rigid and often paltry 401(k)s that workers have today” before going on to berate America’s retirement plan, dismissively claiming that “there’s little question that the 401(k) as we know it just isn’t getting the job done.”

That, of course, depends on what one considers “the job” – though, to his credit - and I generally appreciate Jason's perspectives - he didn’t fall into the common journalistic device of pining for the “good old days of the defined benefit plan.” Quite the contrary, he bluntly proclaims (in language that one rarely sees attributed to DB plans) that even in their heyday, “defined-benefit plans were, in fact, sporadic, arbitrary and unfair.” (This is a pervasive myth – see “‘Myth’ Understandings.”)

That said, the issue might be that he’s not very well acquainted with “the 401(k) as we know it.” Consider that his recommendations for a “new retirement plan” aren’t exactly “new,” nor are they the kind of thing that would seem to “reinvent retirement-savings plans from scratch.” Rather, the article calls for:
  1. making “it easier to convert savings into regular income” (by providing incentives to workers to take distributions as annuity income, since, left to their own devices, individuals don’t); 
  2. implementing solutions so that “retirement income should last well past 65 (a.k.a. deferred longevity annuity); and 
  3. making it harder for folks to tap into their retirement savings prior to retirement (by directing some initial contribution funding into rainy day accounts). 
Indeed, perhaps the most radical notion – and one that might well push aside the 401(k) with a government-run version. Put forth by former Assistant Secretary of Labor Phyllis Borzi, this is a program that would be voluntary for employer contributions, but mandatory for employees – “regardless of whether you were self-employed, a full-time employee, an independent contractor or a leased employee” where a “professionally managed not-for-profit company with an independent board of directors would collect and invest retirement contributions from you and your employers.” An idea that sounds awfully (and I do mean “awfully”) similar to an idea proposed in the House late last year. 

But the idea that the author devoted the most space to was, ironically enough, the notion of taking the “forgettable” 401(k) – and making it universally available! This, ironically enough, from Ted Benna who, of late, has mostly been touting a new book and dissing the program he’s often credited with “discovering.” 

Ultimately, headline notwithstanding, it’s hard to imagine any of these “new” ideas as a reality without the underpinning of the 401(k). In fact, apparently the only thing holding the “forgettable” 401(k) from doing “the job”… is that everyone doesn’t have one.

But I’d say that makes the 401(k) pretty UN forgettable!

- Nevin E. Adams, JD

Saturday, February 16, 2019

'Hidden' Costs

Valentine's Day was this week, and you have perhaps seen those increasingly ubiquitous advertisements for a certain online florist.

Now, I’ve used that particular service on many an occasion over the past several years; they are not only convenient, they deliver a quality product, and on time. In sum, I’ve used them before, have, in fact, used them this year, and will doubtless use them again.

The ads tout the ability to get a dozen roses for $24.99. That’s in red only (but hey, it’s Valentine’s Day), and you do actually get a glass vase included in that price (with options to “upgrade,” of course).

That said, “standard” delivery is another $12.99, and – at least at this (late) date, it’ll cost you $9.99 to guarantee Valentine’s Day delivery, another $14.99 if you want it there in the morning, and there’s a “care & handling charge” of $2.99, regardless of delivery date or time.

In fact, by the time you add in taxes those $24.99 roses will run you… well, quite a bit more than $24.99.

Not that you’ll see that all presented in one place – well, until the very last screen, anyway.

Hardship Costs

I wonder sometimes if that isn’t how those who request a hardship withdrawal feel – though, disclosures notwithstanding, it’s not like they can see what it’s actually going to cost at the point they make the request.

Oh, they know the amount they need, and presumably request. But then there’s the 20% withholding that comes off the top, but then, come tax time, they’ll find out if that 20% withholding was “enough.” At the same time, they’ll likely discover the 10% penalty (for those who aren’t yet 59½). Less obvious is the retirement savings “ground” they’ve lost to the customary 6-month suspension of contributions (and match). And that’s not considering the 401(k) loan they likely had to take first because, after all, we have to make really, really sure that you absolutely have no other way to get to that money.

