The Way We Were

As a parent (or even a mentor), sooner or later, you’ll wind up sharing tales of the way things “used to be.” Whether it’s a tale of the proverbial five-mile walk to school in the snow (“uphill, both ways”), the challenges of adjusting a tinfoil-laden TV antenna to obtain a decent black-and-white picture on one of four channels, or the days of laboring to get a quarterly valuation completed by six weeks AFTER the valuation cycle, the story-telling traditions of humankind are part of what makes us – well, human. By sharing a sense of where we have been, we all gain a better sense of the importance of where we are – and an appreciation (hopefully) for the progress that we’ve made.

Now, according to a recent survey, it seems that we may well be on our way to a day when participant direction of their investment accounts seems as quaint a notion as a quarterly transfer.

The aptly, if somewhat inelegantly, titled “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2007” by the Employee Benefit Research Institute (EBRI) indicates that lifecycle funds, a.k.a. target-date funds, were available in two-thirds of 401(k) plans in the year-end 2007 database the firm maintains with the Investment Company Institute (ICI), up from 57% in the prior year’s report. That means that two-thirds of the EBRI/ICI database, some 14.7 million participants, had an opportunity to choose those investment options. And, in fact, EBRI reports that, among participants offered lifecycle funds, 37% held them at year-end 2007 (see More than a Quarter of 401(k) Participants Hold Lifecycle Funds.

Doubtless, the Labor Department’s embrace of the qualified default investment alternative (QDIA) design (among which target-date offerings loom large) accounts for much of the increase in availability. Still, at year-end 2007, more than one-third of recently hired 401(k) participants held lifecycle funds, while at year-end 2006, 28% of recently hired 401(k) participants did so.

The EBRI study noted that younger participants were, in fact, more likely to hold lifecycle funds than older participants: 29% of participants in their 20s held lifecycle funds, compared with 19% of those in their 60s. And more-recently hired participants were more likely to hold lifecycle funds than participants with more years on the job; 34% of those with two or fewer years of tenure held lifecycle funds, compared with 23% of those with five to 10 years of tenure – and just 14% for those who had been in the workforce for more than 30 years.

That augers well for the future, of course. And consider that, at year-end 2007, nearly half (48%) of recently hired participants holding balanced funds had more than 90% of their account balance invested in balanced funds, compared with a mere 7% in 1998. On the other hand, note also that “less than half” of those with an investment in what is ostensibly an already-balanced fund did NOT have more than 90% of their account in that option. Indeed, one of the issues with asset allocation solutions is that participants often still seem to view them as one more choice on the menu, rather than THE choice from the menu (see ). It remains to be seen how the current generation of target-date funds – many of which still have fee structures, glide paths, and underlying asset classes that are wildly varied – will hold up amid the current market turmoil.

Still, one can’t help but wonder if – a decade or so from now – we’ll find ourselves trying to explain to a new generation of retirement plan advisers how much time, energy, and effort we used to spend trying to help participants make their own investment decisions.

And if they’ll wonder why we did.

- Nevin E. Adams, JD

Making A List...

There was a time when Christmas shopping for my nieces and nephews was a relatively straightforward process. Simply put, we’d spend a day or two at the mall, looking for things that we thought would be genuinely fun (in my case) in a generic sort of way—some flavor of electronic car, legos, dolls, etc.

Of course, as our family has grown ever more extended—and my nieces and nephews older—it became very nearly impossible to keep up with their various and sundry interests—and to a point where the only practical solution was a gift card (even then, pains must be taken to make sure it’s from a store at which they shop).



Nonetheless, and in the spirit of the holiday season, here are some “presents” that I hope participants find on their retirement plan menus during the next year:

(1) A workplace retirement plan. It’s easy to overlook this one, particularly for those of us who work with these programs on an ongoing basis. The sad fact is that roughly half of working Americans still don’t have access to any kind of workplace retirement plan. That means no convenience of payroll deposit, no assistance from an employer match, no education and/or advice about how to properly invest their retirement savings—and, in all likelihood, no retirement savings.

(2) The ability to roll over distributions from prior programs into their current plan. We all know how difficult it can be for participants to keep up with even a single 401(k) account. How much harder is it for them to keep up with—or remember—all those stray accounts left behind at prior employers, or rolled into retail-priced IRAs? It’s better for them—and it could well be better for the plan as well.

(3) The chance to automatically increase their deferral amounts. Plan sponsors have increasingly been willing to embrace automatic enrollment—but auto-escalation, even though it’s an integral part of the Pension Protection Act’s (PPA) automatic enrollment safe harbor provisions, has proven to be a harder sell. More’s the pity. This is a chance to let participants set in motion a systematic improvement of their retirement plan fortunes—and with a minimum of effort.

(4) The opportunity to select a target-date fund. Some target-date funds have better asset allocations and investments than others, but almost all are likely to provide more favorable investment results over time than most participants will achieve on their own.

(5) Some consideration of a retirement income alternative. It’s ironic to me that we spend decades working with participants trying to help them make prudent, well-reasoned savings and investment decisions—and then, at the most critical moment (distribution), most just get pointed in the general direction of a rollover IRA or annuity. Both can be effective, of course, but can be quite the opposite as well. We shouldn’t just leave participants to their own “advices” at this critical juncture—and there is a whole new generation of options to choose from.

(6) The continued support of an employer match. I’ll admit this is a tough one, and it can be expensive, particularly when the economy is in such turmoil, and when it seems like so many others are cutting back. Still, we know that the existence of a match has a notable impact on the level of contributions, and certainly influences participation. And even if it did neither, it goes a long way toward shoring up the adequacy of those individual retirement accounts. It is, quite simply, money well spent.

—Nevin E. Adams, JD

The Gift of Time

My eldest has been carrying a heavier than “recommended” class load this semester, and that – combined with her choice of classes – has meant that she’s been trying to get ready for finals and writing several critical papers all at the same time. Now, she’s a gifted student, and more committed to her studies than most (or so she has convinced her father and mother) – but the pressure was certainly mounting. Just when she thought it couldn’t possibly all get done on time, she asked for – and got – an extension on one of the papers.

Not that she did so with enthusiasm. She is very conscientious about her work and deadlines, and on more than one occasion has pulled the infamous “all-nighter” to meet deadlines. This time, however, she was smart enough to acknowledge the need and make the request. And while the extension was modest, it seems likely to give her enough mental “room” to devote the requisite level of attention to the array of competing priorities that the end of a college semester brings with it.

You don’t have to be in school to know that things can get pretty crazy this time of year, even in the best of times – and these are surely not the best of times. Just about everybody I talk to in this business is busier than ever, caught up not only in the usual plethora of year-end duties, but in a whole new set of issues brought on by the roiling markets. Indeed, one need look no further than the provider firms and advisory businesses that have, in recent weeks, expanded their call center hours or capabilities to appreciate the uptick in activity.

In the middle of all this turmoil, it was refreshing, therefore, to get from Uncle Sam one of the rarest of gifts – time.

During the last week alone, we got another year to deal with the document requirements of 403(b), a(nother) reprieve on 409A reporting of deferred compensation, and some breathing room so that the funding requirements of the Pension Protection Act can be more rationally assimilated with the current market realities (though President Bush still has to sign the last, and the initial signals suggest that he’s not yet convinced this is a good idea, despite the unanimous voice vote of both houses of Congress).

