Saturday, July 28, 2007
Last week, no fewer than a dozen industry trade organizations put their collective heads together and tried to help the Department of Labor—which has been working on a project regarding fee disclosure, and has asked for input—put together some workable principles on retirement plan fee disclosure (see Retirement Associations Submit Fee Disclosure Recommendations to DoL). Also last week, and perhaps not coincidentally, Congressman George Miller (D-California) did what he has been making noises about doing for some time now: He introduced a bill that would put the force of law behind better retirement plan fee disclosure, both to plan sponsors and plan participants (see Representative Miller Introduces Fee Disclosure Legislation). Miller’s 401(k) Fair Disclosure for Retirement Security Act of 2007 would go beyond mere words, however. It would mandate the inclusion of at least one “lower-cost, balanced index fund” on retirement plan menus.
It’s hard to credibly argue that we shouldn’t be telling participants how much they are paying for these retirement programs. On the other hand, we—rightfully, and this was a big part of the combined trade organization communication—don’t want participants to focus obsessively on fees alone. In this business, as in life generally, sometimes you get what you pay for, after all.
Where that leaves us, of course, is with a need to provide participants even more information about their retirement plan accounts than they receive at present. Now, we’re already burying them in paper—enrollment kits, prospectuses, fund information sheets, 404(c) communications, black out notices. Moreover, thanks to the Pension Protection Act (PPA), this year we began providing quarterly diversification notices (we’ll set aside for a minute the fact that we had to begin doing that before we had final clarity on exactly what was supposed to be in those notices). I have yet to talk to an adviser, third-party administrator, or plan sponsor who doesn’t think that we long ago passed the point of information overload—where participants are absolutely just dumping all of this paper straight into the waste basket. Yet, despite this knowledge, our solution is to create some more “information.”
Even if we weren’t at that stage, however, think about where we are as an industry with participant involvement with these accounts: automatic enrollment and contribution escalation, defaulted investments. We are rapidly entering a period where it’s going to be quite “fashionable” for workers to be even less involved with their retirement accounts than they have ever been. The mainstream media is already touting these “automatic” programs as something workers ought to be looking for and asking about. Kathy Kristoff, a personal finance columnist in the LA Times, last week said, “If you're lucky enough to have the newest kind of 401(k) plan, experts say you're off to a good start even if you don't lift a finger.”
Do we really think that this new generation of participants that didn’t even have to “lift a finger” to join the retirement plan will pay any attention to the current plan disclosures—much less the new ones that appear to be looming?
That won’t keep us from pushing for more and better disclosure, nor should it. At some level, whether participants read it or not, there’s just something about making people put information in writing—and knowing that SOME people WILL read it—that helps keep things on the “up-and-up.”
But, IMHO, we’ve had far too many “solutions” created by regulators and legislators—by lawyers for lawyers, if you will—and they’re not doing a bit to help the people for which they are ostensibly intended (here’s a hint: If a disclosure requires a footnote, it’s too complicated). At the risk of greatly oversimplifying the challenge, I wonder if we couldn’t develop an “elevator speech” for these programs, boiled down to the essence of what a participant really needs to know—deliverable in the space and time of an elevator ride.
I’ll bet we could do it. I’ll bet some of you have.
- Nevin E. Adams, JD
Note: If you’ve got an elevator speech for participants; something that gets to the heart of the reason for savings, the selection of appropriate investments, and the fees associated with those decisions – please share it with me at email@example.com. We’ll share the best in a future issue of PLANSPONSOR magazine, anonymously if you – or your compliance department - prefer.
Saturday, July 21, 2007
I am fortunate enough to have access to a vast array of studies, research, and surveys about this business. Even more fortunate to have access to a PLANSPONSOR research arm that provides an opportunity not only to gather and analyze, but to pose our own questions to a remarkably diverse audience. Still, as Mark Twain once famously wrote, “There are three kinds of lies: lies, damned lies, and statistics.” (1)
We recently ran coverage of a survey that spoke to trends among defined benefit plans. That engendered the following response from a reader:
Isn't it interesting how perspective can rule the most simple things? The article you refer to that shows defined benefit plans decreasing in number is such a case. Mercer deals with the larger corporate plan sponsors. Their plans are underwater for numerous reasons and are being terminated in wholesale lots. On the other hand, small companies are making defined benefit plans the plan du jour. There are several reasons for this; larger tax deductions, demographics, insecurity with Social Security, the investment experiences of 1999-2002, the desire for a "guaranteed" benefit, etc. Our company is the largest pension administration firm in Florida, and we have set up five defined benefit plans to every three defined contribution for four consecutive years. Our experience has been shared by virtually all TPA's in the small-company market all over the country.
