'Over' Blown?

Looks like the pension crisis is finally over.

Well, the funding part of the crisis, anyway. No fewer than three separate studies* were published this past week that essentially said that the pension plans of larger employers are either fully or nearly fully funded again.

For several years now, we’ve been struggling with the impact of the so-called “perfect storm” on pension plans. The catchy nomenclature was borrowed from the 2000 film by the same name (which, in turn, was pulled from the 1997 book on which it was based)—a reference to the 1991 Halloween Nor’easter that resulted from the unusual combination of several forces of nature to create an exceptionally powerful storm across a very large area. A storm—nearly a hurricane—that caught many off-guard.

The so-called perfect storm for pension plans also resulted from an unusual confluence of factors—a slumping investment market, the “vacation” from funding that many plans took during a period when soaring investment returns made such actions unnecessary, and, significantly, an unprecedented decline in the interest rate of the 30-year Treasury bond after the Clinton Administration decided to quit issuing new ones.

Back in the Black

In the intervening years, plan sponsors have benefited from investment returns that exceeded projections—as they frequently do over the long term. Also adding to the value of the assets in these programs, plan sponsors have returned to the process of making regular—and in some cases, extraordinary—contributions to the programs. Finally—and this has had a significant impact on the calculation of the liabilities owed by these plans—the return to something like a “normal” interest rate environment coupled with the use of a blended rate, rather than an artificially distorted 30-year Treasury. It hasn’t been easy, it hasn’t been painless, and it surely hasn’t been “perfect”—but many, perhaps most, large pension plans seem to be back in the “black.”

Not that the funding shortfalls for most were ever as bad as they were portrayed. While there were clearly some villains—and some unsustainable promises dumped on the Pension Benefit Guaranty Corporation—being 85% funded on a pension obligation isn’t all that different from having 85% of your mortgage paid off with 20 years to go (it’s actually better than that).

You’d never have gotten a sense of that from the headlines, or the angst of the legislators. It may be worth remembering that the last time these funds were flush with cash (we’re a long way from that), pensioners were up in arms that the pension surplus should be given to them in the form of higher benefits, analysts were critical of the “gloss” that pension returns lent to financial reporting, and, frankly, plan sponsors were disinclined to make regular contributions in excess of the required amounts.

It’s worth noting that since this last storm “broke,” many plan sponsors have chosen to freeze or terminate their traditional pension plans. The reasons are varied, of course. The confluence of factors cited above may have made the program untenable financially; workplace demographics may have cried out for a different retirement plan design; or they may simply have looked ahead to the future and made a different choice.

Still, it’s hard not to wonder how many were set on that path for no reason more substantive than the relentless pillorying of the funding “crisis” in the media. It was certainly more than a tempest in a teapot—but IMHO, the concerns expressed were always overblown.

- Nevin Adams, JD


* Editor’s note: the studies include reports from:

Towers Perrin (see DB Funding Landscape Starts to Shine in 2006),
UBS (see UBS New Tracker Finds 2006 Pension Improvement), and
Watson Wyatt (see A Return to Better Funding for Pensions in 2006)

"Exit" Strategy

This past week, we passed the “anniversary” of the commencement of bombing strikes in Operation Desert Storm (1991). Now, I was too old—and my kids too young—to have been directly impacted by that action. But I’ll always remember that night.

I was living in North Carolina at the time, and had been invited by a co-worker to my first NCAA basketball game at the “Dean Dome” at the University of North Carolina. Tickets had been hard to come by, and Chapel Hill was a nearly three-hour drive from where I lived (and on a “school” night, to boot)—but I was excited at the prospect. My friend and I got there early—grabbed some refreshments, found our seats, and sat down to watch the warm-ups. We were only about 10 minutes to tip-off when they made the announcement about Desert Storm—and the resulting decision to cancel the game.