There are those, of course, who may take issue with those extensions; let’s face it, those that manage to find a way to comply with the original deadlines might naturally presume that everyone would have made the same effort. Still, IMHO, with the possible exception of the 403(b) extension (and even there, plan sponsors have to conduct plan operations as if the document were in place from the original date, so the “relief” is probably less than it might otherwise seem), the extra time seems fair, reasonable, and timely. In each situation, plan sponsors, their advisers, and advocates took the time to make a compelling case about the need for a little more time (I will say that having to read/assimilate and report on all this activity makes our jobs a bit more complicated). To their credit, those in a position to grant those requests listened – and, IMHO, cautiously and carefully, acquiesced.

And for those of us impacted by such matters, the holidays just got a little bit easier.

- Nevin E. Adams, JD

Unbelieve Able

As my wife and I drove to pick up our eldest for the Thanksgiving break, I saw something I never thought I would see again: $1.95/gallon gasoline (even more incredible, that was while I was still in the borders of Connecticut, which imposes some of the highest gasoline taxes in the nation).

Indeed, what with the election, the introductions of the new Administration’s team, the bailout/rescue of the week, and the continued jitters of the world markets, the reality that gasoline costs about half what it did in July has gone almost unreported. Still, I heard a report last week that suggests the net impact of that drop in price has put about $500 billion back in American pockets—now THAT’S a “stimulus package” we can believe in!

Still, what I find interesting about that dramatic turnaround in oil prices is that it happened so rapidly that the explanations of why it ran up so quickly are still ringing in my ears. I remember all too well the pundits laying the price hikes off on the growth in the emerging industrial economies of China and India, the impact of hurricanes on production in the gulf, concern about turmoil in the Middle East, the perceived vulnerability of the shipping lanes....Others, of course, cited the fact that we hadn’t built a new refinery in more than a decade, and that we refuse to consider drilling in areas that wouldn’t seem to pose a threat to man nor beast. But what I remember most vividly was how consistently the so-called experts denied that “mere” speculation could account for these kinds of increases.

Yeah, right.

IMHO, one of the most frustrating things about the current economic crisis is that nobody seems to know what is causing it and, thus, no one can offer a credible idea of how long it will last or what can (or should) be done to hasten its end, much less what the “rest of us” are supposed to do in the “interim.”

While financial pundits are, these days, prone to trace cyclical “corrections” to the bursting of “bubbles”—housing, tech—the resulting declines are generally not that sudden, nor are they, generally speaking, wholly unanticipated. Rather, they are the result of pressures on our financial system like the geological pressures that often result in earthquakes or the eruption of volcanoes. And, like those geophysical manifestations, there are often precursors to the actual “big event,” as well as significant after effects (nor do you have to be a financial genius to see them—how many times did you look at the soaring prices of homes in your neighborhood and think “this can’t go on?”). The problems at Freddie Mac and Fannie Mae that ostensibly triggered the most recent crisis were so blatantly obvious that even Congress felt compelled to hold hearings on the subject (and back in 2006, no less!).

At the outset of the current crisis, I was encouraged to see the federal government step forward to help and facilitate some—but not every—institution that appeared to be struggling. In hindsight, that may not have been as well-reasoned as one might want to believe, but at least there was the appearance of selective and intelligent, if not appropriate, involvement.

We want to believe that the so-called experts know what they’re doing. But with every passing day, it seems more and more obvious that they don’t. Little wonder, then, that the American electorate is increasingly disinclined to simply hand over a blank check. Little wonder also that some of the market’s “natural” remedies have apparently been staved off by people waiting to see how much the government would do—knowing full well that an outgoing Administration desperate for its legacy, and an incoming Administration anxious to prove itself would be more than somewhat inclined to do more than might otherwise be the case.

Retirement plan investors are consistently and, IMHO, prudently told to “stay the course” in times of turmoil; reminded that, even when change seems appropriate, even essential, to be careful about overreacting. It’s an approach that advisers, in large part, applaud and support.

Maybe it’s time the folks in Washington took a bit of THAT advice to heart.

- Nevin E. Adams, JD

'Nothing' Doings

I wouldn’t for a second suggest that the current financial/economic crisis that we are enmeshed in isn’t “real,” or that the efforts to remedy it thus far aren’t well-intentioned, but it’s hard to shake the feeling that the words put forth to explain the situation—and thus the solutions put forward to redress that situation—are being done by folks desperate to be seen to be doing something, but not quite (at all?) sure what that something should be. And, IMHO, that inclination won’t diminish with a new Administration eager to prove itself. Let’s face it—even when doing nothing might be the best medicine (and I, for one, am at that point), we tend to believe that “something should be done.”

Meanwhile, we have retirement plan participants, most of whom—again—appear to be riding this one out. Oh, there are signs of change on the fringes—some modest reductions in average deferral rates, slight upticks in hardship distributions, and, on particularly volatile days in the market, a bump in transfer activity. Still, for the very most part, participants appear to have taken the “stay the course” message to heart. Nor are they sleeping through the crisis; all the major providers are reporting a significant increase in call center volumes—but participants appear to be doing little more than assessing the damage and checking on their options. That, of course, is widely taken to be a good thing.

I’ve always thought it was interesting that we bemoan the negatives of participant inertia (or sometimes try to turn that negative into a positive via “automatic” solutions)—except when it manifests itself during times of market turmoil. At those times, it’s the rare industry pundit who doesn’t applaud the “wisdom” and calm shown by participants. It’s that one time when “doing nothing” is not a problem to be solved, but an indication of prudence.

“This time” may be different, of course—and the call center inquiries may well suggest that participants are making an active decision to stay put, though it seems to me more likely that those inclined to make a change simply aren’t sure what to do. Human beings may, like an object at rest, tend to remain so—but with this much turmoil still going on after all this time, in my experience, people feel better if they can actually DO something.

"Action" Steps

So, here are some things participants can do:

Get started on rebalancing by changing the investment elections of new contributions, rather than transferring existing balances. It will take longer to realign the entire account, but at least you aren’t realizing those as-yet-unrealized losses.

Increase your current deferral rates. When you think about just how much cheaper those retirement plan investments are compared with a year ago, it’s hard to pass up that kind of bargain. More so if you aren’t yet saving at the maximum level of the match.

Consider automated rebalancing. The vast majority of providers now have in place mechanisms that will, on some preset frequency (monthly, quarterly, annually), automatically rebalance individual accounts in accordance with your investment elections. It’s a good way to keep things in balance without having to worry (or remember) about the best time to do so.

Those 12/31 statements are now only about a month away—but there’s no reason to wait till then to start taking proactive steps on the road to portfolio “recovery.”

- Nevin E. Adams, JD

Thanks Giving

Thanksgiving has been called a “uniquely American” holiday, and while that is perhaps something of an overstatement, it is unquestionably a special holiday, and one on which it seems a reflection on all we have to be thankful for is fitting.

Here's my list for 2008:

I’m thankful that the election is over—and that the results were determined on Election Day (for the very most part). I’m thankful that so many made the effort to vote—and that, regardless of whether or not one always agrees with the outcome, we have the ability to do so.

I’m thankful that our nation has passed yet another September 11 without a terrorist attack on our soil—and thankful to the leaders of this great nation, and to the men and women in our armed forces, intelligence agencies, and Homeland Security for their continued sacrifices in keeping us safe.

Closer to “home,” I’m once again thankful that so many in Washington are concerned about the current state of employer-sponsored retirement plans, and the importance of fee disclosure—and once again (still?) just a tad worried that some of that concern will find form in a bad solution. I’m encouraged that we’re looking for new ways to replace the integrity of that fabled three-legged stool.

