As the nation mourns the passing of former President Ford this weekend, it’s been interesting to think back on that period. Most of the coverage seems to run in the vein of “He deserves more credit than history has given him”—a nice way of saying that history really hasn’t given him much credit. That’s not unusual, of course. People are often not fully appreciated until well after they have passed from this mortal coil—and the dividends of presidential policies are often long-term investments. One thing he’s not often noted for—but that we in this business benefit from every day—is his signing of the Employee Retirement Income Security Act of 1974 (ERISA), less than a month after taking office.
I wasn’t paying much attention to such matters in 1974. I was more focused on beginning my college education (and paying for same), and worrying how my dating life was going to survive having to pay 55 cents/gallon for gasoline (but relieved I no longer had to wait in line to do so). As presidents frequently are, Gerald Ford was portrayed by the media as a bumbler of sorts. One of our most athletic presidents, he had the temerity to engage in active sports such as skiing—and its companion activity, falling—in front of cameras. For those less prone to watch the nightly news, Chevy Chase, the then-hot ticket on the newly launched Saturday Night Live, transformed his “skill” for falling in front of the cameras into a weekly parody of President Ford during the 1976 presidential race. When press reports emerged quoting former President Lyndon Johnson’s comment that Gerald Ford had played too much football without a helmet—well, we all got the “joke.”
President Ford’s 895-day term as president is perhaps most noted for his pardon of his predecessor. A controversial decision, to say the least, and one that may well have cost him the 1976 presidential election, it still strikes me as one of those tough, principled decisions that we expect our nation’s leaders to make at critical junctures in history. It was, however, a decision that I think Gerald Ford was able to make for the simple reason that he had spent a lifetime establishing a reputation for personal and professional integrity. There may well have been those who suspected a quid pro quo—but while those notions fit nicely amidst concerns of a Watergate conspiracy, those suspicions simply didn’t hold water when applied to Gerald Ford (imagine if Spiro Agnew had granted that pardon).
Not that Gerald Ford was a saint, by any means. Recent reports suggest that his pardon of Richard Nixon may have had personal, as well as professional, motivations; and his decision to release criticisms of the current Administration’s polices—but only after his death—certainly lends a human “pallor” to his reputation, IMHO.
Still, President Gerald Ford lent his reputation and his integrity to a decision that his country needed—at a time when we needed it most.
- Nevin E. Adams
Saturday, December 30, 2006
Saturday, December 23, 2006
Deal or No Deal?
Deals like the one announced on Friday by The 401(k) Company, Nationwide, and Schwab are the kind of thing that gives advisers—and plan sponsors—heartburn. Not that one in particular, I should hasten to add—one could have the same queasiness about the recent Great-West/US Bank deal (see Great-West Sweeps Up More 401(k) Business), the sale of Southeastern Employee Benefit Services (see First Charter Lets Go of Recordkeeping Unit), or just about any structural change at a 401(k) recordkeeper.
The reasons for that angst are obvious, I would suspect. Change—even change for the better—is frequently disruptive to the human psyche. Most of us tend to drift into comfortable “ruts” of pattern, or perhaps habit—places where we know what to expect and, roughly anyway, when to expect it. And, at least in my experience, the more frazzled your existence, the more one pines for these oases of quiet and relative clarity.
There are few things more disruptive to the peace or clarity of a 401(k) plan than a switch in recordkeepers, even when the change is instigated by a regular, thoughtful, focused evaluation of the alternatives; or even when that change is the product of a desperate quest driven by a truly awful service relationship. But it is perhaps especially disruptive when the change is thrust on the plan by forces outside of its control or instigation. Particularly because, IMHO, that kind of change calls for at least a passing review of what the change means to the plan.
Some changes are less impactful than others on the plan’s daily administration, of course. Changes that trigger a mass departure of key staff can be upsetting, and those that necessitate moving to a new processing platform even more so. Change that requires communication to participants is anathema to most plan sponsors (and trust me, when a local provider engages in a big financial transaction, the media will cover it, and participants WILL ask).
On the other hand, changes that are merely structural in nature can be a big yawn—and changes that result in additional resources, better capabilities, a clearer focus, and a stronger commitment to “the business” are not as rare as you might think (though not as common as the post-announcement press releases would have you believe, either).
Regardless of whether the change appears to be good, bad, or inconsequential on its face, you need to ask—and get an answer to—the question “What does this mean to us?”
And the question only you can answer—“What are you going to do about it?”
- Nevin E. Adams
The reasons for that angst are obvious, I would suspect. Change—even change for the better—is frequently disruptive to the human psyche. Most of us tend to drift into comfortable “ruts” of pattern, or perhaps habit—places where we know what to expect and, roughly anyway, when to expect it. And, at least in my experience, the more frazzled your existence, the more one pines for these oases of quiet and relative clarity.
There are few things more disruptive to the peace or clarity of a 401(k) plan than a switch in recordkeepers, even when the change is instigated by a regular, thoughtful, focused evaluation of the alternatives; or even when that change is the product of a desperate quest driven by a truly awful service relationship. But it is perhaps especially disruptive when the change is thrust on the plan by forces outside of its control or instigation. Particularly because, IMHO, that kind of change calls for at least a passing review of what the change means to the plan.
Some changes are less impactful than others on the plan’s daily administration, of course. Changes that trigger a mass departure of key staff can be upsetting, and those that necessitate moving to a new processing platform even more so. Change that requires communication to participants is anathema to most plan sponsors (and trust me, when a local provider engages in a big financial transaction, the media will cover it, and participants WILL ask).
On the other hand, changes that are merely structural in nature can be a big yawn—and changes that result in additional resources, better capabilities, a clearer focus, and a stronger commitment to “the business” are not as rare as you might think (though not as common as the post-announcement press releases would have you believe, either).
Regardless of whether the change appears to be good, bad, or inconsequential on its face, you need to ask—and get an answer to—the question “What does this mean to us?”
And the question only you can answer—“What are you going to do about it?”
- Nevin E. Adams
Saturday, December 16, 2006
Naughty or Nice?
A few years back—when my kids still believed in the reality of Santa Claus—we discovered an ingenious Web site that purported to offer a real-time assessment of their “naughty or nice” status. Now, as Christmas approached, it was not uncommon for us to caution our occasionally misbehaving brood that they had best be attentive to how those actions might be viewed by the big guy at the North Pole.
But nothing ever had the impact of that Web site – if not on their behaviors (they’re kids, after all), then certainly on the level of their concern about the consequences. In fact, in one of his final years as a “believer,” my son (who, it must be acknowledged, had been PARTICULARLY naughty) was on the verge of tears, worried that he’d find nothing under the Christmas tree but the coal and bundle of switches he surely deserved.
One might plausibly argue that many participants act as though some kind of benevolent elf will drop down their chimney with a bag full of cold cash from the North Pole. They behave as though, somehow, their bad savings behaviors throughout the year(s) notwithstanding, they’ll be able to pull the wool over the eyes of a myopic, portly gentleman in a red snow suit. Not that they actually believe in a retirement version of St. Nick, but that’s essentially how they behave, even though, like my son, a growing number evidence concern about the consequences of their “naughty” behaviors. Also, like my son, they tend to worry about it too late to influence the outcome—and don’t change their behaviors in any meaningful way.
Ultimately, the volume of presents under our Christmas tree never really had anything to do with our kids’ behavior, of course. As parents, we nurtured their belief in Santa Claus as long as we thought we could (without subjecting them to the ridicule of their classmates), not because we expected it to modify their behavior (though we hoped, from time to time), but because, IMHO, kids should have a chance to believe, if only for a little while, in those kinds of possibilities.
We all live in a world of possibilities, of course. But as adults we realize—or should realize—that those possibilities are frequently bounded in by the reality of our behaviors. This is a season of giving, of coming together, of sharing with others. However, it is also a time of year when we should all be making a list and checking it twice—taking note, and making changes to what is naughty and nice about our savings behaviors.
Yes, Virginia, there is a Santa Claus—but he looks a lot like you, assisted by “helpers” like the employer match, your financial adviser, investment markets, and tax incentives.
Happy Holidays!
- Nevin Adams
P.S. The Naughty or Nice site is still online at http://www.claus.com/naughtyornice/index.php
But nothing ever had the impact of that Web site – if not on their behaviors (they’re kids, after all), then certainly on the level of their concern about the consequences. In fact, in one of his final years as a “believer,” my son (who, it must be acknowledged, had been PARTICULARLY naughty) was on the verge of tears, worried that he’d find nothing under the Christmas tree but the coal and bundle of switches he surely deserved.
One might plausibly argue that many participants act as though some kind of benevolent elf will drop down their chimney with a bag full of cold cash from the North Pole. They behave as though, somehow, their bad savings behaviors throughout the year(s) notwithstanding, they’ll be able to pull the wool over the eyes of a myopic, portly gentleman in a red snow suit. Not that they actually believe in a retirement version of St. Nick, but that’s essentially how they behave, even though, like my son, a growing number evidence concern about the consequences of their “naughty” behaviors. Also, like my son, they tend to worry about it too late to influence the outcome—and don’t change their behaviors in any meaningful way.
Ultimately, the volume of presents under our Christmas tree never really had anything to do with our kids’ behavior, of course. As parents, we nurtured their belief in Santa Claus as long as we thought we could (without subjecting them to the ridicule of their classmates), not because we expected it to modify their behavior (though we hoped, from time to time), but because, IMHO, kids should have a chance to believe, if only for a little while, in those kinds of possibilities.
We all live in a world of possibilities, of course. But as adults we realize—or should realize—that those possibilities are frequently bounded in by the reality of our behaviors. This is a season of giving, of coming together, of sharing with others. However, it is also a time of year when we should all be making a list and checking it twice—taking note, and making changes to what is naughty and nice about our savings behaviors.
Yes, Virginia, there is a Santa Claus—but he looks a lot like you, assisted by “helpers” like the employer match, your financial adviser, investment markets, and tax incentives.
Happy Holidays!
- Nevin Adams
P.S. The Naughty or Nice site is still online at http://www.claus.com/naughtyornice/index.php
Sunday, December 10, 2006
Taking "Sides"
I was trolling around on the Internet last weekend, when I saw a story titled “The Downsides to Your 401(k).” Needless to say, I was intrigued by the headline (I’m sure that was the intention), which turned out to be a lead-in to an interview with Smartmoney.com Editor Ray Hennessey.
There was an interesting pull quote designed to further whet the interest of the casual reader: "If your company goes belly-up, you're left with a lot of company match that you thought was automatic money, (and now) it's gone."
Well, right off the bat, I’m thinking the real downside in this article is its portrayal of the truth—after all, a company’s bankruptcy doesn’t put the match at risk. So, I read on.
Turns out, the pull quote was lifted out of context. The words were accurately quoted, but were presented without the benefit of an introductory sentence that clarified that the match put at risk was a match made in company stock. A situation that Hennessey said occurs “often.” Well, it’s common enough in large companies, of course, but a relative rarity elsewhere (the last statistics I recall seeing on that phenomenon indicated that something like 16% of plans offered it as an option, and I suspect that fewer mandate the match in that currency). And, of course, since the Enron implosion, a growing number of those firms have made it easier for workers to shift money from that investment on their own—and the Pension Protection Act contains provisions designed to deal with the rest.
Another downside: The fees companies charge to manage retirement accounts are “often” too high. Okay, I get fees as an issue. But “often” too high? Is it the same “often” as the company stock match? Are they “too” high relative to what you’d pay for buying similar funds in a retail IRA? What is too high, anyway?
The remaining downsides struck me as a bit contradictory; first, that you’re “forced to choose from the funds that your company decides to participate in”—a menu that might not be sufficiently diverse. The other, that “lots of times” there are too many funds to choose from.