Still – and though the 61st Annual Survey of Profit Sharing and 401(k) Plans from the Plan Sponsor Council of America (PSCA) indicates that more than 80% of plans offer a hardship withdrawal option – only 2.3% of workers who have access to them take them. Data from the nonpartisan Employee Benefit Research Institute puts that at fewer than 2%, and Vanguard’s “How America Saves” study says that only about 3% of participants do.

Expanded Access

Then late last year, Congress passed the Bipartisan Budget Act of 2018, which, among other things, set aside several of these “hidden” costs, notably the requirement to take a plan loan first (it’s now optional), and more significantly, the suspension of contributions. They broadened not only the categories of contributions eligible for hardship (it now includes matching contributions and non-elective contributions, as well as earnings on those accounts), but also included changes in the ability to qualify for a hardship distribution in the case of casualty losses and losses associated with federal disaster areas. The IRS also loosened the rules for determining the status of a hardship – which should lessen the burden of both requesting and approving these distributions.

Now, despite the retirement focus of these savings, I’ve always thought that it was important to provide emergency access. After all, if you thought that there was no way you could ever tap into those funds in a dire situation no matter what, wouldn’t you hold back on savings? And while there are almost certainly abuses, the relatively low take-up rates despite the widespread availability suggest that those are the exception, not the rule. The new rules, while they certainly open the door to pre-retirement withdrawals a bit wider, seem, for the most part, a thoughtful extension of potential relief to individuals that surely need it.

What remains to be seen – the new provisions were only just effective for plan years beginning on or after Jan. 1, 2019, after all – is how that expanded access will influence the historically low take-up rates on hardships.

And what the ultimate cost will be.

- Nevin E. Adams, JD

Saturday, February 09, 2019

‘Likely’ Stories

It is customary when sharing (or reading) the portents of a survey to focus on the actions that respondents say they have, or will undertake. But what about the things they say they will not do?

Human beings gravitate toward “norms,” of course. Plan sponsors, certainly those conscious of the personal liability that accompanies those responsibilities, can hardly be blamed for seeking the behavioral norms of their profession, drawing comfort from the collective movement of the “pack,” particularly with new and/or controversial ideas.

Large ‘Charge’

This past weekend I was reviewing Alight Solution’s 2019 Hot Topics in Retirement and Financial Wellbeing report. But, while the positive trendlines on things like financial wellness were interesting, what struck me in reviewing this particular survey were the (relatively) strong percentage weighing in on things they said they were notlikely to do, including:
  • evaluate phased retirement alternatives (66% not likely to do)
  • offer qualifying longevity annuity contract (QLAC) – 86%
  • facilitate purchasing annuities outside the plan as options for plan distributions – 85%
  • reduce the number of loans available – 86%
  • allow terminated participants to continue loan repayments to reduce frequency of loan defaults – 67%
  • offer student loan repayment assistance – 48%
  • measure employee perceptions and/or suggestions for benefit improvements – 30%
Not to mention the more than half (53%) who said they were not likely to address lifetime income, a similar 51% were not likely to show projected health care costs in retirement projections, not to mention the 39% who were not likely to discourage cashouts, or the quarter (25%) who were not likely to do anything about minimizing leakage.

Additionally, 25% (up from 21%) had no plans to implement initiative to address the retirement savings gap, 27% (up from 25%) were not at all likely to project the expected retirement income adequacy of the population, and 29% were not at all likely to “offer services, tools, or education campaigns on debt management.”

‘Not’ Likely

While the survey cited an impressive two-thirds of surveyed employers responding they are very likely to take steps in 2019 to create or focus on the financial wellbeing of their workers in ways that go beyond retirement savings – and even though this percentage grew from 30% in 2014 to 65% in 2019 – fully one in eight of these very large employers said they were not likely to create a broad financial wellbeing strategy. And there was the 1 in 10 who said they were not likely to recognize retirement readiness.