I’m thankful that, having figured out constructive (and voluntary) ways to get people into these programs—through devices like automatic enrollment—we are now focusing on how to help make sure they are saving and investing appropriately—through devices like contribution acceleration and asset allocation solutions. I’m also thankful that we’re seeing a growing number of retirement-income solutions come to market—because, after all, being able to live off what you have saved is what it is all about.

I’m thankful we have retirement savings accounts big enough for a 40% loss to hurt—but, of course, will be even more thankful when those “paper losses” disappear. I’m thankful we are talking about things like suspending the required minimum distribution rules to soften the blow, if not quite as sure that taking down the barriers on hardships and loans is a good idea. I’m thankful that so many employers remain committed to making those company matches that surely do so much not only to encourage the savings of workers, but also to help close the gap in savings adequacy.

I’m also thankful that so many employers have remained committed to their defined benefit plans and—certainly ahead of the market turmoil of recent weeks—had made serious, consistent efforts to respond to the new funding challenges imposed by the Pension Protection Act. I’m hopeful that lawmakers also will respect those efforts—and will give those programs the extra breathing room they have surely “earned” on the implementation date of some of those new rules.

I’m thankful that the “waiting” on implementation under the final 409A and 403(b) regulations is nearly over. I’m appreciative of the “patience” of regulators on those critical issues, their willingness—particularly the Internal Revenue Service on 403(b)s—to work so hard to assuage employer concerns ahead of that implementation date.

Finally, I'm thankful for the home I have found at PLANSPONSOR and then with PLANADVISER, and the warmth with which its loyal readers have embraced me, as well as the many who have "discovered" us during the past nine years. I'm thankful for all of you who have supported—and I hope benefited from—our various conferences, designation program, and communications throughout the year. I’m thankful for the constant—and enthusiastic—support of our advertisers.

But most of all, I’m once again thankful for the unconditional love and patience of my family, the camaraderie of dear friends and colleagues, the opportunity to write and share these thoughts—and for the ongoing support and appreciation of readers like you.

Thank you!

Nevin E. Adams, JD

Discontent 'Ed'

In another week (or so), PLANSPONSOR will publish its annual Defined Contribution Survey. There are other surveys in this space, of course, but ours stands apart, IMHO, for its breadth and depth, painting a portrait of the industry that transcends size, geography, and provider. And this year the survey, now in its 13th year, is even bigger than ever.

Over the years, asked to rank the criteria used in selecting their DC plan provider, plan sponsors have reliably opted to put “others” first—and this year, as in every year we have asked plan sponsors to do so, they ranked service to participants as the most important criteria, garnering a ranking of 6.5 on a 7.0 scale. Once again service to plan sponsors was the second most important (6.50). Not surprisingly (particularly these days), investment performance was deemed the third most significant, while the financial strength of the provider was ranked fourth. Interestingly enough, the numerical importance of all of these declined slightly from a year ago (more on that in a minute).

There was, however, one service criteria that actually rose in importance—transparency of fees.

Transparency notwithstanding, reasonableness of fees remained a high priority—in fact, it was deemed more important than transparency (though one might well wonder how you can be sure of the former without the latter), while brand name funds (which dropped the most of any criteria in importance, and was the lowest ranked criteria in this year’s survey), and the industry knowledge of account managers and the sales force were relegated to near after-thoughts in the rankings. Clearly, it’s about what you do and how you do it, not how much you know.

If there appeared to be some deflationary trends in the weightings, there was an even more ominous trend for providers in the evaluations. Despite the rapid expansion of target-date funds, and the enthusiasm for qualified default investment alternatives (QDIA), “focus on participant asset allocation” garnered a rating of just 5.74. Still, that put it ahead of the two lowest rated categories of participant service, overall participant education program (5.68) and fees for participant services (5.59—down from last year’s 5.64).

As for plan sponsor services, compliance was the top performing category, just ahead of the industry knowledge of account reps (though one should remember the relative unimportance accorded that knowledge in the evaluation category). Once again, fees were a sore spot: The next-to-lowest ranked criteria was fee disclosure (5.73); the lowest was fairness of fees (5.72). Some good news: Staff consistency/turnover was rated 6.04, and responsiveness to problems/inquiries a strong 6.18 on the 7.0 scale (though still down from 2007).

As a general rule, plan sponsors in the micro-plan segment, those with less than $5 million in assets, were happier at all levels than other segments. And, while it may be a function of higher expectations, the largest plan sponsors were noticeably less satisfied. Consider that while responsiveness to problems/inquiries was rated a 6.30 by micro plans, large plan sponsors gave their providers an average rating of just 5.68 on that 7.0 scale.

Now, what does all this mean for advisers? Well, it suggests that plan sponsors are less satisfied with the status quo than they were a year ago. Moreover, since the bulk of these responses were received well ahead of the recent market tumult, one can surely imagine that the level of satisfaction has not improved (though admittedly some advisers and providers will “shine” in their response to the crisis).

More importantly, plan sponsors’ satisfaction with their provider is often “linked” to that of their adviser (particularly when the adviser played a role in choosing the provider). And that link—particularly in what may be an emerging season of discontent - is something, IMHO, that all advisers—and the providers they choose to work with—would be well-advised to remember.

- Nevin E. Adams, JD

“Out of” Practice

Regardless of age, regular exercise is important – but I’m at an age where the demands of everyday life (and the toll of previous “misadventures”) frequently make that impractical, if not impossible. Nonetheless – generally after I’ve been away at a conference (where the hours, food, and drink have all been beyond my usual quotas) – I undergo a renewed “commitment” to exercise. Unfortunately, once you have gotten out of the habit – well, let’s just say your body has a way of reminding you how long it’s been.

Consequently, I was concerned a couple of weeks ago when I heard that GM had decided to suspend its 401(k) match for salaried workers (see “Benefits Cuts Next on GM Agenda”). Now, the giant automaker, like many other firms, is struggling at present. And, frankly, given a choice between having a job and having a matching 401(k) contribution, I’d opt for the former every single time.

Still, in recent weeks, that’s a move that we’ve seen a number of employers make (see “Tightening Economy Drives More 401(k) Match Suspensions”), and that is reminiscent of 2003, when a series of well-known employers – names like Schwab, BF Goodrich, Goodyear Tire & Rubber Co, El Paso Corp, and Textron Inc. – took similar steps.

The sad irony, of course, is that these moves are being taken at a time when the markets are also undermining the confidence of participants. They were also coming to light at a time when a new Schwab survey highlighted the connection between the level of an employer match and participant contribution rates (see “Schwab Finds Employer Match, Employee Savings Link”).

Now, the match that GM suspended was generous by industry standards – 100% on the first 4% of employee deferrals. And it’s not like GM hasn’t been down this road before; GM cut its match in 2005 ), and they also cut it in 2001 – but in both cases, they restored it the next year, and one would hope that, in this case, anyway, history will repeat itself.

It’s worth noting, however, that the VAST majority of employers are not even contemplating suspending the company match (for an “unscientific” sampling of PLANSPONSOR NewsDash readers, see “SURVEY SAYS: What Are Your Plans for Your Match?” at ), and that the actions of few name-brand employers do not necessarily portend a trend. Still, I have heard from a number of advisers that their plan sponsor clients are “looking at” the current level of their match. Frankly, it would probably be imprudent not to.

On the other hand, like my exercise regimen, dropping, or even reducing, the match has real consequences. There’s the obvious reduction in participant account balances, of course, but – as the Schwab survey reminds us – there is also a cause and effect on participant behaviors. Take away that “free money,” and not only do participants have less incentive to save, they may even see it as a signal that they should cut back on their retirement contributions as well.