Now, I suppose that having one’s choices limited would feel like a disadvantage to some, even being forced to choose from a menu that has, at least ostensibly, been selected and reviewed by a prudent expert (or one who has enlisted the services of same). I’m not sure how that squares with having too many options to choose among (though with an industry average of nearly 20 options to choose from, there’s certainly merit in a concern about too many). However, I suspect the point would be that you can have too many, and still not access to the one (or two) you want. However, it is a perspective that seems very much less in vogue these days, as participants and plan sponsors alike warm to the allure of lifestyle funds and managed accounts.
Ultimately, the article concludes that one should consider both the good and the bad about their 401(k): “Familiarize yourself with your fund options and the fees involved. Know your investments. After all, it's your future.”
On that, at least, we can agree.
- Nevin Adams
There was an interesting pull quote designed to further whet the interest of the casual reader: "If your company goes belly-up, you're left with a lot of company match that you thought was automatic money, (and now) it's gone."
Well, right off the bat, I’m thinking the real downside in this article is its portrayal of the truth—after all, a company’s bankruptcy doesn’t put the match at risk. So, I read on.
Turns out, the pull quote was lifted out of context. The words were accurately quoted, but were presented without the benefit of an introductory sentence that clarified that the match put at risk was a match made in company stock. A situation that Hennessey said occurs “often.” Well, it’s common enough in large companies, of course, but a relative rarity elsewhere (the last statistics I recall seeing on that phenomenon indicated that something like 16% of plans offered it as an option, and I suspect that fewer mandate the match in that currency). And, of course, since the Enron implosion, a growing number of those firms have made it easier for workers to shift money from that investment on their own—and the Pension Protection Act contains provisions designed to deal with the rest.
Another downside: The fees companies charge to manage retirement accounts are “often” too high. Okay, I get fees as an issue. But “often” too high? Is it the same “often” as the company stock match? Are they “too” high relative to what you’d pay for buying similar funds in a retail IRA? What is too high, anyway?
The remaining downsides struck me as a bit contradictory; first, that you’re “forced to choose from the funds that your company decides to participate in”—a menu that might not be sufficiently diverse. The other, that “lots of times” there are too many funds to choose from.
Now, I suppose that having one’s choices limited would feel like a disadvantage to some, even being forced to choose from a menu that has, at least ostensibly, been selected and reviewed by a prudent expert (or one who has enlisted the services of same). I’m not sure how that squares with having too many options to choose among (though with an industry average of nearly 20 options to choose from, there’s certainly merit in a concern about too many). However, I suspect the point would be that you can have too many, and still not access to the one (or two) you want. However, it is a perspective that seems very much less in vogue these days, as participants and plan sponsors alike warm to the allure of lifestyle funds and managed accounts.
Ultimately, the article concludes that one should consider both the good and the bad about their 401(k): “Familiarize yourself with your fund options and the fees involved. Know your investments. After all, it's your future.”
On that, at least, we can agree.
- Nevin Adams
Saturday, December 02, 2006
"Reasonable" Doubts
We got yet another call for 401(k) fee transparency last week. The latest – a report from the Government Accountability Office (GAO) at the behest of Congressman George Miller (D-California) – painted a relatively bleak picture of both the impact of fees on retirement savings, and on the ability of plan participants (not to mention plan sponsors and government regulators) to discern what they are paying for. Before the week was out, the Investment Company Institute (ICI) had published a report with a similar focus – but with a much different conclusion.
For the most part, the GAO report didn’t plow any new ground. In fact, IMHO, any self-respecting retirement plan professional could have written the report (or at least bulleted its conclusions) in their sleep. The bottom line: Fees can have a huge impact on retirement savings, but few seem to know what fees they are paying, and they have to work hard to know what little they do know. In contrast, the ICI report conveyed the kind of calm, reassuring perspective on mutual fund investment by 401(k) plans that one would expect from the mutual fund industry’s chief lobbying group. But I would sum it up as follows: Compared with retail mutual fund investors, 401(k) plan participants are getting a good deal.
Plan fiduciaries are, of course, charged with ensuring that both the fees AND THE SERVICES PROVIDED (emphasis mine) are reasonable. I know of no way to fulfill that obligation without a complete understanding of the services you are receiving, and the price you are paying for them. Unfortunately, we live in a world where the vast majority of fees paid by retirement plan participants are funded from a single fee source – the imbedded expense ratios of mutual funds. At some level, most of us can, with at least some effort, as the GAO report notes, know how much we are paying. And, with the assistance and complicity of providers and fund complexes, we can – again, with some effort – discern how much money is going to whom, and for what purpose(s).
Fees, like death and taxes, are a given in the world of retirement plan savings (believe if or not, one of the “key findings” in the ICI report was this little factoid: “Employers offering 401(k) plans typically hire service providers to operate these plans, and these providers charge fees for their services”). Furthermore, despite a growing interest in, and awareness of, the need for transparency in such matters, we still seem to be a long way from the solution – perhaps even in terms of deciding what the problem is that we are trying to solve.
I would suggest that we’re trying to make sure that relatively unsophisticated participants aren’t being ripped off by a system that has been afforded certain privileges to, at least ostensibly, help them. Secondly, we’re trying to arm and/or inform those charged with overseeing those programs – plan sponsors, advisers, and yes, even regulators – with the information they need to provide effective oversight. Finally – and while this goal is perhaps less explicit, it seems most important – I believe we are finally creeping up on the ability to articulate what the “right” answer is when it comes to determining what is “reasonable.”
It’s not likely to be easy, however. Consider that one of the tools referenced in the GAO report was the Department of Labor’s Fee Disclosure Form, and you need look no further than this multi-page template to gain a sense for the challenge confronting this effort – not just to identify the charges, but to understand their applicability to an individual plan – and to be able to compare them against competing platforms and fee structures.
It will take more than mere transparency to get there, of course, but we’ll never know if they are reasonable if we don’t know what those fees are in the first place. It’s the difference between an assurance that fees are reasonable – and having reasonable doubts.
- Nevin E. Adams
The GAO report is online at http://www.gao.gov/new.items/d0721.pdf
The ICI report is online at http://www.ici.org/home/fm-v15n7.pdf
The DOL Fee Disclosure form is online at http://www.dol.gov/ebsa/pdf/401kfefm.pdf
Editor’s Note: Some interesting excerpts from the GAO report:
In fiscal year 2005, Labor received only 10 inquiries or complaints related to 401(k) fees.
Labor officials told us that it is difficult to discern whether a fee is reasonable or not on its face, and therefore, investigators rarely initiate an investigation into a fee’s reasonableness.
Labor’s most recent in-depth review of fees identified some plans with high fees but determined that they were not unreasonable or in violation of ERISA.
In some cases, Labor did determine that participants were paying high fees. It referred these cases—which included insurance products and international equity funds—to a fee expert from academia for further analysis to determine if the fees were unreasonably high. The expert determined that the fees were high, but not unreasonable.
For the most part, the GAO report didn’t plow any new ground. In fact, IMHO, any self-respecting retirement plan professional could have written the report (or at least bulleted its conclusions) in their sleep. The bottom line: Fees can have a huge impact on retirement savings, but few seem to know what fees they are paying, and they have to work hard to know what little they do know. In contrast, the ICI report conveyed the kind of calm, reassuring perspective on mutual fund investment by 401(k) plans that one would expect from the mutual fund industry’s chief lobbying group. But I would sum it up as follows: Compared with retail mutual fund investors, 401(k) plan participants are getting a good deal.
Plan fiduciaries are, of course, charged with ensuring that both the fees AND THE SERVICES PROVIDED (emphasis mine) are reasonable. I know of no way to fulfill that obligation without a complete understanding of the services you are receiving, and the price you are paying for them. Unfortunately, we live in a world where the vast majority of fees paid by retirement plan participants are funded from a single fee source – the imbedded expense ratios of mutual funds. At some level, most of us can, with at least some effort, as the GAO report notes, know how much we are paying. And, with the assistance and complicity of providers and fund complexes, we can – again, with some effort – discern how much money is going to whom, and for what purpose(s).
Fees, like death and taxes, are a given in the world of retirement plan savings (believe if or not, one of the “key findings” in the ICI report was this little factoid: “Employers offering 401(k) plans typically hire service providers to operate these plans, and these providers charge fees for their services”). Furthermore, despite a growing interest in, and awareness of, the need for transparency in such matters, we still seem to be a long way from the solution – perhaps even in terms of deciding what the problem is that we are trying to solve.
I would suggest that we’re trying to make sure that relatively unsophisticated participants aren’t being ripped off by a system that has been afforded certain privileges to, at least ostensibly, help them. Secondly, we’re trying to arm and/or inform those charged with overseeing those programs – plan sponsors, advisers, and yes, even regulators – with the information they need to provide effective oversight. Finally – and while this goal is perhaps less explicit, it seems most important – I believe we are finally creeping up on the ability to articulate what the “right” answer is when it comes to determining what is “reasonable.”
It’s not likely to be easy, however. Consider that one of the tools referenced in the GAO report was the Department of Labor’s Fee Disclosure Form, and you need look no further than this multi-page template to gain a sense for the challenge confronting this effort – not just to identify the charges, but to understand their applicability to an individual plan – and to be able to compare them against competing platforms and fee structures.
It will take more than mere transparency to get there, of course, but we’ll never know if they are reasonable if we don’t know what those fees are in the first place. It’s the difference between an assurance that fees are reasonable – and having reasonable doubts.
- Nevin E. Adams
The GAO report is online at http://www.gao.gov/new.items/d0721.pdf
The ICI report is online at http://www.ici.org/home/fm-v15n7.pdf
The DOL Fee Disclosure form is online at http://www.dol.gov/ebsa/pdf/401kfefm.pdf
Editor’s Note: Some interesting excerpts from the GAO report:
In fiscal year 2005, Labor received only 10 inquiries or complaints related to 401(k) fees.
Labor officials told us that it is difficult to discern whether a fee is reasonable or not on its face, and therefore, investigators rarely initiate an investigation into a fee’s reasonableness.
Labor’s most recent in-depth review of fees identified some plans with high fees but determined that they were not unreasonable or in violation of ERISA.
In some cases, Labor did determine that participants were paying high fees. It referred these cases—which included insurance products and international equity funds—to a fee expert from academia for further analysis to determine if the fees were unreasonably high. The expert determined that the fees were high, but not unreasonable.
Saturday, November 18, 2006
Thanks Giving
Like many of you perhaps, I suddenly realized this past week that this week is Thanksgiving.
For me, 2006 has been an extraordinary year on fronts both personal and professional: turning 50, the death of my father, my 20th wedding anniversary, sending our first kid off to college, #2 turning 16, PLANSPONSOR’s first industry conference, a new adviser magazine…oh, and a little piece of legislation called the Pension Protection Act.
Still, as I sit here today preparing to pick my mother up at the airport for her first Thanksgiving visit with us in the northeast – and look ahead to picking up my eldest at college next week – I’m struck by just how much there is to be thankful for.
First and foremost, I’m thankful for a loving and patient family – who must all too frequently endure the intrusions of my career-long passion for this field into our daily lives.
I’m thankful for the home I have found at PLANSPONSOR, and the warmth with which its loyal readers have embraced me, as well as the many who have “discovered” us during the past seven years, and for all of you who have supported – and I hope benefited from – our various programs and communications throughout the year.
I’m thankful for the ability to make a positive contribution to the efforts of plan sponsors, advisers, and others who share my passion for the important work we do in helping provide for the retirement security of others. I’m thankful that so many gifted professionals have committed themselves to being part of the solution to these issues.
I’m also thankful for having found – so early in my working life – an area about which I could care so deeply, and which provides so much fulfillment, personally and professionally.
Finally, I’m thankful for the protections our democratic form of government affords us all; for the courage and selflessness of those, past and present, who have been willing to make the ultimate sacrifice to preserve those freedoms; and for the grace of a benevolent God in giving us all so much for which to be thankful at this special time of year.