It has, of course, long been accepted wisdom that trends among larger employers are instructive in anticipating movements down market – and, in fact, on many things it has been (a notable exception: automatic enrollment, which, a decade after the Pension Protection Act’s implementation, among smaller programs significantly lags adoption by larger plans). Mind you, this survey is based on the perspectives of not just large employers – but very large employers – that employ, on average, 44,500 workers – and 17,000 even at the median (although 2% of the respondents had less than 1,000 workers). Consequently, those trendlines might be meaningful for the plans with which you work (particularly larger employers) – then again, they may not.

More than that, one should, of course, be careful in reading too much into trendlines from one period to the next – it’s rare that the survey respondents in one period are identical to those in another, and thus the difference – be it positive or negative – but particularly when the jumps are large – might be nothing more than what one group of employers say they will do versus a completely different group at a different point in time.

Caution is also warranted in reading too much into statements regarding planned, or intended, actions. While they’re doubtless an accurate assessment of planned undertakings at the time, we’re all very aware of how often those good intentions get derailed by any number of unanticipated events.

That said, I’d argue that in contemplating future trends, there’s merit in spending as much time looking at what plan sponsors say they aren’t likely to do, as we do the possibilities.

- Nevin E. Adams, JD

Saturday, February 02, 2019

A Pigskin Prediction for Your Portfolios?

Will your portfolio rise with the Rams – or get pummeled by the Patriots?

That’s what adherents of the so-called Super Bowl Theory would likely conclude. The Super Bowl Theory holds that when a team from the old National Football League wins the Super Bowl, the S&P 500 will rise, and when a team from the old American Football League prevails, stock prices will fall.

It’s a “theory” that has been found to be correct nearly 80% of the time – for 40 of the 52 Super Bowls, in fact.

Not that it hasn’t had its shortcomings. One need look back no further than last year’s win by the NFC champion Philadelphia Eagles against the AFC Champion Patriots (who once were the AFL’s Boston Patriots) to find an instance where it turned out to be a loser, market-wise, with the S&P 500 down more than 6% (though for most of the year it was quite a different story). Ditto the year before when the epic comeback by those same AFC Champion Patriots against the NFC champion Atlanta Falcons didn’t forestall a 2017 market surge.

Nor is it always the Patriots who play Super Bowl Theory spoilers – the year before that, the AFC’s (and original AFL) Broncos’ 24-10 victory over the Carolina Panthers, who represented the NFC, also proved to be an “exception.”

Market Makings

That was an unusual break in the streak that was sustained in 2015 following Super Bowl XLIX, when the New England Patriots (yes, those same Patriots) bested the Seattle Seahawks 28-24 to earn their fourth Super Bowl title. It also “worked” in 2014, when the Seahawks bumped off the legacy AFL Denver Broncos, and in 2013, when a dramatic fourth-quarter comeback rescued a victory by the Baltimore Ravens – who, though representing the AFC, are technically a legacy NFL team via their Cleveland Browns roots.

Admittedly, the fact that the markets fared well in 2013 was hardly a true test of the Super Bowl Theory since, as it turned out, both teams in Super Bowl XLVII – the Ravens and the San Francisco 49ers – were NFL legacy teams.

Who’s your pick to win Super Bowl 53? Cast your vote here!

However, consider that in 2012 a team from the old NFL (the New York Giants) took on – and took down – one from the old AFL (the New England Patriots – yes, those New England Patriots). And, in fact, 2012 was a pretty good year for stocks.

Steel ‘Curtains’?

On the other hand, the year before that, the Pittsburgh Steelers (representing the American Football Conference) took on the National Football Conference’s Green Bay Packers – two teams that had some of the oldest, deepest and, yes, most “storied” NFL roots, with the Steelers formed in 1933 (as the Pittsburgh Pirates) and the Packers founded in 1919. According to the Super Bowl Theory, 2011 should have been a good year for stocks (because, regardless of who won, a legacy NFL team would prevail).

But as you may recall, while the Dow gained ground for the year, the S&P 500 was, well, flat.