And, like any exercise regimen, once you get out of the “habit,” it’s easy to find other ways to spend that time/money – and hard to get back to doing what you know you should be doing.

- Nevin E. Adams, JD“Out of” Practice

Ballot Initiative

For all the talk of “hope” and “change,” this extended election cycle has offered little of either, IMHO.

Now, I realize that there are those among you who are highly enamored of one candidate or the other – or at least highly un-enamored of the other. But, IMHO, if you don’t have some concerns about how both of the candidates would conduct themselves in office on at least some issues, you haven’t been paying attention.

Truth be told, neither of the major U.S. party candidates would be my first choice for the office (don’t read too much into that – I don’t have anyone particular in mind), and frankly, I’m not all that keen on the folks they’ve chosen to back themselves up (though I can appreciate the rationale behind the choices). Nonetheless, our nation’s tried and tested method of screening and selecting representatives has, with all its flaws, done its job.

Now it’s our turn.

Come Tuesday, we have a real choice to make. And this one – more than most, perhaps more than any in my lifetime – feels like a “game changer.”

As individual voters, it may not feel like we can have much impact, particularly if your state reliably goes “blue” or “red” (whether you do or not). However, the reality is that our votes do make a difference – if not in the result, then at least in the margin of the result; not just in terms of who sits in the Oval Office, but the tenor of voices on Capitol Hill, the influences in state legislatures, the composition of that local school board….

These are the people who will set in motion policies and practices that can have an impact that can, for good or ill, be felt far beyond their terms of office.

You owe it to yourself, to those you love, to those who have fought and died to preserve your right – your privilege – your responsibility – to vote.

- Nevin E. Adams, JD

The Pit and the Pendulum

They say that desperate times call for desperate measures. Well, of late, the markets have surely seemed desperate—and goodness knows, the response by regulators and lawmakers, certainly to this point, reeks of desperation, IMHO. We do seem, for the moment anyway, to be in something of a “pit” (and one, I must say, that the politicians seem to be trying to fill with money).

As if things weren’t complicated enough, we’re also in the waning weeks of what is perhaps the longest election cycle in history—one that, according to the pundits, will sweep the Democrats into a fuller, if not veto-proof, majority in Congress, if not the White House itself. If those trends hold, the pendulum would have continued its swing back—from the 2000 elections where the Republicans controlled all three, the 2004 elections where they solidified that hold, and the 2006 interim elections where Democrats regained their control of Congress. Such is the way of American politics.

Still, having spent some part of the last several years worrying about the establishment of a “you’re on your own-ership” society (see IMHO: Legs to Stand On , IMHO: Dead "Beat" ), I have been distressed to see a growing voice given to those who would treat the ills of the employer-based leg of the three-legged stool - by amputation.

Unwanted Attention

Those voices garnered some unwanted attention this month when the House Education and Labor Committee conducted a round of hearings on “The Impact of the Financial Crisis on Workers’ Retirement Security.” Unwanted attention in the form of headlines that read “House Democrats Contemplate Abolishing 401(k) Tax Breaks,” “Would Obama, Dems Kill 401(k) Plans?”, “Eyeing Your Pension: Are 401(k)s safe from congressional Democrats?”, and blog headlines that were even more provocative (“A 'Spread the Wealth' Plan for your 401k?”). Why, the word got out so fast that Congressman George Miller (D-California), who chaired the hearings in question, felt the need to reassure the media of his good intentions regarding the programs by issuing a background memo ahead of another hearing on Friday with the subject line “Background Memo on Preserving and Strengthening 401(k)s.”

What stirred things up was the testimony of Dr. Teresa Ghilarducci, who reiterated her previous advocacy for a “Guaranteed Retirement Account” (funded by a 5% of pay tax on workers and employers and a $600/worker contribution from the federal government) in place of the current tax preferences accorded 401(k)-type plans. And, apparently in keeping with lawmakers’ current inclination to bailout various troubled constituencies, she also suggested allowing workers to “trade their 401(k) and 401(k)-type plan assets” for one of those Guaranteed Accounts—at mid-August prices, no less.

Of course, it’s one thing to make a proposal (Ghilarducci has gone so far as to write a book around hers; see IMHO: Conspiracy Theories ), or even to entertain the notion as part of a broader inquiry into considering ways to shore up the existing system. What got things stirred up were the intimations that Miller and Congressman Jim McDermott (D-Washington), chairman of the House Ways and Means Committee’s Subcommittee on Income Security and Family Support, were actively considering the approach (1).

It doesn’t take much imagination to see where this kind of approach would take us. IMHO, it’s, at best, just a sneaky way to raise the Social Security tax from 12.7% of wages to 17.7% (and that’s not even counting the cost of the $600/worker the federal government would toss in). And that for an account that you couldn’t tap in a financial emergency, or leave to a spouse or children—because, despite the nomenclature, it wouldn’t be an “account” at all. On the other hand, you’d no longer have to worry about that saving for retirement plan—you’d just have to worry what new plans politicians might develop for your retirement “savings” (in her book, Gilharducci says that the financial risks are “borne by the government, not by the worker”—as though the government has a funding system independent of those workers).

Now, as I said before, these are difficult, extraordinary, even unprecedented times—and we find ourselves dealing with them smack dab in the middle of an election year. It is a time that cries out for bold action—and yet it is a time when even those with the best of intentions can do great harm.

The pendulum does, after all, swing back and forth. But if, god forbid, those pendulum swings wipe out the 401(k)—well, IMHO, that would really be the pits.

— Nevin E. Adams, JD

(1)Fueling concerns was the announcement that Argentina's leftist President Cristina Kirchner had signed a proposal nationalizing the country's private pension funds. The move, which is being challenged in the courts there, would transfer all the assets in individual accounts to the nation’s "pay as you go" system, even as it made future contributions to the state system mandatory. See “Argentina President Moves to Nationalize Pensions”

see also:

IMHO: Wonder Land

IMHO: Picture Perfect?

IMHO: “Diss” Ingenuous

IMHO: Vanishing Points?

No Time Like the Present

My September 30 statement arrived on Friday. No, I didn’t look at it.

My wife opened hers (she’s braver than I). I heard her rip the envelope open, and I’m pretty sure I held my breath (doubtless listening for the thud of a body in the next room). But then, much to my surprise, she commented that it wasn’t as bad as she thought it might be. For a brief second optimism flittered—I started to get up to check it out.

Then, I remembered the date of the statement. That’s right, September 30, 2008. Or as I think of them now, the “good old days.”

We’ve all been dreading the arrival of those statements for what seems an eternity now. Yes, the headlines have been screaming about the stock market losses, and the 24-hour news cycle has been feasting on one interminable voice after another offering their perspectives on what it means, and when—or if—it will end. Participants—even those who have been trying not to think about it—surely have to be prepared for the worst.

And therein lies a possible ray of hope, IMHO. As disappointing as many of those September 30 balances will be, they are almost certainly better than many will be expecting (not all, of course—and some are surely monitoring the daily impact on their accounts via the Internet). And, while I would never advocate misleading participants about the painful realities of market cycles, it seems to me that, between now and the next statement cycle, there is a window of opportunity to recapture the attention of participants who might otherwise be inattentive to the current state of their retirement readiness.