- Nevin Adams editors@plansponsor.com
For me, 2006 has been an extraordinary year on fronts both personal and professional: turning 50, the death of my father, my 20th wedding anniversary, sending our first kid off to college, #2 turning 16, PLANSPONSOR’s first industry conference, a new adviser magazine…oh, and a little piece of legislation called the Pension Protection Act.
Still, as I sit here today preparing to pick my mother up at the airport for her first Thanksgiving visit with us in the northeast – and look ahead to picking up my eldest at college next week – I’m struck by just how much there is to be thankful for.
First and foremost, I’m thankful for a loving and patient family – who must all too frequently endure the intrusions of my career-long passion for this field into our daily lives.
I’m thankful for the home I have found at PLANSPONSOR, and the warmth with which its loyal readers have embraced me, as well as the many who have “discovered” us during the past seven years, and for all of you who have supported – and I hope benefited from – our various programs and communications throughout the year.
I’m thankful for the ability to make a positive contribution to the efforts of plan sponsors, advisers, and others who share my passion for the important work we do in helping provide for the retirement security of others. I’m thankful that so many gifted professionals have committed themselves to being part of the solution to these issues.
I’m also thankful for having found – so early in my working life – an area about which I could care so deeply, and which provides so much fulfillment, personally and professionally.
Finally, I’m thankful for the protections our democratic form of government affords us all; for the courage and selflessness of those, past and present, who have been willing to make the ultimate sacrifice to preserve those freedoms; and for the grace of a benevolent God in giving us all so much for which to be thankful at this special time of year.
- Nevin Adams editors@plansponsor.com
Saturday, November 11, 2006
Wonder Land
However you feel about the results of last week’s elections, there’s little disputing that things are going to be different in Washington. Amazingly, though perhaps not surprisingly, I’m already getting invitations to presentations, or offers to send me assessments, on what all this change will mean for benefit programs generally, and retirement savings specifically.
My initial reaction was a bit like when I walked into the mall last weekend and was confronted with Christmas displays – it’s too soon for this!
I doubt that many went to the polls with pensions on their minds (even those of us who make our living supporting them), and with the ink on the Pension Protection Act of 2006 still damp, one is tempted to think that we have all the regulatory help we’ll need until after the next election – at least.
Personally, I’m not expecting much out of this Congress, certainly not on pensions (does anyone really think that the momentary comity displayed for the television cameras will last?). We can probably “thank” the airline industry’s pension funding crisis for forcing the issue this past term, but higher interest rates and new pension accounting regulations from the Financial Accounting Standards Board (FASB) will likely grease the skids with no further legislative impetus. For defined contribution plans, there’s little question that the PPA sets a lot of interesting trends in motion – and much of that can proceed without the assistance of Congress. Moreover, if the removal of EGTRRA’s sunset dates doesn’t actually create true “permanence,” it nonetheless, for the time being, removes the ability of Congress to simply allow distasteful (to some) tax breaks to expire. Advice? Well, that was one of the more controversial aspects of the PPA legislatively – and it’s pretty clear that that is one area in which controversy, and just a bit of confusion, remains. I’m not at all sure that that will be resolved in the near term, but one never knows.
Not that a little inaction from Congress would be a bad thing. Most of us will have our hands full assimilating, explaining, and implementing the new provisions of the PPA until well past the 2008 elections. In addition to the Department of Labor’s newly minted proposals on Qualified Default Investment Alternatives , we have yet to see some of the details that will be required to fulfill some new reporting obligations, including quarterly benefit statements, and things like the Roth 401(k) may have a broader appeal now that the EGTRRA sunset has been removed.
But, as we lumber toward our next Presidential election, I wouldn’t be surprised if some began to wonder aloud if automatic enrollment might not be better deployed as a mandatory enrollment – after all, why leave “bad” behaviors to chance? Nor would I be surprised to hear legislators beginning to talk not about the disappointing participation rates of the 44% of working Americans who have the chance to participate, but about why the other 56% don’t have the same opportunity. After all, all taxpayers are, in a sense, subsidizing the programs of the 44% (similar arguments have been made about employer-sponsored health-care programs already, by the way). Could you envision a sort of uber-Social Security program that mandated worker (and perhaps employer) contributions that go into a private account? Maybe not in that particular format today – but there are elements in that design that could garner bipartisan support, IMHO. What might that mean for retirement security? For your retirement business security?
It’s not too early to start wondering – after all, 2008 is just around the corner.
- Nevin E. Adams editors@plansponsor.com
My initial reaction was a bit like when I walked into the mall last weekend and was confronted with Christmas displays – it’s too soon for this!
I doubt that many went to the polls with pensions on their minds (even those of us who make our living supporting them), and with the ink on the Pension Protection Act of 2006 still damp, one is tempted to think that we have all the regulatory help we’ll need until after the next election – at least.
Personally, I’m not expecting much out of this Congress, certainly not on pensions (does anyone really think that the momentary comity displayed for the television cameras will last?). We can probably “thank” the airline industry’s pension funding crisis for forcing the issue this past term, but higher interest rates and new pension accounting regulations from the Financial Accounting Standards Board (FASB) will likely grease the skids with no further legislative impetus. For defined contribution plans, there’s little question that the PPA sets a lot of interesting trends in motion – and much of that can proceed without the assistance of Congress. Moreover, if the removal of EGTRRA’s sunset dates doesn’t actually create true “permanence,” it nonetheless, for the time being, removes the ability of Congress to simply allow distasteful (to some) tax breaks to expire. Advice? Well, that was one of the more controversial aspects of the PPA legislatively – and it’s pretty clear that that is one area in which controversy, and just a bit of confusion, remains. I’m not at all sure that that will be resolved in the near term, but one never knows.
Not that a little inaction from Congress would be a bad thing. Most of us will have our hands full assimilating, explaining, and implementing the new provisions of the PPA until well past the 2008 elections. In addition to the Department of Labor’s newly minted proposals on Qualified Default Investment Alternatives , we have yet to see some of the details that will be required to fulfill some new reporting obligations, including quarterly benefit statements, and things like the Roth 401(k) may have a broader appeal now that the EGTRRA sunset has been removed.
But, as we lumber toward our next Presidential election, I wouldn’t be surprised if some began to wonder aloud if automatic enrollment might not be better deployed as a mandatory enrollment – after all, why leave “bad” behaviors to chance? Nor would I be surprised to hear legislators beginning to talk not about the disappointing participation rates of the 44% of working Americans who have the chance to participate, but about why the other 56% don’t have the same opportunity. After all, all taxpayers are, in a sense, subsidizing the programs of the 44% (similar arguments have been made about employer-sponsored health-care programs already, by the way). Could you envision a sort of uber-Social Security program that mandated worker (and perhaps employer) contributions that go into a private account? Maybe not in that particular format today – but there are elements in that design that could garner bipartisan support, IMHO. What might that mean for retirement security? For your retirement business security?
It’s not too early to start wondering – after all, 2008 is just around the corner.
- Nevin E. Adams editors@plansponsor.com
Saturday, November 04, 2006
Election Nearing
If you have turned on a TV, walked by a radio, or driven down a residential street in the past month, you will, of course, be aware that our nation will go to the polls tomorrow. Certainly, politics has never been a pretty business, but I doubt that I would get much argument in stating that this particular political season has been as nasty, vitriolic, and personal as any in recent memory—including not a few of those ads where the candidate’s visage appears to say that he or she “approved this message.”
Like a couple of bickering siblings, both sides protest either that they didn’t start it, or that it is the other side’s fault. Lowered to levels of political discourse that once would have gotten your mouth washed out with soap, the verbal free-for-all threatens to obfuscate not only the real issues in this election, but the truth itself. We’re all sick and tired of it—even when they’re dishing the dirt on the candidate we’re hoping is forced to slink off the public stage in disgrace come Tuesday.
Ultimately, of course, these strident pleas represent attempts not only to persuade, but to overcome the historic inertia of the American citizenry, particularly in one of these so-called “off-year” elections. Those of us who struggle to get workers to properly prepare for their own personal retirement security can surely appreciate the challenge, if not the consequences.
However ill we may be of the discourse, there is little argument that this election, more than most, will have a dramatic impact not only on the next two years, but on the 2008 presidential election campaign that is already underway. The political pundits have it all figured out, of course—but they’ve been wrong before. Political punditry spends a lot of time looking back over its shoulders at the past, but as any mutual fund investor knows (or should know), “past performance is no guarantee of future results.” Indeed, whether it is because, or in spite, of the current level of vitriol, the American public’s interest in expressing its opinion by actually taking the time to go to the polls – or in pursuing an absentee ballot—appears to be on the upswing. And, if the last several elections have taught us nothing else, we now know that votes—even a single vote—can matter.
The nation is not so cleanly demarcated into “blue” and “red” as pundits would have us believe, though we surely have our differences, IMHO. I suspect at most levels the voting public is not as polarized in their opinions as those running for political office seem to think. Frequently, that means that we must indeed opt for “the lesser of two evils,” but at least we have a choice—and unlike the brave Iraqis who walked to the polls last December to exercise a right to which they were long-deprived, we can do so without fear of assassination or retribution.
Here’s hoping that—whatever your position on the issues - you take the time to vote this election. It is not only a right, after all, it is also a privilege—and a responsibility.
- Nevin Adams editors@plansponsor.com
Like a couple of bickering siblings, both sides protest either that they didn’t start it, or that it is the other side’s fault. Lowered to levels of political discourse that once would have gotten your mouth washed out with soap, the verbal free-for-all threatens to obfuscate not only the real issues in this election, but the truth itself. We’re all sick and tired of it—even when they’re dishing the dirt on the candidate we’re hoping is forced to slink off the public stage in disgrace come Tuesday.
Ultimately, of course, these strident pleas represent attempts not only to persuade, but to overcome the historic inertia of the American citizenry, particularly in one of these so-called “off-year” elections. Those of us who struggle to get workers to properly prepare for their own personal retirement security can surely appreciate the challenge, if not the consequences.
However ill we may be of the discourse, there is little argument that this election, more than most, will have a dramatic impact not only on the next two years, but on the 2008 presidential election campaign that is already underway. The political pundits have it all figured out, of course—but they’ve been wrong before. Political punditry spends a lot of time looking back over its shoulders at the past, but as any mutual fund investor knows (or should know), “past performance is no guarantee of future results.” Indeed, whether it is because, or in spite, of the current level of vitriol, the American public’s interest in expressing its opinion by actually taking the time to go to the polls – or in pursuing an absentee ballot—appears to be on the upswing. And, if the last several elections have taught us nothing else, we now know that votes—even a single vote—can matter.
The nation is not so cleanly demarcated into “blue” and “red” as pundits would have us believe, though we surely have our differences, IMHO. I suspect at most levels the voting public is not as polarized in their opinions as those running for political office seem to think. Frequently, that means that we must indeed opt for “the lesser of two evils,” but at least we have a choice—and unlike the brave Iraqis who walked to the polls last December to exercise a right to which they were long-deprived, we can do so without fear of assassination or retribution.
Here’s hoping that—whatever your position on the issues - you take the time to vote this election. It is not only a right, after all, it is also a privilege—and a responsibility.
- Nevin Adams editors@plansponsor.com
Sunday, October 29, 2006
"Shop" Talk
This past weekend was Parent’s Weekend at the college where my eldest has now been in residence for the last two months. We’d had a great weekend, but as we went to check out of the hotel, I noticed that the final charges were considerably more than the rate we had been quoted when we made our reservations. Setting aside for the moment concerns that my 14-year-old had discovered the wonders of pay-per-view, closer scrutiny yielded the number I had anticipated—our room charge. But also included in the charges I was now expected to pay were a room tax, a city tax, and an occupancy sales tax.
I suppose one could hardly fault the hotel for those additional charges – they had, after all, provided the room and facilities to my family for the agreed upon rate. I’ll bet that somewhere on their Web site, or perhaps even on the form I signed at registration, the existence of these additional taxes was acknowledged. However, I’m reasonably certain that the hotel was happy to have me think I was getting the base rate when making my booking decision. And, when all was said and done, I’m assuming that comparable hotels in the vicinity had comparable (if not identical) taxes.