Now, I have no independent validation of that reader’s claims, but I heard from a number of advisers and providers that support smaller employers that the rumors of the defined benefit plan’s demise is, to draw on another quote from Mr. Twain, “greatly exaggerated”.
In our business, we must constantly guard against the favorable positioning of some survey results vis-à-vis the interests of a sponsoring organization; or the extrapolation of too much conclusion from too small, or unscientific, a sampling. Generally speaking, I favor sharing as much information/insights as possible—with as much full disclosure about the size of the sampling and/or the interest(s) of the sponsoring organization as possible. In our coverage, we try very hard to position—as high in the story as possible—the size of the sampling, the sponsoring organization, and where it seems applicable (and not obvious), some indication of possible motivation in putting out the information. It’s not that they necessarily would be pushing a specific result—sometimes it just influences their perspective on the proper conclusion to be drawn from the data.
The challenge, of course, is that some data are simply more available. Larger providers tend to have larger client bases, and client bases of larger clients, to draw on, and/or larger budgets to pay other organizations to gather that information (generally from plans that fit their targeted plan demographics). Moreover, the use of “averages” frequently, if unintentionally, obscures the reality in small samplings. And when averages are averaged—well, it’s Katie, bar the door!
In my experience, human beings are inclined to focus on surveys that reinforce their own version of reality, rather than one that challenges it. Still, market trends are a significant motivator of plan sponsor behavior. That’s not illogical, IMHO—in an environment where complex financial decisions fraught with personal and professional risk are the order of the day, “what everyone else is doing” can offer a compelling reality check. But only if the reality is real—and not just “lies, damned lies, and statistics.”
- Nevin E. Adams, JD
When considering data that purports to offer insights, it’s worth knowing:
Who sponsored/conducted the survey?
What are they selling?
Is the conclusion supported by the data?
Does that conclusion “fit” with those drawn by similar surveys?
How unbiased is the survey sampling?
How scientific is the survey sampling?
How similar is the survey sampling to your perspective/size?
(1) While the original quote is attributed to Benjamin Disraeli, Twain popularized it in the U.S. in “Chapters from My Autobiography.”
Saturday, July 14, 2007
Without question, asset-allocation solutions—particularly target-date fund solutions—are well on their way to becoming a dominating force on retirement plan menus. More than three-quarters of the roughly 5,000 respondents to last year’s Defined Contribution Services Survey already had one of these options on their menu.
Moreover, the popularity of these offerings has resulted in a burgeoning number of choices, with what seems like a new introduction every other week, and by some of the most well-known and highly regarded names in the asset management business.
Having said that, the notions of what constitutes an “appropriate” asset allocation, much less an appropriate asset-allocation fund—or fund family—are varied, to say the least. Almost as varied as the number of choices, in fact—and it appears that those notions are shifting as well. These “moving” targets (see “Moving Targets”) will keep us all on our toes for the foreseeable future—and I suspect that we will all bring to that evaluation process certain grounding biases as we evaluate the alternatives, whether we admit to them or not.
Here are some of mine:
Stock up. Longer life spans suggest (to me, anyway) a need for more equities, longer, than traditional asset-allocation models seem to call for. At the moment, the primary battle for the “hearts and minds” of target-date design seems to focus on the amount—and motivations for the amount—of equities in the portfolios, particularly the further one goes out on the time horizon. The equity markets have been kind of late (to say the least) to those who have leaned heavily on them. Some target-date offerings have beefed up their equity allocations; others have grown increasingly critical of those decisions. The bottom line: I find that many of the more “conservative” asset-allocation strategies look very much like the traditional asset allocations of 40 years ago. That was then….
"Go long" in matching matching participants with target-dates. Although participants are already talking more about working past age 65, the current logic associated with picking a target-date fund still largely focuses on when you will attain 65. Even though most of the literature speaks to “retirement date” as the target, I think it’s a good idea to round “up” when it comes to picking the right choice.
Risk evaluation shouldn’t be a one-way street. When it comes to discussions of risk, I find that the risk of outliving money isn’t weighted as strongly as the risk of losing money. Now, this is a tricky thing because people tend to worry hugely about the latter until they get to a point where the former is a reality—and then, of course, it’s too late. This is exactly why participants (and plan sponsors who make default investment choices for participants) lean toward stable value and money market fund choices (see “Other People’s Money”). Now, I’ll admit there’s a big difference between going 100% stable value at age 30, and going 80% fixed income at age 60. But I think some of those conservative allocations don’t contemplate actually having to live on those investments for a quarter century—though once you get to age 65, the odds are pretty good.