There’s no time like the present to remind participants of:

• the importance of keeping a regular eye on their asset allocation—and/or the tools that can help them do so; automatic rebalancing is now a common feature in many recordkeeping platforms, not to mention managed accounts or asset allocation solutions, such as target-date funds;

• the need to refine those allocations as they approach retirement, to move money toward less volatile options that can provide the steady source of income we’re all looking for in retirement;

• the importance of their retirement savings account as a part of broader approach to retirement planning;

• the value and role of things like defined benefit pensions and retiree health care, for those who have access to those resources (dare one hope for a resurgence in participant interest?);

• the importance of remembering longer-term trends in the markets; for instance, what happened between October 19, 1987, and the end of that year. Or, for those too young to appreciate that reference, the recovery after the tech bubble “burst”;

• the fact that regular investment through payroll deduction means that they invest at different times and different prices—neither the peak, nor the trough;

• the “return” on their account that comes from their employer’s match;

• the importance of saving the right amount versus picking the “right” investments.


Now, these are extraordinary times, by any measure. But there’s no time like the present, IMHO, to remember—and remind participants—of their future – and the importance not only of saving, but of saving the right way.

- Nevin E. Adams, JD

Due Process

The recent market tumult has hit Main Street in its retirement pocketbook—and some are once again fretting about their “201(k)s.” You can say all you want that this is a good buying opportunity, but the reality is that our retirement savings accounts have taken a hit, and most people are going to be in mourning, at least for a time.

Regardless of the markets (which we can’t control), we all know that the most important determinant of retirement security is how much we save—something we can, within bounds, control. However, when it comes to saving, there are two big questions looming over us, IMHO: Are we saving enough?—and, more importantly, Can we save enough?

Those of the opinion that Americans are saving enough are few and far between. With a median retirement savings plan balance of less than $125,000 (and that was before the impact of the last several weeks), it’s hard to see how we could be saving “enough” based on historical spending patterns, much less taking into account the projected increases in longevity and health-care costs.

The answer to the second question exposes the Achilles’ heel of the voluntary savings system. For most of us, saving for retirement remains one of those things we do after we pay for food, mortgage, gasoline, and even the kid’s braces. That’s not necessarily an irresponsible approach, IMHO, though it can be. The problem, of course, is that most household budgets get divided into things that have to be paid, those that have to be paid eventually, and what’s left over after you have dealt with the former two. Frequently, retirement savings still slips into the last group—for while we often give lip service to the need to “pay yourself,” most people still see it as saving toward something you’d like to have one day, not a bill that has to be paid.

How Much Is Enough?

But, to the point: If retirement savings was a bill, how big would it be? That’s the $64,000 question—and, unfortunately, there tends to be some disparity depending on who you ask and the assumptions you employ. However, if you assume a need to replace roughly 70% of pre-retirement income (and that number is too low, by some accounts), and if you assume that you are looking at a 30-year-old employee who makes $50,000, a recent Vanguard study puts that annual savings rate at 17% of pay—per year. Even if the worker makes no more than $25,000, the deferral rate would need to be 14%. There is disagreement on the amount that needs to be replaced, though 70% is about as low as any credible source still goes. The bottom line—what’s likely to be required is likely more, perhaps much more, than anybody you work with is currently saving.

Can—or will—workers save at that rate? Well, some are already close to that, certainly once you factor in an employer match. But again, those rates of saving “work” only if you start early—and, of course, if you are “only” trying to replace about 70%. If you think you’ll need more—or if you start later—or if you are trying to replace a higher income—you’d need to save more, or hope for other sources of income.

What does that mean for the future of retirement? Well, for those still in the workforce—and certainly for those on the “wee” side of 55—I suspect retirement will start later, and perhaps start differently, than it has for today’s retirees. Some will try to stay in the workplace longer (let’s face it, you won’t even get full Social Security benefits today if you retire at 65), though they may look for ways to cut back or “phase down” ahead of full retirement.

This actually works out to be a powerful savings strategy. I have seen any number of studies that suggest that working till 70—continuing to add to your nest egg—while at the same time forestalling tapping into it for another five years can transform many (most?) of those projections of inadequate savings accumulations into sufficiency (you can see this on just about any retirement projection calculator as well).

Want “Adds?”

On the other hand, it’s one thing to want to work longer (“want” perhaps not being the best word to describe that decision), and perhaps another altogether to have that option. Indeed, statistics suggest that workers routinely depart the workforce prior to their 65th birthday, and frequently not of their own volition (and not because they have achieved the requisite level of retirement income security). Consequently, while working longer may be part of the plan, you can’t afford (no pun intended) to simply expect that will be an option.

These past several weeks, much has been said about the economic crisis foisted on the “rest of us” by those who promised a free lunch to others who were willing to be duped, or were at least willing to be led to believe (of course, some drew that conclusion on their own) that what couldn’t be afforded now would be available at more favorable terms in the future. $700 billion later (before add-ons), we’re not even sure who we’re “helping.”

It’s not too much of a stretch to see a similar pattern emerge in retirement savings. There are plenty of folks who, rather than make a tough choice today, have chosen to put off the day of reckoning. They’re hoping for a time when it will be easier to save for retirement, a time when it will be more affordable—and some, no doubt, are simply hoping that someone else will solve the problem for them. And yes, some got rich while fostering those illusions.

Like it or not, retirement savings is a bill. It may look like “no money down” today, but there’s one heck of a balloon payment coming.

- Nevin E. Adams, JD

Reference Points

For most 401(k) plan participants, this has been a good quarter—to lose your statement.

Sure, we all know that the lower prices make this a good chance to invest new contributions at a bargain price (once we get past the concern that those prices won’t continue to fall), but there is a very real possibility that some (many?) participants will see a 09/30 balance that is lower than it was a quarter ago, wiping out three months’ worth of contributions (and then some).

It is interesting—and perhaps fortuitous—that, even as the markets struggle, asset allocation choices are available on a growing number of retirement plan menus. That they are increasingly a favorite as a plan default option—even as a growing number of automatically enrolled participants are defaulted into them—represents, IMHO, one of those rare occurrences where a much-needed solution is actually available and in place before the crisis it is designed for hits.

Having said that, it is also a year when even diversified portfolios are taking it on the chin. And participants defaulted into those choices—even participants who actively embraced the convenience of the “just pick one” solution—may not fully appreciate the benefits of that alternative.

On the other hand, these are the kinds of markets where the benefits of diversification should stand out, but only if you are able to provide them a point of reference. In a quarter when the S&P 500 shed 9% of its value, those target-date funds may look very good indeed.

The Bigger Picture

There is another aspect to this, of course—because all target-date funds are not created equal. Despite the commonality in naming structures, there are marked differences in fees, in their choice of fund structures and, most critically, in their glide paths—the underlying asset allocation, and the philosophy that underpins it. Of course, plan fiduciaries have an obligation to prudently select and monitor all investment options, a standard in no way diminished or excused when it comes to these target-date funds (or, more broadly, the qualified default investment alternative (QDIA) enclave to which they now belong).

Still, their relative newness has made it difficult to objectively evaluate their appropriateness, at least according to traditional standards, while their limited availability on specific recordkeeping platforms has perhaps made it seem less necessary (after all, if you only have one target-date family to choose from, what choice do you really have?).

But with the passage of time, we now not only have more choices, we have begun to accumulate track records, and just as significantly, a more refined sense of purpose for these offerings—some have, in fact, refined their purposes. True, as things stand today, for many, the gap between their stated goals and the reality of their asset allocations looms large—and, IMHO, the stated goals of many are still obtuse to the point of obfuscation. Nonetheless, we are rapidly reaching the point where such ambiguities can be appreciated.

The passage of time has also brought a new generation of indexes for these funds. Perhaps not surprisingly, in view of the breadth of philosophies underlying the various glide paths, this new generation of indexes—most of which are only just being brought to market, and some of which are still in incubation—bring to the table different philosophies about how these offerings should be evaluated. In other words, while this new generation of indexes purports to provide a standard against which target-date fund choices can—and should—be evaluated, there is not yet a consensus on what standards should be applied.