In a similar fashion, mutual fund investors have no doubt become a bit desensitized to the disclosure of fees. We talk about investment management fees as a proxy for what we are paying for the actual management of money, but at the same time realize that there are other charges, such as 12b-1s, that go to cover certain required administrative costs of running and maintaining the fund. And, for the most part, we assume that most funds that have comparable administrative structures also have comparable cost structures. We may even assume, as I did with my hotel bill, that those costs aren’t even fees, but simply a recovery of costs.
Well, disclosure isn’t necessarily clarity, and last week we were reminded that there frequently is more than meets the eye even with so-called disclosure. The latest “disclosure,” of course, is the revelations slowly emerging from an SEC investigation into the business practices of some fund company administrators in dealing with the fund complexes (for more details, see HERE). While in most respects, it may not be as monetarily significant, or perhaps not quite as pernicious as the mutual fund trading scandal, it is, nevertheless, one more not-so-shining example of what greed, coupled with an “excess” of funds available to fuel those vices, can yield.
For years, retirement plan investors have been willing to fork over billions of dollars in fees to the mutual fund industry. In turn, we have benefited from professional money management, call-center support, 24/7 access to our accounts via the Internet, the flexibility of daily valuation, the convenience of daily liquidity, and, in many cases, the support of financial professionals to help guide us in the management of our retirement savings accounts. Many of those services have been funded, in whole or significant part, by so-called revenue-sharing arrangements. However, IMHO, many of these mutual fund complexes have either forgotten—or have chosen to deliberately ignore—their obligation to the investing public.
I, for one, am sick and tired of having to fork over redemption fees self-righteously imposed by firms that not so long ago saw fit to profit richly from illicit and profitable arrangements they deliberately struck. I’m weary of 12b-1 fees ostensibly imposed to benefit investors with lower fees resulting from broader fund distributions—but that somehow never seem to achieve that result no matter how broad that dissemination. I’m tired of the oligopolistic mentality that sets a “fair” fee based on whatever the plurality of similarly situated mutual funds already get away with; I’m disgusted with the insidious development of special share classes designed to cloak retail pricing in what appears to be an institutional wrapper, and the sense that investors shouldn’t be troubled with a full, transparent disclosure not only as to how much money is being taken from their accounts, but to what ends, and what parties, it is being directed.
Normally, of course, we don’t seek to delve deep into the product profitability of every dollar we spend. I may have qualms about oil company profitability as I fill my tank—and I may well wonder at the expense of a bag of popcorn at the local cinema—but ultimately, as a consumer, if I believe I am being taken advantage of, I shop somewhere else. A mechanic that appears to gouge me on a simple repair will lose my business forever; a roofer, after repeated attempts to remedy a leaky roof, may gain my ire and a call to the Better Business Bureau.
In recent times, the investment industry has conducted itself in such a way as to not only jeopardize the trust of the investing public, but to suggest that it doesn’t really “get” what the big deal is. Maybe if we started shopping somewhere else, they would.
- Nevin Adams editors@plansponsor.com
I suppose one could hardly fault the hotel for those additional charges – they had, after all, provided the room and facilities to my family for the agreed upon rate. I’ll bet that somewhere on their Web site, or perhaps even on the form I signed at registration, the existence of these additional taxes was acknowledged. However, I’m reasonably certain that the hotel was happy to have me think I was getting the base rate when making my booking decision. And, when all was said and done, I’m assuming that comparable hotels in the vicinity had comparable (if not identical) taxes.
In a similar fashion, mutual fund investors have no doubt become a bit desensitized to the disclosure of fees. We talk about investment management fees as a proxy for what we are paying for the actual management of money, but at the same time realize that there are other charges, such as 12b-1s, that go to cover certain required administrative costs of running and maintaining the fund. And, for the most part, we assume that most funds that have comparable administrative structures also have comparable cost structures. We may even assume, as I did with my hotel bill, that those costs aren’t even fees, but simply a recovery of costs.
Well, disclosure isn’t necessarily clarity, and last week we were reminded that there frequently is more than meets the eye even with so-called disclosure. The latest “disclosure,” of course, is the revelations slowly emerging from an SEC investigation into the business practices of some fund company administrators in dealing with the fund complexes (for more details, see HERE). While in most respects, it may not be as monetarily significant, or perhaps not quite as pernicious as the mutual fund trading scandal, it is, nevertheless, one more not-so-shining example of what greed, coupled with an “excess” of funds available to fuel those vices, can yield.
For years, retirement plan investors have been willing to fork over billions of dollars in fees to the mutual fund industry. In turn, we have benefited from professional money management, call-center support, 24/7 access to our accounts via the Internet, the flexibility of daily valuation, the convenience of daily liquidity, and, in many cases, the support of financial professionals to help guide us in the management of our retirement savings accounts. Many of those services have been funded, in whole or significant part, by so-called revenue-sharing arrangements. However, IMHO, many of these mutual fund complexes have either forgotten—or have chosen to deliberately ignore—their obligation to the investing public.
I, for one, am sick and tired of having to fork over redemption fees self-righteously imposed by firms that not so long ago saw fit to profit richly from illicit and profitable arrangements they deliberately struck. I’m weary of 12b-1 fees ostensibly imposed to benefit investors with lower fees resulting from broader fund distributions—but that somehow never seem to achieve that result no matter how broad that dissemination. I’m tired of the oligopolistic mentality that sets a “fair” fee based on whatever the plurality of similarly situated mutual funds already get away with; I’m disgusted with the insidious development of special share classes designed to cloak retail pricing in what appears to be an institutional wrapper, and the sense that investors shouldn’t be troubled with a full, transparent disclosure not only as to how much money is being taken from their accounts, but to what ends, and what parties, it is being directed.
Normally, of course, we don’t seek to delve deep into the product profitability of every dollar we spend. I may have qualms about oil company profitability as I fill my tank—and I may well wonder at the expense of a bag of popcorn at the local cinema—but ultimately, as a consumer, if I believe I am being taken advantage of, I shop somewhere else. A mechanic that appears to gouge me on a simple repair will lose my business forever; a roofer, after repeated attempts to remedy a leaky roof, may gain my ire and a call to the Better Business Bureau.
In recent times, the investment industry has conducted itself in such a way as to not only jeopardize the trust of the investing public, but to suggest that it doesn’t really “get” what the big deal is. Maybe if we started shopping somewhere else, they would.
- Nevin Adams editors@plansponsor.com
Saturday, October 21, 2006
Fear of Filings
Last week, the elementary schools in Attleboro, Massachusetts, gained a bit of notoriety for their decision to ban kids from playing tag (more specifically, any unsupervised “chase” game). They weren’t the first to do so, but headlines like “Tag, You’re Out!” are just too tempting for journalists to turn their backs on. And, let’s face it, the notion of tag being “outlawed” is the kind of “you’ve got to be kidding me” story that people will read.
The reason for the ban is simple: Recess is "a time when accidents can happen," was a quote attributed to Willett Elementary School Principal Gaylene Heppe, who approved the ban. Having had a dangerous encounter of my own on the school playground during sixth-grade recess (I still have the scars), I can attest to the veracity of the concern. Of course, no one really thinks this is about children’s safety. We all know – and, unfortunately, understand - that it’s about the lawsuits that such accidents will almost certainly engender.
The lunacy of our litigious society is hardly a new phenomenon, but it seems to me that we have entered a new phase. Where once we would have had some kid getting hurt playing tag, the school getting sued, and subsequently banning tag, now we have what is effectively a preemptive action. Like Pavlov’s dogs, as a society, we know what’s coming – and rather than wait for the worst to happen, we take preventive action. Now, there’s nothing wrong with that approach, of course. Properly focused, it’s productive, proactive – even prudent, if not just plain, old-fashioned common sense. But, in a time when the only limits to being sued are the imaginations of a creative litigator and a receptive judiciary, well, you wind up doing things like banning unsupervised tag.
The mindset of retirement plan sponsors is not yet in that vein, so far as I am able to discern. In fact, in my experience, the fear of getting sued is perhaps the strongest consistent motivator of inertia in plan sponsor behaviors. Not that behavioral change is easy to accomplish – after all, when it comes to tough, complicated financial decisions with legal impact, plan sponsors are as inert as any participant.
Still, the fear of getting sued – or, as we tend to euphemistically refer to it, “fiduciary concerns” – remains one of the most frequently cited reasons for inaction. We tend to forgo offering investment advice to participants because we are afraid of getting sued, for instance – and we forestall implementing an investment policy statement – or taking a questionable fund off the menu – for much the same reason.
In fact, while fiduciary awareness is, IMHO, key to innovative, thoughtful plan designs, ironically, fiduciary concerns can be anathema to the same result. Fiduciary concerns are never all that far off a plan sponsor’s radar screen – but motivating good behaviors generally takes more than the fear of getting sued.
- Nevin Adams
The reason for the ban is simple: Recess is "a time when accidents can happen," was a quote attributed to Willett Elementary School Principal Gaylene Heppe, who approved the ban. Having had a dangerous encounter of my own on the school playground during sixth-grade recess (I still have the scars), I can attest to the veracity of the concern. Of course, no one really thinks this is about children’s safety. We all know – and, unfortunately, understand - that it’s about the lawsuits that such accidents will almost certainly engender.
The lunacy of our litigious society is hardly a new phenomenon, but it seems to me that we have entered a new phase. Where once we would have had some kid getting hurt playing tag, the school getting sued, and subsequently banning tag, now we have what is effectively a preemptive action. Like Pavlov’s dogs, as a society, we know what’s coming – and rather than wait for the worst to happen, we take preventive action. Now, there’s nothing wrong with that approach, of course. Properly focused, it’s productive, proactive – even prudent, if not just plain, old-fashioned common sense. But, in a time when the only limits to being sued are the imaginations of a creative litigator and a receptive judiciary, well, you wind up doing things like banning unsupervised tag.
The mindset of retirement plan sponsors is not yet in that vein, so far as I am able to discern. In fact, in my experience, the fear of getting sued is perhaps the strongest consistent motivator of inertia in plan sponsor behaviors. Not that behavioral change is easy to accomplish – after all, when it comes to tough, complicated financial decisions with legal impact, plan sponsors are as inert as any participant.
Still, the fear of getting sued – or, as we tend to euphemistically refer to it, “fiduciary concerns” – remains one of the most frequently cited reasons for inaction. We tend to forgo offering investment advice to participants because we are afraid of getting sued, for instance – and we forestall implementing an investment policy statement – or taking a questionable fund off the menu – for much the same reason.
In fact, while fiduciary awareness is, IMHO, key to innovative, thoughtful plan designs, ironically, fiduciary concerns can be anathema to the same result. Fiduciary concerns are never all that far off a plan sponsor’s radar screen – but motivating good behaviors generally takes more than the fear of getting sued.
- Nevin Adams
Saturday, October 14, 2006
"Losing" Propositions
Last week, participants who had brought a company stock suit against their employer won a settlement. No real surprise there, you say? Well, actually, in approving the relatively modest $11 million settlement in the case of In re: Broadwing, Inc. ERISA Litigation, the court essentially said that plaintiffs should take the money and be glad they could get it—since their odds of winning (“prevailing on the merits” in legalspeak) were uncertain.*
Now, admittedly, that might be something of an overstatement. In approving the settlement, the court basically did what courts are supposed to do in approving a settlement—they ran down a checklist of things that purport to establish that the settlement is fair, particularly in a class action, where most of the plaintiffs aren’t in the courtroom. And one of the conclusions courts are basically required to draw in approving such settlements is that it represents the best deal for a plaintiff under the circumstances.
In Broadwing, the action was brought on behalf of some 5,000 participants, and it claimed that the defendants breached their ERISA fiduciary duties by failing to provide employees with information about the firm’s true financial condition. (This, of course, has become an investigation trigger for any firm that has any kind of earnings “surprise” or some suggestion of accounting mal- or misfeasance. And, for good measure, they also typically charge that participants were not adequately informed of the risks of investing in company stock.)