And then there was the string of Super Bowls where the contests were all between legacy NFL teams (thus, no matter who won, the markets should have risen):
  • 2006, when the Steelers bested the Seattle Seahawks;
  • 2007, when the Indianapolis Colts beat the Chicago Bears 29-17;
  • 2009, when the Pittsburgh Steelers took on the Arizona Cardinals (who had once been the NFL’s St. Louis Cardinals); and
  • 2010, when the New Orleans Saints bested the Indianapolis Colts, who had roots back to the NFL legacy Baltimore Colts.
Sure enough, the markets were higher in each of those years.

As for 2008? Well, that was the year that the NFC’s New York Giants upended the hopes of the AFL-legacy Patriots (yes, those Patriots) for a perfect season, but it didn’t do any favors for the stock market. In fact, that was the last time that the Super Bowl Theory didn’t “work” (well, until this past year – oh, and the year before that – and the year before…).

Patriot Gains

Times were better for Patriots fans in 2005, when they bested the NFC’s Philadelphia Eagles 24-21. Indeed, according to the Super Bowl Theory, the markets should have been down that year – but the S&P 500 rose 2.55%.

Of course, Super Bowl Theory proponents would tell you that the 2002 win by (those same) New England Patriots accurately foretold the continuation of the bear market into a third year (at the time, the first accurate result in five years). But the Patriots’ 2004 Super Bowl win against the Carolina Panthers (the one that probably nobody except Patriots fans remember because it was overshadowed by Janet Jackson’s infamous “wardrobe malfunction”) failed to anticipate a fall rally that helped push the S&P 500 to a near 9% gain that year, sacking the indicator for another loss (couldn’t resist).

Bronco ‘Busters’

Consider also that, despite victories by the AFL-legacy Denver Broncos in 1998 and 1999, the S&P 500 continued its winning ways, while victories by the NFL-legacy St. Louis (by way of Los Angeles) Rams (that have now returned to the City of Angels) and the Baltimore Ravens did nothing to dispel the bear markets of 2000 and 2001, respectively.

In fact, the Super Bowl Theory “worked” 28 times between 1967 and 1997, then went 0-4 between 1998 and 2001, only to get back on track from 2002 on (though “purists” still dispute how to interpret Tampa Bay’s 2003 victory, since the Buccaneers spent their first NFL season in the AFC before moving to the NFC).

Indeed, the Buccaneers’ move to the NFC was part of a swap with the Seattle Seahawks, who did, in fact, enter the NFL as an NFC team in 1976 but shuttled quickly over to the AFC (where they remained through 2001) before returning to the NFC (see below). And, not having entered the league until 1976, regardless of when they began, can the Seahawks truly be considered a “legacy” NFL squad? Bear in mind as well, that in 2006, when the Seahawks made their first Super Bowl appearance – and lost – the S&P 500 gained nearly 16%.

As for Sunday’s contest, the Patriots have been here before (to put it mildly), the Rams (just) twice – but not since 2002 (when they lost to the Patriots, 20-17 in the first Super Bowl to be played in February, following the one-week delay in the NFL season after the 9/11 attacks).

Indeed that victory is seen by many as marking the beginning of the current Patriot “dynasty” (and one that, no doubt, the Rams would like to “avenge”).

Jersey ‘Sure’?

On a separate note, despite (technically) being the home team, the Rams have decided to wear their blue/yellow throwback jerseys – meaning that the Patriots will (again) be wearing white jerseys. The Patriots are doubtless pleased with the Rams’ decision because, dating back to 2005 with the Patriots in Super Bowl XXXIX, the team wearing white jerseys has won 12 times. That’s 12 wins in 14 years with the only teams to win while wearing colored uniforms in that span being the Packers in Super Bowl XLV… oh, and the Eagles last year against… well, you know.

All in all, it looks like it should be a good game.

And that – whether you are a proponent of the Super Bowl Theory or not – would be one in which regardless of which team wins, we all do!

- Nevin E. Adams, JD

Note: Seattle is the only team to have played in both the AFC and NFC Championship Games, having relocated from the AFC to the NFC during league realignment prior to the 2002 season. The Seahawks are the only NFL team to switch conferences twice in the post-merger era. The franchise began play in 1976 in the NFC West division but switched conferences with the Buccaneers after one season and joined the AFC West.