That’s not necessarily a bad thing, of course. People, even experts, have different notions of what constitutes an appropriate asset allocation, and people—perhaps especially experts—are certainly entitled to their varied opinions.

What that means for fiduciaries—and for those who counsel them—is that the selection of that benchmark could be as important as the funds we measure against it.

— Nevin E. Adams, JD

Staying on Course

One of my favorite quotations is George Santayana’s, “Those who cannot remember the past are doomed to repeat it.” It is also, unfortunately, one of the most overused quotations, generally during times when we are in the middle of repeating an unremembered mistake.

The current financial mess on Wall Street is the most recent example, of course. The problem—like the tech bubble that preceded it, the derivatives mess in the mid-1980s, the junk bond blow-up before that—is not that we don’t see it coming. It’s that we don’t do a very good job of knowing when it will hit. That, and nobody wants to leave the “party” before it’s over. And then we all wind up with hangovers.

On the plan sponsor side, it was interesting to see the encouraging words of a number of public pension plans this week (see "Public Pension Groups: We’re Still OK". Most spoke to the long-term nature of their investments, and the short-term security that comfortable funding levels provided. Some offered a comforting historical perspective—since both they and their members could recall times when the markets were poised even more precariously on the precipice. And most were able to point to returns that were better than most of their participants had been reading about in the headlines—mostly because their diversified portfolios haven’t been hit as hard as the equity-only indexes that get reported.

I thought about that as I reflected on a NewsDash survey this week—and what plan sponsors said they had been hearing from their advisers and providers. Not surprisingly, most had been told to tell their participants “stay the course.”

In view of what has been going on in the markets, that didn’t seem to be bad advice, even if it did seem a bit trite. But I couldn’t help thinking that a broad-based message to all participants to stay put, however well-intentioned, wouldn’t necessarily be good advice for every participant, certainly not for the ones who haven’t yet found their way into a properly diversified portfolio. This should be—and perhaps will, once the “dust” has settled on the current crisis—an opportunity to highlight the importance of diversification, the benefits of ongoing rebalancing.

Having said that, I suspect that “staying the course” is what the vast majority of participants will do. After all, that is what nearly all do, day in and day out, year after year. Inertia in such things is not only the order of the day, it is a behavioral tendency we can focus on, and work around with approaches such as automatic enrollment, deferral acceleration, and asset allocation solutions. Those, in turn, are approaches that allow us to say—confidently and credibly—that participants are best-served by leaving their retirement investments in place.

Staying the course is sound financial advice, after all—but only if the course you are staying on is a good one.

- Nevin E. Adams, JD

Pay “Back”?

It was an interesting week, to say the least—all the more so since I spent it surrounded by financial advisers.

The downs and—eventually—ups of the market, the absorption of storied brands, and the likely disappearance of others were, as you might imagine, fodder for a lot of cocktail banter and the occasional moment of financial gallows humor. But, after what is surely one of the most momentous weeks in memory, the question for most is—now what?

IMHO, most investors realize that stock markets will go up and down—even, as was the case this week, when those movements are deep and largely unanticipated. Those who rode out the tumult are doubtless relieved that they did (having the wisdom to “stay the course” is a time-honored rationalization for inertia). As one adviser told me, the only person that gets hurt on a rollercoaster is the one who tries to get off in the middle of the ride.

On the other hand, when malfeasance and/or malevolence seem to underlie those dramatic swings—and there are rumored culprits aplenty for this current mess—we should not be surprised that their confidence in our free market system of investment, their trust in those “stay the course” assurances, is shaken.

It’s not just that loans were made to people who couldn’t afford them—by people who shouldn’t have made them in the first place. Nor that those loans’ increasingly generous terms were encouraged by politicians pandering to constituents and “constituencies” and—let’s face it—driven by the greed of both lenders and borrowers willing to believe that there really was a free lunch. That that “free” lunch fed on itself, fueling prices that no one ever thought were sustainable over the long term—but that just about everyone thought could go on for just a bit longer—wasn’t the real issue…though that, of course, provided the impetus for even more bad loans that wound up being “packaged” in bundles that purported to provide diversity, even as they served to obscure just how tainted the underlying bundle had become (and just as surely, in some cases, served to rationalize a suspension of prudent evaluation).

That those chickens eventually came home to roost—and with a vengeance exacerbated by short-selling “vultures” (doubtless cousins of the speculators that have driven gasoline prices to record highs with little or no market justification)—should have surprised no one, for we have seen this cycle repeated time and again.

What may be different this time—at least in terms of its visibility—is the actions and “leadership” of those who will, despite their complicity in the debacle, walk away with more money than most Americans will see in their entire lives.

That, and the pervasive sense that “we” are paying for those exorbitant exit packages—with our retirement savings. IMHO, my love for our free markets notwithstanding, it’s time some of “them” paid for what they’ve done to the rest of us.

- Nevin E. Adams, JD

“Free”, Falling

According to a new survey, nearly one in 10 plan sponsors still believes that they pay no fees for their retirement plan.

On the other hand, the Spectrem Group survey of an undisclosed number of plan sponsors (see "The First Step is Understanding") claims that nearly one in four plan sponsors was of that opinion as recently as 2005.

Not that they aren’t getting that information. Overall, 84% of sponsors responding to the Spectrem Group survey receive a written fee disclosure statement from their plan providers, and 88% receive one from their advisers and consultants(1). However, as impressive as those statistics are, about half of the plan sponsors in the survey rely on their plan provider or the adviser who sold them the plan for any analysis of fees paid (only a third analyze fees using in-house staff, and a mere 17% use an outside consultant or a TPA).

In sum, while the vast majority of plan sponsors said they were getting disclosures from their providers/advisers, most were also apparently relying on those same institutions to help them make sense of them.

That reliance notwithstanding, only half of plan sponsors are confident that they fully understand the fees charged by their advisers and consultants (four or five on a five-point scale), and even fewer (43%) are confident they fully understand the fees charged by their plan provider. Perhaps as a consequence, only half of plan sponsors are satisfied that they are receiving full value for the fees they pay.

Ironically, perhaps, firms where the retirement plan decisions resided with human resources were more likely to get those disclosures (95%) than were those firms where the decision-making resided with finance (91%)—though it is possible that the finance-led process simply chose to do their own analysis. In fact, finance-led operations were significantly more likely to be confident that they “fully understood” the fees paid their adviser/consultant than the HR-led firms (58% versus 38%). It is perhaps no surprise that 57% of those same finance-led firms were satisfied that they were getting full value for the fees paid to that adviser/consultant, compared with less than a third (31%) of firms whose retirement plan administration was led by HR.

It is perhaps hazardous to infer too much from this data. However, any number of surveys (including PLANSPONSOR’s own annual Defined Contribution Survey) continue to indicate that significant minorities of plan sponsors do not know what fees are being paid for/by their retirement plans, and even more appear to underestimate those sums. IMHO, even more do not understand the fees being assessed, and many aren’t sure how to determine if those fees are reasonable. These are troubling findings—and I suspect that, beginning next year, with the implementation of the first of the Department of Labor’s new fee disclosure initiatives, there will be a whole new level of questions (though issues remain with the clarity and consistency of the proposed disclosures).

Setting aside for a moment the fiduciary admonition to ensure that the fees paid by and services rendered to the plan are reasonable, the Spectrem Group survey also suggests that the more that plan sponsors understood the fees they were paying, the more likely they were to be satisfied that they were getting their money’s worth.

