Nevin's Data "Points"

I was on a panel at our recent Plan Designs conference, and the topic of qualified default investment alternatives (QDIAs) came up. There was discussion about the Department of Labor’s proposed regulations on the subject; some observations about when we might expect to see final regulations; and ruminations from co-panelists Fred Reish and Mike Barry about ERISA’s embrace of the concepts of modern portfolio theory (MPT), and the importance of capital accumulation rather than capital preservation in making “appropriate” investment choices for participants that hadn’t, for whatever reason, elected to make their own. Then, a plan sponsor in the audience raised her hand and shared the experience of her plan—shared how they had carefully considered the alternatives of a stable-value investment alongside an asset-allocation alternative, and how they had decided on the former, and did so just before the market tanked in 2000. Her perspective was simply this: If they had chosen the asset-all...

Last week the Government Accountability Office (GAO) published a 67-page report titled “ Conflicts of Interest Involving High Risk or Terminated Plans Pose Enforcement Challenges .” In announcing the results of that report, Congressmen George Miller (D-California) and Ed Markey (D-Massachusetts), who had commissioned the report, issued a press release claiming that “Undisclosed Conflicts Reduce Pension Plan Returns,” and that “Workers Likely Bear Brunt of Lower Returns in the Form of Reduced Pension Benefits.” The gist of that report: “[P]ension plan consultants assisting significant numbers of pension plan sponsors may have conflicts of interest, as a result of their affiliations or business arrangements with other firms that could affect the advice they provide to these sponsors.” However, let me draw your attention to two words in that long sentence: “may” and “could.” That’s right, after drilling down into the specific firms identified in a Securities and Exchange Commission (SEC...

“[T]he complaint is a rambling 38 page collection long on legal argument, public policy rhetoric and repetition, but vague in its allegations of facts which might be relevant to the claims alleged.” With all the tact of a law professor dressing down a first-year student, U.S. District Judge John Shabaz of the U.S. District Court for the Western District of Wisconsin last week dismissed one of the so-called 401(k) revenue-sharing lawsuits brought by the St. Louis-based law firm of Schlichter, Bogard & Denton – and did so in just 18 pages. And he did so “with prejudice and costs.” It was the second such case to be dismissed. In an even more succinct dismissal in February (two-pages), U.S. District Judge John Darrah said that the 401(k) participants in the Exelon Corp. plan failed to make a "link between the administrative fees they were charged and their market-based losses" (see Court Tosses 401(k) Participants’ Request for Investment Losses Relief ). Not that there wer...

A couple of weeks ago my better half told me that she thought it was time that we traded in two of our aging vehicles – one a car that is too small for our family, the other a van that now seems too big for all but cross-country trips – for something in the middle. I was amenable to the idea – until she mentioned that she didn’t think we needed to buy a new vehicle as a replacement. If you have ever in your life purchased a “pre-owned” anything, you’ll appreciate the dangers inherent in the principle of caveat emptor, literally “let the buyer beware.” That’s why, to this day, the notion of purchasing a used car practically causes me to break out in cold sweats. Not that lemons don’t roll off the new car lots every day – but there, at least, it seems that your odds are better – if not in terms of product, at least of obtaining satisfaction if something doesn’t work out. Buying a used car is, of course, as much art as science – particularly if you aren’t mechanically inclined. That’...

In nearly 30 years working with employer-sponsored retirement plans, I am hard-pressed to call to mind a product innovation that has been adopted with as much vigor as the current generation of target-date funds. In PLANSPONSOR’s 2006 Defined Contribution Survey , more than three in four of the nearly 5,000 responding plans had a risk- or target-date-based option on their menu – compared with “just” 54% in the prior year’s survey. There’s being on the menu, of course, and there’s being chosen from that menu. Still, in the 2006 survey, roughly 25% of participant balances, on average, were already invested in such options – and, on the median, 15% - and this well ahead of the Department of Labor’s tacit enhancement of these vehicles as the default investment vehicle of choice. All in all, it would appear that participants have more access to such choices and are beginning to wake to the simplicity of an investment choice that requires referencing little more than a birth certificate ...