Now, unless it is a playoff game, or a remarkably close contest, people have a tendency to exit such events early to “beat the rush.” In this case—and I don’t know how many people can actually fit in the Dean Dome—nobody saw the cancellation coming, so everybody tried to hit the exits at the same time. My buddy and I actually thought we were in a distant enough parking lot that we could beat some of it, but spent the next hour basically one car length from the parking place we started in—and another hour just getting to the exit of the parking lot.

For years, we’ve been worried about the Boomers heading into retirement. We’ve worried what would happen on that day when they would quit working (and cause our economy to come to a halt), worried that they would pull out all of their retirement savings from the stock market and invest it in bonds, and, most of all perhaps, worried that they would simply get to retirement without enough money to live through retirement. And while, on an individual level, those concerns are certainly real, we’ve also rightly worried about what would happen when they all tried to “exit” the working arena for the “home” of retirement at the same time.

Different Paths

A new study by Vanguard affirms what most of us know, at least anecdotally--people’s approach to retirement is about as variable as, well, people. The report highlights six different paths (see “Workers Plan To ‘Downshift’ Into Retirement” at ) but, of course, it’s more complicated than that. The bottom line is this: Working full time until you reach age 65 and then “retiring” appears to be the exception, not the rule. Apparently, people begin gradually cutting back in their fifties (by their late fifties, the rate of full-time workers falls to 62%)—and even by the time you get to the second half of the sixties, 17% are still working.

The good news could be that people are working, and saving, longer—and perhaps deferring tapping into their retirement savings beyond the date(s) that many retirement projections now assume. The bad news, of course, is that workers could be cutting back on work (and compensation) earlier than those same projections contemplate—and not always at the choice of the worker. Note that, among those who returned to work in the Vanguard sampling, more than half did so to meet basic expenses, and a quarter needed to pay for health insurance.

We’ve tended to think of retirement as a cessation of compensated employment and, perhaps simplistically, crafted certain financial assumptions around the notion that that occurs at a specific point in time. IMHO, the Vanguard study reminds us that the individual decisions around employment generally, and retirement specifically, are just that—individual decisions.

Accordingly, I’d like to propose an alternative definition for retirement in the workplace—an “exit” strategy, if you will—“to fall back or retreat in an orderly fashion, and according to plan.”

It’s an exit strategy in which advisers can clearly play an integral role.

- Nevin Adams

Forth "Right"

A couple of weeks ago, we got a panicked call from daughter No. 1, who had, on her way home from work, gotten her first flat tire. Now, flat tires are never fun, but she was clearly unnerved. It was after dark, at the end of a full day of work for her, and even though she was less than two miles from home, and we have motor club coverage, her mother and I piled into a car to change the tire.

Whilst I was attending to the changing of the tire, my wife turned her attention to gaining a better understanding of the events that had led up to the event. I thought that was odd at the time—after all, tires run over objects and go flat all the time. But gradually, and painfully, my wife—who has a mother’s knack for discerning when the kids are being less than forthcoming—wrested the truth. It turns out that daughter No. 1, in her 10-minute drive home, had been adjusting the car radio—took her eyes off the road—and struck a curb at just the right angle. Sure, the tire going flat had been upsetting, but the real problem for her that night was that her actions created the situation. And the real problem for her after that disclosure—as she soon found out—was that she hadn’t been straight with us in the first place.

Now, it could have been so much worse—a pedestrian could have been involved, or another car. Frankly, we retraced her steps later, and it was something of a miracle that she didn’t hit a fire hydrant or tree. Still, as one might expect, we took full advantage of the “opportunity” to explain to her the potential consequences of her actions—and fuller advantage of the opportunity to deal with the real consequences of her reluctance to be immediately “forthcoming” with her parents (not to mention making her dad change a tire in the dark in the middle of the street in the middle of winter).