There’s no such thing as a free lunch, after all—and those who think they’re getting one could wind up with a serious case of indigestion.

- Nevin E. Adams, JD

(1) interestingly enough, the average estimated amount of fees paid to plan providers in this year’s survey was 123 basis points, up from 107 basis points in 2005. On average, plan sponsors estimate they pay approximately 35 basis points for the services of their advisers and consultants, though sponsors of the largest plans estimate their fees for advisory services at 46 basis points.

Storm "Surge"

Over the past several weeks, I’ve received a dozen different inquiries from providers and advisers, all wanting to know if we’re seeing any pickup in provider changes. Now, aside from the frequency and consistency of the inquiries, they also share two interesting aspects. The first is that—to a person—the inquirers say that, while they are still enjoying a good deal of activity/interest, they have heard that things are slowing down.

What I’ve not been able to figure out, of course, is if they are just nervous that their string of good luck is getting ready to run out, or if they are feeling really confident about their business prowess and are looking for some independent affirmation of same.

Truth be told, I’ve not seen anything to suggest a noteworthy uptick in the number of provider changes—other than the uptick in volume that frequently is associated with changes at the providers themselves (see “Exit Signs”). It’s summer, after all, and if it isn’t quite the activity doldrums that it was once upon a time, the reality is that provider changes are generally committee decisions, committees are made up of people, and people—certainly those with kids—still tend to be out of the office for extended periods of time in the summer. And those absences tend to slow, if not freeze, committee actions.

Will there be more change this year than in years past? Frankly, I doubt it. “Change” may now be the mantra of the 2008 presidential election, but IMHO, for most plan sponsors, change equals work. It’s work to go through a search process, after all (even if a consultant/adviser does most of the legwork), and, some have reminded us in the current election cycle, change is not necessarily for the good. There are risks: that the changeover won’t go smoothly, that the new provider will turn out to be no better—or even that, in ways as yet unanticipated, they will be worse. Furthermore, even the most seamless of transitions imposes change—not only on plan sponsors, but on plan participants. New Web sites, new toll-free call in numbers, different statements, new procedures for handling loans and withdrawals—and the potential for a reinvigorated investment menu—all serve to “inflict” change on plan participants, as well as the plan sponsor.

That’s why, in my experience, plan sponsors approach change with caution (some might term it “prudence”). And most—though they are always interested in improving services and in reducing fees—reasonably find the tasks and uncertainties attendant with a provider change sufficiently daunting to keep them firmly planted (change can be forced on them, of course, by provider exits or by service “missteps”).

However, you can sense a sea change just over the horizon as a new series of fee disclosure initiatives takes hold, both at the plan and participant level. It will take time for those to emerge, of course—even longer for plan fiduciaries to absorb and respond. But respond they will, IMHO, and in short order, the question will go from “what am I paying” to “why am I paying what I am paying?”

It’s a change that will catch some unawares, and, with luck, it’s a change that will drive off the unprepared and uncommitted— those who think they can simply “ride out” the storm. It’s a change that is coming—whether you believe in it, or not.

— Nevin E. Adams, JD

“Gold” Mettle

Memories of the 2008 Olympics are fading fast, but looking back I was most struck by the American team’s performance in the 400 freestyle relay.

That’s the one where Jason Lezak, 32, came from out of nowhere in the final leg to win the gold for his team. As incredible as that finish was (that he managed to take it from the team that was “talking trash” ahead of the event was even more satisfying), I was most struck by another statistic from that event; while the top five teams all finished under the previous world record time, two of them (Italy and Sweden) didn't even get a medal.

Watching that event unfold – particularly the top two finishers in the lanes adjacent to each other – you could see how the strong performance of each team – of every team in the race – served to spur each athlete to what may have been their best performance. That it wasn’t enough on that particular night to win a gold medal in no way diminishes their accomplishment – but it says something about how the best can inspire us all to new heights.

That is why, in 2005, we launched our Retirement Plan Adviser of the Year award; to acknowledge "the contributions of the nation's best financial advisers in helping make retirement security a reality for workers across the nation." It has always been our goal to bring to light the very best practices of the nation’s very best advisers (and adviser teams), and in so doing, to set – by your example - new standards for excellence in dealing with workplace retirement plans. One need look no further than the advisers that have been honored with that recognition to appreciate the impact.

Today it is both my honor and privilege to launch the nomination process for our fifth annual campaign to acknowledge the contributions of the very best financial advisers in the nation, both individuals and teams.

Impact Statement

The criteria that underlie the award are simple but meaningful; 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. However, as we acknowledged a year ago, those criteria also underlie the Pension Protection Act’s designs for defined contribution plans. Consequently, while those objective standards will continue to establish a foundation for excellence, this year we will be placing an even greater emphasis on the evaluations of plan sponsors, the quality of consultative materials, leadership in the industry, and transparency of revenue-sharing practices. This year we hope, for the first time, to highlight specific excellence in working with 403(b) and 457 programs.

Once again this year we will acknowledge the finalists in PLANSPONSOR magazine, as well as PLANADVISER, and profile the winners in early 2009. The finalists also will be recognized at PLANSPONSOR’s Annual Awards for Excellence celebration in New York City.

There is nothing like tumultuous times to highlight the value of, and reinforce the need for, expert help for plan fiduciaries. It is also the kind of challenging environment that tends to separate the chaff from the wheat—that sorts out the committed from the merely intrigued. And, yes, 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.

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. As always I look forward to getting to know you, and your practices, better through this process.

Irreconcilable Differences

Last week, the Department of Labor took another step toward finishing another piece of unfinished business.

It did so by proposing regulations necessary to implement (in confidence, anyway) the provisions of the Pension Protection Act (PPA) dealing with investment advice offered to participants under the auspices of a fiduciary adviser.

For the most part, the proposals (see “EBSA Clarifies Investment Advice Regulations”) seem fairly unobtrusive—if not downright “squishy” (more on that in another column). And, like the recent proposals on fee disclosure (see “IMHO: No One (Else) To Blame”), most of the 129-page document is spent outlining the details of the proposal’s cost/benefit analysis ($10 billion, in case you were wondering—$14 billion in benefits versus $4 billion in implementation/compliance costs). So, if you were having trouble working up the courage to wade through the PDF, take heart—the meat is found in the first 35 pages (with the occasional reference to a glossary at the back).

I was about halfway through the document (yes, the whole thing), when the response from Congressman George Miller (D-California) hit my inbox. Now, I wasn’t surprised to find that Miller, Chairman of the House Education and Labor Committee, took issue with the proposal; it’s an election year, after all. But Miller didn’t just criticize the proposal, or say that it didn’t go far enough, as he has on issues like fee disclosure (see “Miller Fee Bill Cruises through House Committee”). No, he called the proposal “nothing less than a boon for Wall Street and corporate executives” and urged the DoL to “immediately withdraw these harmful proposals.” And then he took a final swipe, noting that, “[i]n its final months in office, this administration has developed a disgraceful pattern of sneaking in last-minute regulatory changes at the behest of special interests” (see “Miller Slams DoL Advice Proposal”).

Setting aside for a moment the contents of the proposal, it’s not like the DoL just rolled out of bed and decided to create some guidelines for investment advice. The PPA set out a lot of new rules and plan design opportunities and then—prudently, IMHO—left fleshing out the details on things like participant notices and, yes, fiduciary adviser investment advice to the ministrations of the Department of Labor. Legislation that, admittedly, is now two years old—but one can hardly argue credibly that the DoL hasn’t been kept busy trying to fulfill the “to do” list created by the PPA.