A couple of weeks ago, I stumbled across a paper published by the National Bureau of Economic Research titled “ New Estimates of the Future Path of 401(K) Assets .” In this particular case, “new” appeared to relate to the paper, not the future path of 401(k) assets. Bottom line: 401(k) assets are going to keep growing, and at a better rate over the next couple of decades than they have the past 20 years (there was also a brief article on this paper in the New York Times last week, which you also may have seen syndicated locally). In fact, the paper notes enthusiastically, “We conclude that the increase in the pension assets of future retirees will be much greater than the assets of current retirees.” This is good news, of course, since such programs seem destined to represent the primary retirement savings in the decades to come. We need them to grow, and we need them to grow faster than they have heretofore, certainly based on the average and, more significantly, median account ba...

There’s little question that automatic enrollment “works,” at least in terms of turning employees into participants—just as there is little doubt that, left to their own devices, too many employees remain on the retirement-savings sidelines. However, as I talk to advisers, third-party administrators, and plan sponsors around the country, I’m increasingly aware that the Pension Protection Act’s automatic enrollment safe harbor is more unpalatable than one might have imagined on first blush. Sure, automatic enrollment is an effective way to get people into the plan—but that 50% matching requirement on an escalated contribution (Congress apparently thought that a 50% match up to 6% of pay deferral was “normal,” rather than merely common among larger plans), particularly on participation levels escalated by automatic enrollment, is simply too expensive for many. And many, already taking advantage of the current safe harbor designs, simply don’t need the discrimination testing shield tha...

Plan sponsors (and advisers) who think the Pension Protection Act’s automatic enrollment safe harbor represents an easy solution to disappointing participation rates may have another “think” coming, according to the findings of recent industry data—Including PLANSPONSOR’s own 2006 Defined Contribution Survey. The 10th annual version of PLANSPONSOR’s assessment of the activities of nearly 5,000 plan sponsors found that the median participation rate for plans that had implemented automatic enrollment was 80%. Now, that’s certainly nothing to sneeze at, but it’s not very much ahead of the 75% median rate for the plans in the same survey that had not taken the step toward automatic enrollment—and it’s well short of the outcome that one normally sees touted alongside that option (generally in the 90-95% participation range). Our survey was based on the experience of plans that had adopted automatic enrollment prior to last summer’s passage of the Pension Protection Act of 2006 (PPA), alon...

We have long been concerned about the attention deficit of participants when it comes to their 401(k) plans. There’s the problem of getting them to pay attention to the importance of saving in the first place, and of choosing an appropriate level of savings, the challenge of helping them make sound investment decisions—and the biggest challenge of all, getting them to reconsider those choices over time. Our continued inability as an industry (I realize there are pockets of exception to this rule) to fully engage participants on the issue has, ultimately, led to the adoption of automatic plan designs that don’t require the participant to “do” anything other than write the check. I have a more radical solution to the problem: Let’s make people sign up for their 401(k)—every year. Before you spit up your morning beverage (apologies if it’s too late for that), hear me out. I will concede that signing up for a 401(k) plan can be a daunting task for a participant, and that it is already...

Last week, I stumbled across another of those “DC plans are becoming like DB plans” articles—you know, the “DB-ification” of 401(k)s? This is all supposed to be a good thing, of course, because we know that defined benefit plans do a better job of providing adequate income in retirement than defined contribution plans (well, properly funded, and when workers accumulate adequate service credits, anyway). Moreover, the new Pension Protection Act-engendered trends toward auto-enrollment (nobody asks people to fill out a form to be covered by their DB plan) and asset allocation fund defaults (nobody asks participants to make the investments in the DB plan) are also widely touted as DB innovations that we have finally had the good sense to bring to the DC side of the world. Don’t get me wrong—anything that turns employees into participants (and automatic enrollment surely does that) and helps them make better investment decisions (and, generally speaking, asset allocation solutions fulfil...