Bond funds don’t act like bonds. Consequently, those late-cycle diversifications into bond funds don’t feel like they accomplish the same thing as diversifying into bonds. It’s one thing to pull some gains out of the stock market and invest in a security that stands a reasonable chance of returning your principle at a definite point in the future with scheduled interest payments along the way. Something else altogether, IMHO, to make that same investment in a bond mutual fund. Less volatile than stock funds, perhaps—but also more volatile than bonds, in my experience.
No doubt you have biases of your own, perhaps even some of the above. No doubt at least some of you would take issue with some of mine. I hope so. Clearly, no one person or firm has all the answers, and just as clearly, the ones who think they do—probably don’t. What’s important is that we continue to ask the questions, challenge the assumptions, doubt the “common wisdom.”
Ultimately, the quality of the answers lies in the quality of the questions—and the people asking them.
Nevin E. Adams, JD
Saturday, July 07, 2007
I was on a panel at our recent Plan Designs conference, and the topic of qualified default investment alternatives (QDIAs) came up. There was discussion about the Department of Labor’s proposed regulations on the subject; some observations about when we might expect to see final regulations; and ruminations from co-panelists Fred Reish and Mike Barry about ERISA’s embrace of the concepts of modern portfolio theory (MPT), and the importance of capital accumulation rather than capital preservation in making “appropriate” investment choices for participants that hadn’t, for whatever reason, elected to make their own.
Then, a plan sponsor in the audience raised her hand and shared the experience of her plan—shared how they had carefully considered the alternatives of a stable-value investment alongside an asset-allocation alternative, and how they had decided on the former, and did so just before the market tanked in 2000. Her perspective was simply this: If they had chosen the asset-allocation alternative—chosen the option that many (most?) experts say they should have—people would have lost money.
These days, I think it is fair to say that “common wisdom” would call for a different decision. In fact, the expert panel went on to basically lay out all the reasons why that was, if not a bad decision, at least not the one that ERISA’s prudence standard would seem to call for.
I understand the logic and rationale behind that perspective; and frankly, IMHO, most of the admonitions to broaden the DoL’s proposed QDIA definition to include stable-value choices seem self-serving, at best. We all know the issues with stable value—it’s ill-diversified (at least from the standpoint of the participant investor, though I find that the “single asset class” labels are generally not precisely accurate), pricey, frequently layered with early withdrawal penalties and/or restrictions, and anything but “guaranteed” (the way the old GIC label suggested). Still, I suspect that, for most of the participants that choose the option (and plan sponsors who choose default investments for participants), stable value provides what they are looking for—a return of their principal investment along with some stated rate of income. Simplistically, a bird in the hand, rather than two in the bush.
That doesn’t mean that stable value will gain the Department of Labor’s (DoL) official endorsement as a QDIA, of course—and, if stable value fails to make that list, it certainly will diminish its allure as a default choice (little wonder that the stable-value industry is up in arms, and that the mutual fund industry, which stands to gain significantly by the apparent endorsement of target-date solutions, has weighed in on the other side). That point of contention notwithstanding, current trends certainly seem to favor the adoption of asset-allocation solutions, rather than stable value, as default investments. Let’s face it: There’s a definite allure to being able to match a defaulted investment choice with the retirement date of a participant—a one-for-all solution that nonetheless seems at least somewhat customized. Finally—and for the lawyers, no doubt, sufficiently—ERISA’s concepts of investment prudence may well presume a certain reliance on the principles of MPT, ultimately demanding an asset-allocation solution.
There remains, however, IMHO, a case for a potentially different result when it comes to making decisions about “other people’s money.” A solution that doesn’t require a plan sponsor to explain to participants about MPT, or to offer a rationalization about timing and the markets—and one that, certainly on a net basis, might provide a reasonable return compared with the relative volatility of an asset-allocation alternative. I’m not saying that that decision doesn’t have to pass ERISA’s muster, or that it doesn’t have, as outlined above, problems of its own. I am saying, however, that the plan sponsor is clearly responsible for the prudence of these default investments, and that they must therefore ask themselves, “Do I think that this default is prudent for the likely term of its investment in this plan?”
And if they can make a case for the prudence of that decision, then, “common wisdom” notwithstanding, I think they have a case.
- Nevin E. Adams
For some interesting perspectives on the inclusion of stable value as a QDIA, see “SURVEY SAYS: Should There Be a Stable Value QDIA?”
See also “Default Ed”