Still, despite the Enron debacle’s financial shenanigans, and the myriad headlines generated each and every time (including in PLANSPONSOR’s NewsDash) a plaintiff’s law firm initiates an “investigation” and then actually finds a plaintiff or two to represent the litigation class, most of these cases seem to wind up one of two ways—a settlement or a finding for the employer/defendant. In fact, in recent days, there have been a series of these cases that have not only gone to trial, but have wound up in the latter category (see “No Breach in Fiduciary Duties of Airlines’ Co. Stock Cases”). This trend was referenced in a recent $100 million settlement for AOL TimeWarner participants (see “Court OKs $100M AOL Time Warner 401(k) Suit Settlement”).
Despite what, IMHO, is a reasonably rational application of fiduciary law in these cases, I’m not sure that plans with company stock investments can afford to be complacent. Their presence on a retirement plan menu draws a disproportionate, if not downright imprudent, interest from participants—not to mention litigators. There are costs to litigation that go well beyond lawyers’ fees**; the distraction from the business of making money, most obviously—and even winning can be losing on the PR front.
And, as an old boss of mine used to remind me, “You can spend a lot of money in court being right.”
- Nevin Adams editors@plansponsor.com
* "Several district court decisions favor the possibility of establishing liability in cases alleging fiduciary breaches concerning holdings of risky company stock in individual retirement accounts, however, few of these cases reached the stage of a decision based on the merits." - In re: Broadwing, Inc. ERISA Litigation
** Not that one should begrudge professionals being fairly compensated for their expertise, but roughly 23% of the $11,000,000 Broadwing settlement will go to plaintiff’s counsel. Now, since contingent-fee cases routinely take a third of the settlement, one could certainly find that 23% is reasonable. However, that would leave, as best as I can estimate, only about $1,700 each for the roughly 5,000 participants.
Saturday, October 07, 2006
"Chill" Pill?
Last week, another court rejected claims that a cash balance plan was age discriminatory (see “Cash Balance Plan Not in Breach of Age Discrimination Laws”), though you could perhaps be excused for not noticing that result. In fact, my guess is that a random sampling of the adviser universe would reveal two things about cash balance plans: first, a great ignorance about what they are and how they work (see links below); and second, a general sense that they represent an illegal plan design.
Over the past several years, the conversion – and litigation experience – of a single plan – IBM - has dominated the media’s coverage of these programs. Along the way, Congress has cut off funding for the Department of Labor to issue clarifying regulations on these programs (led by Congressman Bernie Saunders, I-Vermont, in whose state IBM is the largest employer), and the IRS quit issuing determination letters on these plans (basically an approval by the IRS that the plan document passes muster).
They continued to be adopted by employers, of course (see “One Bad Apple”), but it surely couldn’t have been easy given all the bad press regarding those programs. And most of that coverage centered around a single case: Cooper, et al. v. IBM Personal Pension Plan, a case brought in the U.S. District Court of Southern Illinois (see “Murphy’s Law: IBM Loses Cash Balance Ruling”) in 2003.
It’s not the only lawsuit that has been brought regarding cash balance plans – but, until recently, it was one of the very few in which plaintiffs’ counsel had actually been able to convince a court that the plans were illegal (and then only in the context of a conversion from an existing traditional defined benefit plan). And, despite a surprising number of cases in different jurisdictions that came to a completely different conclusion – at least one, Tootle v. ARINC Inc., came to a directly different result – the only one that “the media” seemed to care about was the IBM verdict – and they flogged it relentlessly, IMHO. Consequently, while some employers continued to embrace the cash balance concept, they doubtless did so with trepidation. Countless more - we’ll never know the full effect – employers and advisers likely drew their sense of things from the headlines and simply chose to avoid a potential headache. This “chilling effect” is, of course, exactly the result that cash balance opponents had in mind.
In recent weeks, the landscape has changed dramatically. The Pension Protection Act specifically clears up the age discrimination issue, at least on a prospective basis and, coincidentally, within days of that result, the IBM decision was reversed on appeal. Not that either of these results have been headline news in most cases (the headlines in the IBM case have largely been focused on the plaintiffs’ “determination” to carry their case to a higher court).
And not that cash balance plans are a panacea for what ails our current retirement savings system – but they offer a benefit accumulation that seems more portable than traditional pension plans and more consistent with the working patterns of today’s workforce, is supported by the Pension Benefit Guaranty Corporation (PBGC), and is typically employer-funded. The design is, generally speaking, more balance-sheet friendly than traditional pension plans, and its benefit to participants more readily grasped and communicated.
Automatic solutions alone aren’t likely to be enough to stave off the retirement savings crisis, and we’ll surely draw less support from traditional defined benefit plans in the future than we have heretofore (even for the minority that had that support to begin with). We need new solutions, and we need to consider old solutions in a new light.What’s changed about cash balance plans? Not much. What’s changed about their viability as a plan design alternative? Quite a bit, I hope.
- Nevin Adams editors@plansponsor.com
For more on cash balance plans see:
http://www.plansponsor.com/hp_type2/?RECORD_ID=4910
http://www.plansponsor.com/magazine_type3?RECORD_ID=34704
Over the past several years, the conversion – and litigation experience – of a single plan – IBM - has dominated the media’s coverage of these programs. Along the way, Congress has cut off funding for the Department of Labor to issue clarifying regulations on these programs (led by Congressman Bernie Saunders, I-Vermont, in whose state IBM is the largest employer), and the IRS quit issuing determination letters on these plans (basically an approval by the IRS that the plan document passes muster).
They continued to be adopted by employers, of course (see “One Bad Apple”), but it surely couldn’t have been easy given all the bad press regarding those programs. And most of that coverage centered around a single case: Cooper, et al. v. IBM Personal Pension Plan, a case brought in the U.S. District Court of Southern Illinois (see “Murphy’s Law: IBM Loses Cash Balance Ruling”) in 2003.
It’s not the only lawsuit that has been brought regarding cash balance plans – but, until recently, it was one of the very few in which plaintiffs’ counsel had actually been able to convince a court that the plans were illegal (and then only in the context of a conversion from an existing traditional defined benefit plan). And, despite a surprising number of cases in different jurisdictions that came to a completely different conclusion – at least one, Tootle v. ARINC Inc., came to a directly different result – the only one that “the media” seemed to care about was the IBM verdict – and they flogged it relentlessly, IMHO. Consequently, while some employers continued to embrace the cash balance concept, they doubtless did so with trepidation. Countless more - we’ll never know the full effect – employers and advisers likely drew their sense of things from the headlines and simply chose to avoid a potential headache. This “chilling effect” is, of course, exactly the result that cash balance opponents had in mind.
In recent weeks, the landscape has changed dramatically. The Pension Protection Act specifically clears up the age discrimination issue, at least on a prospective basis and, coincidentally, within days of that result, the IBM decision was reversed on appeal. Not that either of these results have been headline news in most cases (the headlines in the IBM case have largely been focused on the plaintiffs’ “determination” to carry their case to a higher court).
And not that cash balance plans are a panacea for what ails our current retirement savings system – but they offer a benefit accumulation that seems more portable than traditional pension plans and more consistent with the working patterns of today’s workforce, is supported by the Pension Benefit Guaranty Corporation (PBGC), and is typically employer-funded. The design is, generally speaking, more balance-sheet friendly than traditional pension plans, and its benefit to participants more readily grasped and communicated.
Automatic solutions alone aren’t likely to be enough to stave off the retirement savings crisis, and we’ll surely draw less support from traditional defined benefit plans in the future than we have heretofore (even for the minority that had that support to begin with). We need new solutions, and we need to consider old solutions in a new light.What’s changed about cash balance plans? Not much. What’s changed about their viability as a plan design alternative? Quite a bit, I hope.
- Nevin Adams editors@plansponsor.com
For more on cash balance plans see:
http://www.plansponsor.com/hp_type2/?RECORD_ID=4910
http://www.plansponsor.com/magazine_type3?RECORD_ID=34704
Saturday, September 30, 2006
QDIA Essentials
There are many terrifying aspects of being a parent – but perhaps none as intellectually daunting as being asked to help with your children’s homework. See, even if you did well in school once upon a time – even if you can (or think you can) still remember how to solve a certain type of problem, the only way to “know” is to see if you have the “right” answer. And thank goodness, for parents (and, no doubt, students) everywhere, most math texts still carry the answers to the odd problems in the back.
Last week, the Department of Labor provided a similar service – the “right” answer to a dilemma that has plagued plan sponsors and advisers for many years: the choice of an appropriate investment fund for participants who fail to designate one. In announcing the proposed rules, the DOL threw its support behind this solution – a qualified default investment alternative - as a means to foster programs like automatic enrollment (particularly the new safe harbor version contained in the Pension Protection Act) that facilitate not only plan participation, but a better investment diversification by participants. And, to no one’s surprise, when it unveiled its proposal, the DOL formally sanctioned the use of asset allocation funds as default investment options in those circumstances. Moreover, while the DOL’s proposal sanctions the use of professionally managed asset allocation accounts, it leaves the choice of a particular product solution open, acknowledging the applicability of lifecycle funds as well as more traditional balanced funds and the more recently popularized “managed accounts.”
Not only did the DOL place its imprimatur on such designs, it also acknowledged the longstanding use of other options such as money market funds and stable value accounts. However, the DOL noted that “it is possible that at least some plan sponsors strongly prefer to use as default investments such instruments rather than any of the three types embraced by the proposed rule.” Those potential preferences notwithstanding, the DOL noted that “The proposed rule, by providing relief from fiduciary liability, is both intended and expected to tilt plan sponsors' default investment preferences AWAY FROM SUCH INSTRUMENTS AND TOWARD THE THREE TYPES IT EMBRACES (emphasis added),” though the DOL goes on to acknowledge that the proposed rule leaves intact the current legal provisions applicable to the use of such instruments as default investments (basically that the plan fiduciary is responsible for the choice).
The DOL’s proposal also contains some interesting product-centric nuggets that advisers may find instructive. For example, in discussing the lifestyle/lifecycle choice, “The Department presumes that, in those instances when a participant or beneficiary chooses not to direct the investment of the assets in their account, the only objective and readily available information relevant to making an investment decision on behalf of the participant is age,” and then goes on to note that QDIAs are not required to take into account other factors, such as risk tolerances, other investment assets, etc. – and it extends this flexibility to the managed-account alternative. (Ironically, the proposal says that the age of individual participants does not have to be considered in the use of a “balanced fund” alternative, but rather the “demographics of the participant population as a whole.”)
Note that the DOL proposal says that “a qualified default investment alternative must be either managed by an investment manager, as defined in section 3(38) of the Act, or an investment company registered under the Investment Company Act of 1940.” Why? Quite simply, the DOL “believes that when plan fiduciaries are relieved of liability for underlying investment management/asset allocation decisions, those responsible for the investment management/asset allocation decisions must be investment professionals who acknowledge their fiduciary responsibilities and liability under ERISA.”
We are similarly reminded that, “like other investment alternatives made available under a plan, a plan fiduciary would be required to carefully consider investment fees and expenses in choosing a qualified default investment alternative for purposes of the proposed regulation.” Of course, the “silver bullet” in the proposed rules lies in the fact that “a fiduciary of a plan that complies with this proposed regulation will not be liable for any loss, or by reason of any breach that occurs as a result of such investments.” However, the proposal reminds us all that “plan fiduciaries remain responsible for the prudent selection and monitoring of the qualified default investment alternative.”
To some questions, the answers never change, IMHO – nor should they.