As the parent of a daughter away at college for the first time, the events in Blacksburg, Virginia, last week had a particularly horrific effect. No, she’s not going to school at Virginia Tech, but what happened there could happen anywhere. Parents often worry that, despite years of raising them carefully, our kids will, nonetheless, wind up in the wrong place at the wrong time. Yet, so far as we know now, all those poor kids did was be in the right place – where they were supposed to be - at a very wrong time. In a matter of minutes, bright and promising futures were brought to a premature close for no better reason than their proximity to a madman. Many will try to get back to “normal” this week – while for some, normal will never again seem possible. I’ve tried several times to pick up some other theme or idea to speak to in this week’s column – some normal topic, if you will – but all I can think of is those students that won’t be coming home to families. Families that, like...

The Employee Benefit Research Institute (EBRI) and Matthew Greenwald & Associates published the 17th Annual Retirement Confidence Index last week – and, for the very most part, it’s probably safe to say it didn’t tell us much we didn’t already know. More than half (52%) expect to be comfortable, another third categorize their post-retirement income status as “adequate,” and 6% are looking forward to being “well-off” – at least in the first five years after retirement. Just 10% say they will be “struggling.” While they are apparently less confident than they once were in terms of a traditional pension benefit, they remain largely complacent about their overall prospects for a comfortable retirement – more than a quarter are VERY confident, and another 43% are somewhat confident, in fact. Still, only 18% are much less confident about receiving that traditional pension. (Oddly, and perhaps proving that confidence is a relative term, “only” 29% of those who do not expect to receive ...

Sooner or later in your career, you are exposed to the 80/20 rule or, as purists term it, the Pareto principle. Simply stated, it suggests that 80% of the consequences stem from 20% of the causes. You frequently hear how you get 80% of your revenues from 20% of your clients (and sometimes that 80% of your aggravation comes from that same minority). Similarly, with all the furor of late focused on cost sensitivity, revenue-sharing, and the call for greater transparency, it’s easy to overlook the fact that most of that scrutiny and regulatory angst is being applied to 20% of the “problem” of retirement plan fees. "Out of" Proportions Traditional logic held that the fees on your “typical” retirement account ran like this: 70% for investment management, 20% for recordkeeping, and 10% for miscellaneous things like trust/custody, audit, etc. That apportionment wasn’t perfect, of course, but it was a rule of thumb that has been applied fairly liberally over the years. Investment...

When Fidelity announced this last week that it was dropping its pension plan, it drew my attention. Not so much because it was taking that step. By now, there have been enough pension fund freezes—or enough reports about how many pension fund freezes there will be—that the occasional announcement barely fazes me anymore. That Fidelity chose to do so while “riching up” their 401(k) plan (see “ Fidelity Investments to End DB Plan ”) was also pretty much standard fare for such moves. But there was a significant difference in this particular announcement—a focus on concerns about paying for health care in retirement. In a Boston Globe report, a Fidelity spokesperson cited data that 71% of Fidelity workers didn’t know how they would pay for health-care expenses in retirement (kind of makes one wonder about the other 29%); and as part of this shift in strategy, Fidelity will be putting $3,000 into health-care reimbursement accounts for each worker—monies that won’t be taxable when withdra...

We live in an uncertain world, and when it comes to retirement planning, we are forced to make assumptions about an uncertain world some uncertain number of years in the future. However, a recent white paper by JPMorgan Asset Management (JPMAM) calls to mind that old adage about what happens when one assumes (see Participant Behavior Matters in Target Fund Strategy ). First, retirement projection tools tend to overlook the reality that many, perhaps most, participants dip into their retirement savings from time to time: some for only awhile—JPMAM’s research found that 20% of participants borrow, on average, 15% of their account balance—and some forever. JPMAM’s data noted that a full 15% of those over the age of 59 ½ (the age when one avoids the 10% premature distribution penalty) withdraw, on average, a quarter of their account balance. The research, which looked at the behaviors of 1.3 million participants in some 350 plans recordkept by JPMorgan Retirement Plan Services, also fou...