Less Than Forthcoming

“Less than forthcoming” seems to be at the heart of this recent wave of revenue-sharing lawsuits—those filed by that St. Louis law firm on behalf of plan participants, challenges by the New York Attorney General, and more recently, pushbacks and lawsuits from plan sponsors themselves. Granted, the language in the lawsuits is generally more provocative than that. A lawsuit filed just this past week against ING says that "Those amounts bear no relationship whatsoever to the cost of providing the services or a reasonable fair market value for the services”—language echoed in a separate plan sponsor suit against Principal that claimed that the revenue-sharing practices "bear no relationship to Principal's costs of providing services to plans or participants," and that the firm effectively used “plan assets to generate revenue-sharing kickbacks for Principal's own interest and for its own account."

Now, it’s not at all certain that any of these actions will go to court, much less trial—and one surely can’t assume that the allegations made by plaintiff’s counsel represent a comprehensive, balanced recitation of fact. There are a lot of disparate issues under scrutiny here, even if they do all have a common linkage in the issue of fees. We can’t know now how all this will work itself out. Perhaps some of these arrangements truly are illegal; some may well be violative of the letter or spirit of trust essential to such programs. Some, no doubt, represent nothing more than an opportunistic plaintiff’s bar.

What surprises us most, IMHO, is not that these lawsuits have emerged, but that it has taken so long for some of these “less than forthcoming” practices to draw this level of attention. However, providers and advisers who have, up till now, been “less than forthcoming” would be well-advised to reconsider that approach.

- Nevin E. Adams

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See also Paying the Price

Plan Sponsor Sues Principal over 401(k) Fund Revenue Sharing

AIG VALIC Relents on Revenue Sharing Disclosure

FL Pension Plan Accuses ING of Revenue Sharing Fraud
FL Sheriff Sues Nationwide Over Fees
St. Louis Law Firm Files Another 401(k) Fee Suit

The Best Test

I’ve been in this business since before I graduated college (and that’s now been a while) – but my first interaction with a financial adviser didn’t happen until I got to PLANSPONSOR magazine.

Well, sort of. It would be more accurate to say that it was my first opportunity to have an interaction. Like too many plan sponsors out there, we had years earlier been sold the 401(k) by an adviser who, at some point not too long after the sale, went “missing.”

In the real world, employers – even employers that cover the retirement plan industry – have a business to run. Running the retirement plan, as important as it is, generally isn’t part of that business. That’s why, particularly for smaller employers – but increasingly for employers of all sizes – a financial adviser can be such an important addition to the “team.”

That realization has been a growing component of our focus here the past several years. It was part of our decision to launch AdvisorDash in 2003, an integral aspect of the launch of the PLANSPONSOR Institute and the PLANSPONSOR Retirement Professional (PRP) designation in 2005, and an essential factor in our decision to introduce PLANADVISER and PLANADVISER.com in 2006.

It was also, in 2004, the reason we decided to create an award that would acknowledge the best efforts of the best retirement plan advisers in the country. It was a daunting task to contemplate that first year – I wasn’t even sure that we would be able to FIND the best advisers, much less establish the kind of benchmark standards that could truly speak to retirement plan servicing excellence.

I need not have worried – the advisers committed to this space knew us, even when we didn’t (yet) know them. We were blessed with judges who not only knew the space, but the profession. And we received the eager support of plan sponsors who were willing – and in many cases, eager – to share their adviser experiences. Still, every year it gets harder to choose “the best” simply because there are so many good advisers to choose from.

The finalist groups recognized below are indicative of that trend. Over the next several weeks, our judges will be tasked with the challenge of picking one Retirement Plan Adviser of the Year and, in a new category, a Retirement Plan Adviser Team of the Year. It’s not likely to be an easy decision – but how can it not be a good one?

- Nevin E. Adams

You can meet the finalists online at http://www.plansponsor.com/pdfs/RPAYfinalists2006.pdf

Note: We will be announcing the Retirement Plan Adviser of the Year and Retirement Plan Adviser Team of the Year at the 401(k) Summit in San Diego on February 25. Additionally, the Retirement Plan Adviser finalists will join me for an interactive “Best Practices” roundtable at the 401(k) Summit. You won’t want to miss this – find out more about the 401(k) Summit at http://www.asppa.org/archive/conf/2007/2007summit.html