- Nevin Adams editors@plansponsor.com
You can read more about the proposed rules at http://www.plansponsor.com/pi_type11/?RECORD_ID=35012
Last week, the Department of Labor provided a similar service – the “right” answer to a dilemma that has plagued plan sponsors and advisers for many years: the choice of an appropriate investment fund for participants who fail to designate one. In announcing the proposed rules, the DOL threw its support behind this solution – a qualified default investment alternative - as a means to foster programs like automatic enrollment (particularly the new safe harbor version contained in the Pension Protection Act) that facilitate not only plan participation, but a better investment diversification by participants. And, to no one’s surprise, when it unveiled its proposal, the DOL formally sanctioned the use of asset allocation funds as default investment options in those circumstances. Moreover, while the DOL’s proposal sanctions the use of professionally managed asset allocation accounts, it leaves the choice of a particular product solution open, acknowledging the applicability of lifecycle funds as well as more traditional balanced funds and the more recently popularized “managed accounts.”
Not only did the DOL place its imprimatur on such designs, it also acknowledged the longstanding use of other options such as money market funds and stable value accounts. However, the DOL noted that “it is possible that at least some plan sponsors strongly prefer to use as default investments such instruments rather than any of the three types embraced by the proposed rule.” Those potential preferences notwithstanding, the DOL noted that “The proposed rule, by providing relief from fiduciary liability, is both intended and expected to tilt plan sponsors' default investment preferences AWAY FROM SUCH INSTRUMENTS AND TOWARD THE THREE TYPES IT EMBRACES (emphasis added),” though the DOL goes on to acknowledge that the proposed rule leaves intact the current legal provisions applicable to the use of such instruments as default investments (basically that the plan fiduciary is responsible for the choice).
The DOL’s proposal also contains some interesting product-centric nuggets that advisers may find instructive. For example, in discussing the lifestyle/lifecycle choice, “The Department presumes that, in those instances when a participant or beneficiary chooses not to direct the investment of the assets in their account, the only objective and readily available information relevant to making an investment decision on behalf of the participant is age,” and then goes on to note that QDIAs are not required to take into account other factors, such as risk tolerances, other investment assets, etc. – and it extends this flexibility to the managed-account alternative. (Ironically, the proposal says that the age of individual participants does not have to be considered in the use of a “balanced fund” alternative, but rather the “demographics of the participant population as a whole.”)
Note that the DOL proposal says that “a qualified default investment alternative must be either managed by an investment manager, as defined in section 3(38) of the Act, or an investment company registered under the Investment Company Act of 1940.” Why? Quite simply, the DOL “believes that when plan fiduciaries are relieved of liability for underlying investment management/asset allocation decisions, those responsible for the investment management/asset allocation decisions must be investment professionals who acknowledge their fiduciary responsibilities and liability under ERISA.”
We are similarly reminded that, “like other investment alternatives made available under a plan, a plan fiduciary would be required to carefully consider investment fees and expenses in choosing a qualified default investment alternative for purposes of the proposed regulation.” Of course, the “silver bullet” in the proposed rules lies in the fact that “a fiduciary of a plan that complies with this proposed regulation will not be liable for any loss, or by reason of any breach that occurs as a result of such investments.” However, the proposal reminds us all that “plan fiduciaries remain responsible for the prudent selection and monitoring of the qualified default investment alternative.”
To some questions, the answers never change, IMHO – nor should they.
- Nevin Adams editors@plansponsor.com
You can read more about the proposed rules at http://www.plansponsor.com/pi_type11/?RECORD_ID=35012
Saturday, September 23, 2006
'Best' Case?
On September 11, 2006, while the nation was focused on the fifth anniversary of the 09/11 terrorist attacks, a St. Louis law firm launched its own “attack” on a wide array of 401(k) plan practices, primarily centered around the application and reporting of fees. However, unlike the terrorist attacks, this 09/11 event was launched well below the normal media radar screens. In fact, even today, some two weeks after the complaints have been filed in court by the law firm of Schlichter, Bogard & Denton, I don’t believe it has been picked up by any major media outlet.
That a suit has been filed regarding revenue-sharing practices is hardly a surprise, of course – it’s not even the first (for example, see “Nationwide ERISA Suit Survives Challenge”). Moreover, a number of notable ERISA litigation firms have, for some time, effectively solicited these claims from participants via postings on their respective Web sites. However, what is most striking, IMHO (aside from the relative “obscurity” of the filings), is the breadth of the allegations they contain.
These suits are not just about revenue-sharing, though that is clearly a key element of the fiduciary abuses alleged. Rather, the charges all revolve around the disclosure of fees to participants – more accurately, the lack of disclosure. Along the way, how fees are calculated on company stock accounts, the use of non-institutional class shares by large 401(k) plans, the apparent lack of disclosure to participants of hard-dollar fees (which are disclosed to regulators), and even the presentation of ostensibly passive funds as actively managed all are taken to task. And, as you can no doubt discern from that list, the allegations are made against large plans with billions of dollars in assets. All in all, regarding the fee structures in the 401(k) industry, the complaint says, “At best, these fee structures are complicated and confusing when disclosed to Plan participants. At worst, they are excessive, undisclosed, and illegal.”
Nor does this appear to be the random work of some hack firm trying to make a name for itself. In reading through the half dozen of these complaints I currently have access to (there reportedly are, or will be, 20 or so), it is clear that the law firm has carefully reviewed plan documents and/or summary plan descriptions, 5500 filings, and participant communications. While each filing has certain consistent points and arguments, the allegations also reflect a working awareness of the unique structures of each plan and the various providers. Moreover – and you can’t say this about every lawsuit I have seen filed in this business – they seem to understand how these programs actually work; the unitization of company stock holdings alongside a cash component, the difference in pricing between institutional class shares and retail offerings, the nuances of master trust reporting. Finally, and in a compelling fashion, IMHO, they do a fine job of restating the duties and obligations of plan fiduciaries.
Filing a complaint is hardly the same as prevailing against a vigorous defense in a court of law, or surviving an appeal - and at this point, we have only one side of the argument to consider. We cannot say with any degree of certainty that these plan fiduciaries and their service providers have not acted in accordance with ERISA’s mandates, or that plan participants have not been well-served by these structures.
It is clear, however, that a lot of practices this industry has too long taken for granted are now going to be subjected to a fresh - and harsh - degree of scrutiny.
- Nevin Adams editors@plansponsor.com
That a suit has been filed regarding revenue-sharing practices is hardly a surprise, of course – it’s not even the first (for example, see “Nationwide ERISA Suit Survives Challenge”). Moreover, a number of notable ERISA litigation firms have, for some time, effectively solicited these claims from participants via postings on their respective Web sites. However, what is most striking, IMHO (aside from the relative “obscurity” of the filings), is the breadth of the allegations they contain.
These suits are not just about revenue-sharing, though that is clearly a key element of the fiduciary abuses alleged. Rather, the charges all revolve around the disclosure of fees to participants – more accurately, the lack of disclosure. Along the way, how fees are calculated on company stock accounts, the use of non-institutional class shares by large 401(k) plans, the apparent lack of disclosure to participants of hard-dollar fees (which are disclosed to regulators), and even the presentation of ostensibly passive funds as actively managed all are taken to task. And, as you can no doubt discern from that list, the allegations are made against large plans with billions of dollars in assets. All in all, regarding the fee structures in the 401(k) industry, the complaint says, “At best, these fee structures are complicated and confusing when disclosed to Plan participants. At worst, they are excessive, undisclosed, and illegal.”
Nor does this appear to be the random work of some hack firm trying to make a name for itself. In reading through the half dozen of these complaints I currently have access to (there reportedly are, or will be, 20 or so), it is clear that the law firm has carefully reviewed plan documents and/or summary plan descriptions, 5500 filings, and participant communications. While each filing has certain consistent points and arguments, the allegations also reflect a working awareness of the unique structures of each plan and the various providers. Moreover – and you can’t say this about every lawsuit I have seen filed in this business – they seem to understand how these programs actually work; the unitization of company stock holdings alongside a cash component, the difference in pricing between institutional class shares and retail offerings, the nuances of master trust reporting. Finally, and in a compelling fashion, IMHO, they do a fine job of restating the duties and obligations of plan fiduciaries.
Filing a complaint is hardly the same as prevailing against a vigorous defense in a court of law, or surviving an appeal - and at this point, we have only one side of the argument to consider. We cannot say with any degree of certainty that these plan fiduciaries and their service providers have not acted in accordance with ERISA’s mandates, or that plan participants have not been well-served by these structures.
It is clear, however, that a lot of practices this industry has too long taken for granted are now going to be subjected to a fresh - and harsh - degree of scrutiny.
- Nevin Adams editors@plansponsor.com
Sunday, September 17, 2006
Who ARE Those Guys?
One of my favorite Westerns is “Butch Cassidy and the Sundance Kid,” and one of my favorite parts of that movie is the part where they are being pursued – relentlessly pursued – after a particular train robbery by an unidentified posse. As they fruitlessly try one thing after another to shake their pursuers, the two outlaws’ frustration mounts, moving from a “can you believe it?” incredulousness at their ingenuity to a “now what are we going to do?” exasperation – a range of emotions conveyed several different times – in several different ways – by the same phrase, “Who ARE those guys?”
In our industry, the pursued aren’t train robbers, but participants – or more accurately workers who could be participants. The posse trying to “catch” them includes employers, providers, and, yes, financial advisers. Over the years we’ve tried many things, with varying degrees of success, to get everyone who is eligible to save via these programs to do so: the logic of tax-advantaged savings, the allure of “free” money via the company match, the looming financial requirements of retirement. Still, despite our collective efforts over an extended period of time, in the aggregate, somewhere between one-in-four and one-in-five workers eligible to take advantage don’t.
Enter automatic enrollment. The logic behind these programs is almost indisputable. Without their impetus, 401(k) plan participation rates linger in the mid-70% range. With them in place, plan participation rates rise to – and apparently remain at – the mid-90% range. There are, of course, plans that attain that kind of result without automatic enrollment – and I’m sure there must be a plan somewhere that has adopted automatic enrollment that hasn’t been able to sustain such a robust increase in participation (though I’ve yet to come across it). Still, it’s hard not to like something that so readily appears to “fix” the problem of getting that last intransient group of people to take advantage of the benefits of their 401(k). If it isn’t a “silver bullet,” it’s darned close, IMHO.
But who are these 20% that wouldn’t/couldn’t’ expend the energy to fill out an enrollment form, but who WILL let someone take 3% of their pay? Were they interested but just too busy (or too lazy) to return the form? Could they not figure out how much they needed, or could afford, to save? Were they so befuddled by the array of investment choices that they decided to make no choice at all? Do they appreciate the fact that this “forced” savings is taking place on their behalf – do they even know that this new deduction is taking place?
Almost certainly “they” are some – or perhaps in some cases, even all – of the above. People who are full of good intentions frequently fail to act on them. The choices we ask non-investment experts to make are, indeed, complex. Perhaps automatic enrollment “works” because it makes it easy for workers to do the right thing. Perhaps it works – not so much in terms of getting people in their plan, but in terms of keeping them there – because the years of retirement savings messages really have had an impact. Perhaps, having suddenly found themselves saving for retirement, they decide to stick with it. Perhaps that first 401(k) statement (and the company match it displays) reinforces that decision. Perhaps it works because the still-typical 3% we take from their take-home pay is small enough either not to matter or to be seen.
Whatever the reason(s), for now, we can take some comfort in the impact of a solution that appears not only to be readily deployable, but to work, at least in terms of turning eligible participants into participants. However, I’d feel a lot better saying it worked if I felt like we had a more consistent understanding of why it does. Who ARE these guys, anyway?
- Nevin Adams editors@plansponsor.com
In our industry, the pursued aren’t train robbers, but participants – or more accurately workers who could be participants. The posse trying to “catch” them includes employers, providers, and, yes, financial advisers. Over the years we’ve tried many things, with varying degrees of success, to get everyone who is eligible to save via these programs to do so: the logic of tax-advantaged savings, the allure of “free” money via the company match, the looming financial requirements of retirement. Still, despite our collective efforts over an extended period of time, in the aggregate, somewhere between one-in-four and one-in-five workers eligible to take advantage don’t.