For now we see through a glass, darkly. 1 Corinthians 13:12 When St. Paul wrote those words, he was trying to explain to the early Christians that we may not understand why things are the way they are today, because our perspective is clouded. That phrase, to see through a glass—a mirror—darkly, conveys a similar sense in today’s usage: a sense of an obscured or otherwise imperfect vision of reality. For the very most part, those of us in the business of retirement plans look at the landscape and fret about things like the dismal rate of participation, tepid deferral rates, and inert asset allocations (see “IMHO: ‘Never, Ever’ Land” ). Heck, these days, you don’t have to be in the retirement plan business to wring your hands over the sorry state of retirement savings. Equally discomfiting to me are the incessant recitations regarding how apparently oblivious retirement savers are about the looming financial disaster. And while “the industry” often comforts itself by noting that th...

The good news is, Congress is beginning to take a hard look at 401(k) fees. Unfortunately, that also happens to be the bad news. They have a lot of company, of course. The Department of Labor has several initiatives currently under way, the Government Accountability Office (GAO) has called for more transparency, and a number of lawsuits have been filed alleging all sorts of fiduciary malfeasance on the subject (a complaint filed against Cigna last week seemed to suggest that having investment management fees netted against the returns in a mutual fund was some kind of conspiracy - see CIGNA Latest Target of 401(k) Fee Suit ). In view of all that activity, last week’s hearing before the House Education and Labor Committee was relatively sanguine (see Congressional Committee Hears 401(k) Fee Disclosure Testimony ). Not that there weren’t points of contention (but not as many as one might have thought)—and even a couple of moments of tension between those offering testimony. All in all...

Not too long after my first daughter was born, my wife decided that we needed to have a vehicle with four doors. All other decisions about the car were mine—color, options, make, model, etc.—so long as it had four doors (anyone who has ever wrestled with a car seat, or with getting a child into and out of a car seat, will appreciate why). In this particular case, even though I hate car shopping, I had done my homework—the service record of the make made it a cinch, the dealership was close, my wife and I saw eye-to-eye on color, and, for my money, there was only one model (in that make) whose four-door version looked sporty enough to satisfy my sense of a car I wouldn’t mind being seen driving. There was just one problem. This particular manufacturer had its model options arranged in three very specific packages. The model that had the features I wanted—for the price I wanted to pay—was the middle option. The one option I really wanted (and I REALLY wanted it) that wasn’t included...

It’s an undisputed fact that the vast majority of retirement plan participants never rebalance their accounts. It’s one of the reasons that that initial investment decision, particularly in a default situation, is so crucial. And most of us would guess that those participants who do make changes probably make a mess of it. However, new research from the Vanguard Center for Retirement Research tells a different story. Their report indicates that “traders” outperformed nontraders by 0.55% on an annualized basis. Not that we should draw much comfort from that result. First, only 17% of the one million or so participants in the Vanguard sampling were “active” traders (averaging just a bit under three trades each, but most did only one)—and, according to the Vanguard researcher, on a risk-adjusted basis, these same traders fared no better than nontrading participants. In effect, the extra risk they took on—during the relatively mild investing climate of 2003 and 2004—wiped out the be...

There appear to be two great debates of our time—Is global warming (oops, I mean global climate change) real? and How much do people need to save for retirement? The former is beyond the scope of this column, of course (watching the public debate, I’m not certain but that it is beyond the scope of many so-called experts on the subject). As for the latter point, every so often, some academic emerges with proof that people don’t need to save as much as “common wisdom” suggests they should. The issue was most recently addressed in a column in the New York Times titled “Are Americans Saving Too Much for Retirement?”—a column that was quickly picked up in syndication across the country. Of course, what are usually taken to task are the assumptions imbedded in those ubiquitous retirement calculators, the notion that one must accumulate a sum able to replace 70% of one’s preretirement income in retirement, and the ministrations of retirement plan providers and advisers who, ostensibly, stan...