Enter automatic enrollment. The logic behind these programs is almost indisputable. Without their impetus, 401(k) plan participation rates linger in the mid-70% range. With them in place, plan participation rates rise to – and apparently remain at – the mid-90% range. There are, of course, plans that attain that kind of result without automatic enrollment – and I’m sure there must be a plan somewhere that has adopted automatic enrollment that hasn’t been able to sustain such a robust increase in participation (though I’ve yet to come across it). Still, it’s hard not to like something that so readily appears to “fix” the problem of getting that last intransient group of people to take advantage of the benefits of their 401(k). If it isn’t a “silver bullet,” it’s darned close, IMHO.
But who are these 20% that wouldn’t/couldn’t’ expend the energy to fill out an enrollment form, but who WILL let someone take 3% of their pay? Were they interested but just too busy (or too lazy) to return the form? Could they not figure out how much they needed, or could afford, to save? Were they so befuddled by the array of investment choices that they decided to make no choice at all? Do they appreciate the fact that this “forced” savings is taking place on their behalf – do they even know that this new deduction is taking place?
Almost certainly “they” are some – or perhaps in some cases, even all – of the above. People who are full of good intentions frequently fail to act on them. The choices we ask non-investment experts to make are, indeed, complex. Perhaps automatic enrollment “works” because it makes it easy for workers to do the right thing. Perhaps it works – not so much in terms of getting people in their plan, but in terms of keeping them there – because the years of retirement savings messages really have had an impact. Perhaps, having suddenly found themselves saving for retirement, they decide to stick with it. Perhaps that first 401(k) statement (and the company match it displays) reinforces that decision. Perhaps it works because the still-typical 3% we take from their take-home pay is small enough either not to matter or to be seen.
Whatever the reason(s), for now, we can take some comfort in the impact of a solution that appears not only to be readily deployable, but to work, at least in terms of turning eligible participants into participants. However, I’d feel a lot better saying it worked if I felt like we had a more consistent understanding of why it does. Who ARE these guys, anyway?
- Nevin Adams editors@plansponsor.com
Sunday, September 10, 2006
Never Forget
Five years ago, I was in the middle of a cross-country flight, literally running from one terminal to another in Dallas, when my cell phone rang. It was my wife. I had been on an American Airlines flight heading for L.A., after all - and at that time, not much else was known about the first plane that struck the World Trade Center. I thought she had to be misunderstanding what she had seen on TV. Would that she had….
So that day, when family and friends were so dear and precious to us all, I spent in a hotel room in Dallas. It was perhaps the longest day - loneliest night - of my life. In fact, I was to spend the next several days in Dallas – there were no planes flying, no rental cars to be had – separated from home and family by hundreds of insurmountable miles for three interminably long days. When I finally was able to get a car and begin that two day drive home, it was a long, lonely drive, but it gave me a lot of time to think - to pray - and to treasure the things I was still able to come home to. Most of that drive was a blur, just mile after endless mile of open road.
There was, however, one incident I will never forget. Somewhere in the middle of Arkansas, a group of Hell's Angels bikers was coming up around me. A particularly scruffy looking guy with a long beard led the pack on a big bike - rough looking. But unfurled out behind him on the bike was an enormous American flag. At that moment, for the first time in 72 hours, I felt a sense of peace - the comfort you feel inside when you know you are going - home.
Five years hence, I can still feel that ache of being separated from those I love – and still remember the warmth I felt when I saw that biker gang drive by me flying our nation’s flag. On not a few mornings since that awful day, I think how many went to work, how many boarded a plane, not realizing that they would not get to come home again. How many sacrificed their lives so that others could go home. How many still put their lives on the line every day – here and abroad - to help keep us and our loved ones safe.
We take a lot for granted in this life, nothing more cavalierly than that there will be a tomorrow to set the record straight, to right wrongs inflicted, to tell our loved ones just how precious they are. As we remember that most awful of days, and the loss of those no longer with us, let’s all take a moment to treasure what we have – and those we have to share it with still.
Peace.
- Nevin Adams editors@plansponsor.com
So that day, when family and friends were so dear and precious to us all, I spent in a hotel room in Dallas. It was perhaps the longest day - loneliest night - of my life. In fact, I was to spend the next several days in Dallas – there were no planes flying, no rental cars to be had – separated from home and family by hundreds of insurmountable miles for three interminably long days. When I finally was able to get a car and begin that two day drive home, it was a long, lonely drive, but it gave me a lot of time to think - to pray - and to treasure the things I was still able to come home to. Most of that drive was a blur, just mile after endless mile of open road.
There was, however, one incident I will never forget. Somewhere in the middle of Arkansas, a group of Hell's Angels bikers was coming up around me. A particularly scruffy looking guy with a long beard led the pack on a big bike - rough looking. But unfurled out behind him on the bike was an enormous American flag. At that moment, for the first time in 72 hours, I felt a sense of peace - the comfort you feel inside when you know you are going - home.
Five years hence, I can still feel that ache of being separated from those I love – and still remember the warmth I felt when I saw that biker gang drive by me flying our nation’s flag. On not a few mornings since that awful day, I think how many went to work, how many boarded a plane, not realizing that they would not get to come home again. How many sacrificed their lives so that others could go home. How many still put their lives on the line every day – here and abroad - to help keep us and our loved ones safe.
We take a lot for granted in this life, nothing more cavalierly than that there will be a tomorrow to set the record straight, to right wrongs inflicted, to tell our loved ones just how precious they are. As we remember that most awful of days, and the loss of those no longer with us, let’s all take a moment to treasure what we have – and those we have to share it with still.
Peace.
- Nevin Adams editors@plansponsor.com
Saturday, September 02, 2006
"Best" Practices
These are momentous times for our industry, particularly for financial advisers. The shift from employer-funded defined benefit plans to employer-fostered defined contribution models may present challenges for this nation’s long-term retirement security, but it surely plays to the advantage of a profession dedicated to helping plan sponsors construct the right programs, and participants make the best of them.
Just as there is little question that those trends favor financial advisers, there is also no real challenge to the notion that you provide an invaluable service to these programs. It has been our privilege these past several years to lend a hand to your efforts—first via PLANSPONSOR magazine; then via PLANSPONSOR.com, the NewsDash, and this publication; and, more recently, via our education arm, the PLANSPONSOR Institute and our PLANSPONSOR Retirement Professional (PRP) designation. Next month, we will take that outreach a step further with PLANADVISER - a new publication and Web site specifically developed for financial advisers.
It was in that spirit that, two years ago, we announced our inaugural Retirement Plan Adviser of the Year award, an award designed to recognize “the contributions of the nation’s best financial advisers in helping make retirement security a reality for workers across the nation.” Today, it is both my honor and privilege to launch the nomination process for our third annual campaign to acknowledge the contributions of the very best financial advisers in the nation.
The criteria that underlie the award are simple, but impactful; we want to recognize advisers who make a difference through increasing participation, boosting deferral rates, enhancing asset allocation, and/or providing better programs through expanded service or expense management. It is no accident that those criteria also underlie the new Pension Protection Act’s future designs for defined contribution plans, for only by getting more workers saving in these programs at effective rates, and invested in prudent ways, can they have any real prospects for retirement security.
This year, in response to popular demand, we are adding a new category – the Retirement Plan Adviser Team of the Year – which will acknowledge the efforts of an emerging generation of advisory support. Surely, no one is an island unto himself in these efforts, but this will allow us to acknowledge the efforts of teams as well as individuals.
We will acknowledge the finalists for this year’s Retirement Plan Adviser of the Year award in the December issue of PLANSPONSOR, as well as the winter issue of PLANADVISER. Those finalists will join me at the 401(k) Summit in San Diego next February 25-27 for the hugely popular “Best Practices” panel, where we will also announce this year’s Retirement Plan Adviser of the Year and the Retirement Plan Adviser Team of the Year.
In addition to myself, this year’s panel of judges includes the two past recipients of the award, Smith Barney’s John Mott and Dorann Cafaro of the Cafaro Group, as well as Steff Chalk of the Chalk 401(k) Advisory Board; Alison Cooke, managing editor of PLANADVISER; and Mark Davis of Kravitz Davis Sansone.
While these awards are designed to recognize financial adviser excellence, we trust the standards they embody will continue to provide a source of inspiration for those who make a difference every day. I look forward to getting to know you, and your practices, better through this process.
- Nevin Adams
Nominations for the award can be submitted online at http://www.surveymonkey.com/s.asp?u=59642531881
Information on the 401(k) Summit is online at http://www.asppa.org/archive/conf/2007/2007401ksummit.htm
More information on the PLANSPONSOR Retirement Professional designation is online at http://www.plansponsorinstitute.com
Just as there is little question that those trends favor financial advisers, there is also no real challenge to the notion that you provide an invaluable service to these programs. It has been our privilege these past several years to lend a hand to your efforts—first via PLANSPONSOR magazine; then via PLANSPONSOR.com, the NewsDash, and this publication; and, more recently, via our education arm, the PLANSPONSOR Institute and our PLANSPONSOR Retirement Professional (PRP) designation. Next month, we will take that outreach a step further with PLANADVISER - a new publication and Web site specifically developed for financial advisers.
It was in that spirit that, two years ago, we announced our inaugural Retirement Plan Adviser of the Year award, an award designed to recognize “the contributions of the nation’s best financial advisers in helping make retirement security a reality for workers across the nation.” Today, it is both my honor and privilege to launch the nomination process for our third annual campaign to acknowledge the contributions of the very best financial advisers in the nation.
The criteria that underlie the award are simple, but impactful; we want to recognize advisers who make a difference through increasing participation, boosting deferral rates, enhancing asset allocation, and/or providing better programs through expanded service or expense management. It is no accident that those criteria also underlie the new Pension Protection Act’s future designs for defined contribution plans, for only by getting more workers saving in these programs at effective rates, and invested in prudent ways, can they have any real prospects for retirement security.
This year, in response to popular demand, we are adding a new category – the Retirement Plan Adviser Team of the Year – which will acknowledge the efforts of an emerging generation of advisory support. Surely, no one is an island unto himself in these efforts, but this will allow us to acknowledge the efforts of teams as well as individuals.
We will acknowledge the finalists for this year’s Retirement Plan Adviser of the Year award in the December issue of PLANSPONSOR, as well as the winter issue of PLANADVISER. Those finalists will join me at the 401(k) Summit in San Diego next February 25-27 for the hugely popular “Best Practices” panel, where we will also announce this year’s Retirement Plan Adviser of the Year and the Retirement Plan Adviser Team of the Year.
In addition to myself, this year’s panel of judges includes the two past recipients of the award, Smith Barney’s John Mott and Dorann Cafaro of the Cafaro Group, as well as Steff Chalk of the Chalk 401(k) Advisory Board; Alison Cooke, managing editor of PLANADVISER; and Mark Davis of Kravitz Davis Sansone.
While these awards are designed to recognize financial adviser excellence, we trust the standards they embody will continue to provide a source of inspiration for those who make a difference every day. I look forward to getting to know you, and your practices, better through this process.
- Nevin Adams
Nominations for the award can be submitted online at http://www.surveymonkey.com/s.asp?u=59642531881
Information on the 401(k) Summit is online at http://www.asppa.org/archive/conf/2007/2007401ksummit.htm
More information on the PLANSPONSOR Retirement Professional designation is online at http://www.plansponsorinstitute.com
Sunday, August 27, 2006
Goal Oriented
I only discussed retirement investments with my dad once, and the conversation didn’t take place until he had already decided to retire. He had a pretty good idea about what he wanted to do – he just couldn’t figure out how to accomplish that via the all-too-typically complicated distribution request form. Consequently, at my mother’s instigation, he called in an “interpreter” – in this case, the son with the law degree.
It was a complicated discussion. Since hundreds of miles separated us, he had to read the form to me (I suggested faxing, but that was “more trouble than it was worth”; I chose to assume that was a reference to his difficulty with operating the fax machine on his end, and not the quality of advice he was hoping to get from mine). Fortunately, there is something of a boilerplate design to most of these forms and, in reasonably short order, I was able to wrest an English version of his options from the document.
Having outlined the options for him, I asked him if he knew what he wanted to do. Much to my consternation, he wanted to go with an annuity. Now, the market was still on its way up, and while, even then, we all “knew” a pop was coming, it was hard for his financially astute son to accept that he would want to trade the upside potential of having the money in his own hands/account and the ability to draw down that sum at a pace commiserate with his needs for relinquishing that to the notoriously expensive and somewhat inflexible option of an annuity. But what my dad wanted – more than anything else - was the certainty of a regular income stream. If I couldn’t guarantee him that result with the other options, he wasn’t interested.
Goal “Tending”
Ultimately, regardless of how (or when) we get there, the goal of saving for retirement is to have an income in retirement - a regular, secure paycheck that continues even after we are no longer gainfully employed. On the other hand, today’s approach to retirement savings is largely predicated on accumulating enough money to be able to, after retirement, have enough to live on. The problem, of course, is that if you get to retirement with the “wrong” amount of savings, it is darned near impossible to right the wrong.
Still, if what you ultimately want to wind up with is regular retirement income - an annuity, essentially - why wait 40 years to do so? Why “gamble” on the potential upside of making investment choices in a retirement plan – particularly when you don’t know how much it will cost or how much money you will have at retirement to purchase that annuity?
There are reasons, of course. Participants frequently don’t have any appreciation for what their income wants – or needs – will be in retirement. Indeed, that is what makes retirement savings so problematic for many; they lack a specific goal and, thus, tend to save what they think they can afford, rather than what they may need. But if participants really are weary of having to make, and revisit, all those investment and savings decisions, then perhaps we also need to rethink our traditional approach to helping them achieve their goal. Perhaps their retirement savings investments should be directed, not to the selection of mutual funds from a retirement plan menu, but to a more direct investment in a retirement income stream.
Work to Do
Not that we don’t have work to do. Most of the offerings out there at present are even more complicated than the retirement plan decisions participants already struggle with. Participants still will need help setting goals, evaluating choices and, no doubt, managing an accumulation of these investments over time. Imbedded under the auspices of employer-sponsored retirement offerings, plan sponsors also will doubtless be presented with significant challenges, both administrative and fiduciary, as we work toward a new goal-based solution.
Still, there are already a few firms that have applied this notion to retirement plan savings – that allow participants to invest in an annuity as an option in their 401(k) plan. If our goal truly is to help the participant achieve retirement income security, perhaps it is time we actually figured out the best way to help them make that investment sooner, rather than later.
- Nevin Adams
It was a complicated discussion. Since hundreds of miles separated us, he had to read the form to me (I suggested faxing, but that was “more trouble than it was worth”; I chose to assume that was a reference to his difficulty with operating the fax machine on his end, and not the quality of advice he was hoping to get from mine). Fortunately, there is something of a boilerplate design to most of these forms and, in reasonably short order, I was able to wrest an English version of his options from the document.
Having outlined the options for him, I asked him if he knew what he wanted to do. Much to my consternation, he wanted to go with an annuity. Now, the market was still on its way up, and while, even then, we all “knew” a pop was coming, it was hard for his financially astute son to accept that he would want to trade the upside potential of having the money in his own hands/account and the ability to draw down that sum at a pace commiserate with his needs for relinquishing that to the notoriously expensive and somewhat inflexible option of an annuity. But what my dad wanted – more than anything else - was the certainty of a regular income stream. If I couldn’t guarantee him that result with the other options, he wasn’t interested.
Goal “Tending”
Ultimately, regardless of how (or when) we get there, the goal of saving for retirement is to have an income in retirement - a regular, secure paycheck that continues even after we are no longer gainfully employed. On the other hand, today’s approach to retirement savings is largely predicated on accumulating enough money to be able to, after retirement, have enough to live on. The problem, of course, is that if you get to retirement with the “wrong” amount of savings, it is darned near impossible to right the wrong.
Still, if what you ultimately want to wind up with is regular retirement income - an annuity, essentially - why wait 40 years to do so? Why “gamble” on the potential upside of making investment choices in a retirement plan – particularly when you don’t know how much it will cost or how much money you will have at retirement to purchase that annuity?
There are reasons, of course. Participants frequently don’t have any appreciation for what their income wants – or needs – will be in retirement. Indeed, that is what makes retirement savings so problematic for many; they lack a specific goal and, thus, tend to save what they think they can afford, rather than what they may need. But if participants really are weary of having to make, and revisit, all those investment and savings decisions, then perhaps we also need to rethink our traditional approach to helping them achieve their goal. Perhaps their retirement savings investments should be directed, not to the selection of mutual funds from a retirement plan menu, but to a more direct investment in a retirement income stream.
Work to Do
Not that we don’t have work to do. Most of the offerings out there at present are even more complicated than the retirement plan decisions participants already struggle with. Participants still will need help setting goals, evaluating choices and, no doubt, managing an accumulation of these investments over time. Imbedded under the auspices of employer-sponsored retirement offerings, plan sponsors also will doubtless be presented with significant challenges, both administrative and fiduciary, as we work toward a new goal-based solution.
Still, there are already a few firms that have applied this notion to retirement plan savings – that allow participants to invest in an annuity as an option in their 401(k) plan. If our goal truly is to help the participant achieve retirement income security, perhaps it is time we actually figured out the best way to help them make that investment sooner, rather than later.
- Nevin Adams
Saturday, August 19, 2006
Happy Returns
One of the “promises” of the newly enacted Pension Protection Act of 2006 (PPA) is that it will foster, if not encourage, greater levels of retirement plan participation. And while there are several areas that ostensibly facilitate this growth – notably the removal of EGTRRA’s sunset provisions and the expansion of investment advice – the thing that is really supposed to make a difference is automatic enrollment.
So, how does the PPA encourage automatic enrollment? First, it resolves the current dilemma faced by plan sponsors in states that prohibit (or appear to) deductions from a worker’s pay without their explicit permission. While this has been a relatively recent concern, the certainty that federal, not state, law governs these transactions is a welcome relief, and one that is provided immediately. Will it persuade employers who were not already actively considering automatic enrollment? Probably not.
The PPA also lays the groundwork for some much-anticipated clarity from the Department of Labor on the issue of an appropriate default investment election. Still, there seems little doubt that, when we do see the final rules, the DoL will officially embrace the use of some form of asset allocation vehicle. Of course, we were expecting this even if the PPA didn’t pass. Consequently, it will help tidy things up, but isn’t likely to transform current trends. This will be effective for plan years beginning in 2007.
Ironically, the biggest change – and it won’t take effect until 2008 – is the creation of something called a “qualified automatic contribution arrangement.” Implementing this special version of automatic enrollment exempts a plan from both top-heavy and average deferral percentage (ADP) testing (ACP - average compensation percentage – testing as well, if applicable). To qualify, a plan has to implement the program for all eligible workers prospectively; automatically defer in accordance with a schedule stated in the law (see Pension Reform Influences Automatic Enrollment Designs ); match those contributions (the law specifies a schedule); 100% vest those matching contributions within two years; give participants notice of the program, the default options, and their right to opt out in a timeframe that gives them an opportunity to do something different – oh, and it must provide for that initial contribution to be increased annually in accordance with another provision in the law.
In my initial reading of the law, this was the provision that I found most questionable. Not in its ultimate result, or goal – but it struck me as making things just complicated enough mathematically to slow, not speed, the adoption of automatic enrollment. Why? Not the match requirement itself, or the vesting applied to that match – both are comparable in effect to the current safe harbor provisions (there are differences, however). No, what may make a difference to many plan sponsors, IMHO, is the requirement to increase those employee deferrals – and, at least potentially, the employer match associated with those deferrals.
The impact of the latter is obvious – and cost concerns alone may well keep plan sponsors from taking advantage of the option. The former – the decision not only to take money from workers’ paychecks without their involvement, but to increase that initial deferral – could be just as problematic. While I have found that plan sponsors generally are in favor of the concepts behind automatic enrollment, they are less inclined – at present, anyway – to combine that decision with taking even more from those paychecks without “permission.”
On the other hand, workers retain the ability to opt out at any time. They don’t appear to do so very frequently – but that option remains for anyone who truly can’t afford it (or thinks they can’t). But one of the larger concerns for plan sponsors with automatic enrollment is the accumulation of small balances – those deferrals that workers don’t notice until three paychecks later, at which point they stop the deferrals, but then discover that “I wasn’t paying attention to the automatic enrollment notices” doesn’t qualify as a reason for hardship withdrawal.
That’s why, IMHO, one of the real gems in the PPA is the ability, within 90 days of that first contribution, to return those contributions to the worker. In my experience, the inability to do so under current law has been perhaps the largest impediment to these programs – and its inclusion in the new law may make all the difference in the world.
So, how does the PPA encourage automatic enrollment? First, it resolves the current dilemma faced by plan sponsors in states that prohibit (or appear to) deductions from a worker’s pay without their explicit permission. While this has been a relatively recent concern, the certainty that federal, not state, law governs these transactions is a welcome relief, and one that is provided immediately. Will it persuade employers who were not already actively considering automatic enrollment? Probably not.
The PPA also lays the groundwork for some much-anticipated clarity from the Department of Labor on the issue of an appropriate default investment election. Still, there seems little doubt that, when we do see the final rules, the DoL will officially embrace the use of some form of asset allocation vehicle. Of course, we were expecting this even if the PPA didn’t pass. Consequently, it will help tidy things up, but isn’t likely to transform current trends. This will be effective for plan years beginning in 2007.
Ironically, the biggest change – and it won’t take effect until 2008 – is the creation of something called a “qualified automatic contribution arrangement.” Implementing this special version of automatic enrollment exempts a plan from both top-heavy and average deferral percentage (ADP) testing (ACP - average compensation percentage – testing as well, if applicable). To qualify, a plan has to implement the program for all eligible workers prospectively; automatically defer in accordance with a schedule stated in the law (see Pension Reform Influences Automatic Enrollment Designs ); match those contributions (the law specifies a schedule); 100% vest those matching contributions within two years; give participants notice of the program, the default options, and their right to opt out in a timeframe that gives them an opportunity to do something different – oh, and it must provide for that initial contribution to be increased annually in accordance with another provision in the law.
In my initial reading of the law, this was the provision that I found most questionable. Not in its ultimate result, or goal – but it struck me as making things just complicated enough mathematically to slow, not speed, the adoption of automatic enrollment. Why? Not the match requirement itself, or the vesting applied to that match – both are comparable in effect to the current safe harbor provisions (there are differences, however). No, what may make a difference to many plan sponsors, IMHO, is the requirement to increase those employee deferrals – and, at least potentially, the employer match associated with those deferrals.
The impact of the latter is obvious – and cost concerns alone may well keep plan sponsors from taking advantage of the option. The former – the decision not only to take money from workers’ paychecks without their involvement, but to increase that initial deferral – could be just as problematic. While I have found that plan sponsors generally are in favor of the concepts behind automatic enrollment, they are less inclined – at present, anyway – to combine that decision with taking even more from those paychecks without “permission.”
On the other hand, workers retain the ability to opt out at any time. They don’t appear to do so very frequently – but that option remains for anyone who truly can’t afford it (or thinks they can’t). But one of the larger concerns for plan sponsors with automatic enrollment is the accumulation of small balances – those deferrals that workers don’t notice until three paychecks later, at which point they stop the deferrals, but then discover that “I wasn’t paying attention to the automatic enrollment notices” doesn’t qualify as a reason for hardship withdrawal.
That’s why, IMHO, one of the real gems in the PPA is the ability, within 90 days of that first contribution, to return those contributions to the worker. In my experience, the inability to do so under current law has been perhaps the largest impediment to these programs – and its inclusion in the new law may make all the difference in the world.
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