The reality is that the investment advice provisions of the PPA were among its most controversial —that they even made the final cut was something of a miracle or mistake, depending on your perspective; that the areas of gray left were so abundant perhaps an implicit acknowledgement of the inability to balance two very opposite views. Doubtless there were (are?) those who hoped those provisions would simply atrophy on the vine for want of attention.

Of course, the heart of the controversy lies in the potential, if not inherent, conflicts of interest that arise when advisers offer advice on investments that provide compensation to those same advisers. Some, of course, believe that those conflicts can never be surmounted, or at least that they cannot be surmounted by every adviser every time. Others believe that the problem can be overcome by a combination of process structure, disclosure, and oversight.

Whether or not the PPA’s broad outline—or last week’s DoL proposal—is sufficient to provide the latter will remain a point of debate, IMHO—except for those who will never reconcile themselves to the notion.

- Nevin E. Adams, JD

Crisis of Confidence

I’m old enough to have been a driver (albeit a young one) the last time we had a “real” gas crisis (the one where the issue was not being able to buy gas, not just being able to afford to buy gas).

I can still remember the national sense of frustration when a bunch of crackpots in Iran held 52 Americans hostage for 444 days; the concerns when the USSR, using language startlingly similar to that employed during the recent invasion of Georgia, strolled into Afghanistan—and, yes, I can still remember what a “real” recession felt like (the one where we actually had a 5% drop in GDP).

I also remember the “response” of our leaders in Washington at the time. Now, it’s easy to sit on the sidelines and judge those who actually have to make the tough decisions, but I think it’s fair to say that a common sentiment was that we were “getting what we deserved.” America had too long strutted the world stage imposing its values on others, some said—this was just the ghosts of Vietnam and Watergate coming home to roost. We were told that we were suffering from a crisis of confidence, a “national malaise.” It was, some said, simply time we, as a nation, learned to make do with less.

Fortunately, IMHO, not everyone accepted that assessment as a foregone conclusion. The turnaround wasn’t overnight, and it wasn’t easy. But it began with a leader who saw America’s best days still ahead, who was willing to call to mind that “shining city on the hill.” Frankly, it began when people began to believe they could solve the problems confronting them, rather than being victims of circumstance.

Now, I wouldn’t for a moment suggest that the current economy isn’t struggling. Like you, I feel the anger every time I pull up to the pump—that I get excited at the prospect of paying (slightly) less than $4/gallon is troubling, in and of itself. Like yours, no doubt, my 401(k) portfolio has seen (much) better days, and I have every reason to expect that I’ll be paying twice as much to heat my home this winter as I did a year ago.

Unfortunately, it seems that there is today a growing chorus of “it’s all our own fault” and a willingness, if not an eagerness—at least on the part of some—to once again effectively throw in the towel. Not just on the economy, mind you, or gas prices, but on the employer-sponsored retirement system.

Encouraging Words

It was encouraging, therefore, to see this week’s report from Fidelity that suggested that deferrals were up, albeit slightly, even while balances were down over the past year. It was even more encouraging that participants who had been deferring into the same plan year over year saw a more significant increase (see “Fidelity Database Shows Participants More Inclined To Save”), while statistics on participant loans (down slightly) and hardship withdrawals (up slightly) suggest that participants are, in large part, not only staying the course, but upping their ante.

Our industry has long cautioned against the consequences of not preparing adequately for retirement, but those June 30 participant statements were almost certainly a shock to participants who had been acting on those admonitions. Certainly there were some (perhaps many) who, as the averages in the Fidelity study suggest, saw their entire quarter’s contributions apparently “disappear” into the ether, swept under by the market’s maelstrom. That will, no doubt, fan concerns about how “safe” your 401(k) (or 403(b) or 457) plan is.

Without question, changes will be required. The three-legged stool, to the extent it ever existed, is a thing of the past for most workers (see "Saving While You Still Work"). We may well have to rethink our notion of retirement—though I’m not sure that notion will wind up being much different than the one our parents are already living. And yes, I think the federal government may well be part of the solution—but I don’t think most Americans want government to be THE solution.

The Fidelity survey offers hope—a reassurance that we can make (and are making) a difference; that we don’t necessarily have to lower our expectations of people. We could always do more—and perhaps better—of course. We need to keep exploring the reasons people hesitate to save, or don’t save enough. We need to continue to find solutions, like target-date funds, that make it easy to do the right things when it comes to retirement savings. We need to be willing to be open and honest not only about the goals and risks of these programs, but about their costs. We need to continue to encourage employers of all sizes to remain committed to these programs.

And, yes, we need to do all of that with an appreciation of the importance of our mission—and confidence in the abilities of ourselves and our profession to succeed.

- Nevin E. Adams, JD

What WIll Participants Do?

At the moment, the industry is scrambling to respond to the DoL’s call for comments on the proposed participant fee disclosure regulations by September 8 (see "Know Way".

I think, based on the conversations I have had to date, that most of those comments will be positive on the scope of the disclosures, and fretful about the timeframe for implementation. Most seem to think that the DoL’s measured approach will be matched by a (more) reasonable timeframe for implementation that that contained in the proposal. Of course, there’s pressure from other sides - Congressman George Miller, who has not only held hearings on the subject, but introduced legislation regarding fee disclosures, is grumbling that the DoL’s version doesn’t go far enough. He’ll no doubt be joined by the voices of unbundled solutions who may well feel that they are disadvantaged by the current proposal’s terms.

The ‘debate” over participant fee disclosure has generally focused on one of two concerns – the physical impossibility (or at least impracticality) of doing it – and concerns about what participants would do once they had that information. Those concerns have similarly run the gamut, everything from “we’d spend all this money for no reason” to worries that participants would be so shell-shocked by the size of those fees (or the realization that there WERE fees) that they would opt out of retirement plan savings altogether. The Department of Labor’s recent proposal on the subject will surely serve to mute the debate on whether we should disclose those fees, but what we don’t really know yet is – what will participants do?

How Much Ado?

The DoL clearly (and explicitly) expects that participants will make better investment decisions. In fact, it’s made some effort to quantify the financial impact of those decisions as part of its proposal (see IMHO: No One (Else) to Blame). However, no one – apparently not even the DoL – actually expects that all participants will pay attention (in its estimation of the impact of the regulations, the DoL projects that less than a third of participants will benefit from a time reduction in looking for the information – presumably the rest aren’t paying attention).

Most participants won’t be helped much by the disclosures, IMHO. That’s not a criticism of the effort – but let’s face it, we’re talking in large part about the kind of disclosure that has long been available through mutual fund prospectuses. Does anyone really believe that most participants will comprehend the fine print of those disclosures any better than they currently grasp that same kind of detail in their mutual fund prospectus? Seriously – look at the model comparative chart . I’m not saying this is rocket science, but even in the DoL’s proffered example, you have models of clarity like “$20 annual service fee assessed for accounts holding less than $10,000. May be waived in certain circumstances.” (All of which would make this “model” participant wonder – are we talking about my individual 401(k) account or the plan – my account in total, or my account holdings in that particular fund? And are MY circumstances “certain?”)

Some Improvements, But…

Now, there is the improvement in frequency and convenience of delivery of this information. But while there’s surely something to be said for that, it also has a downside - the sheer volume of materials we’ll now be producing to provide this information. While the DoL took some pains in its proposal to leverage existing mediums, they nonetheless estimated that the annual disclosure would represent an additional 13 pages of disclosure for non-404(c) compliant plans. Surely there has to be a better way!

Perhaps I’m being too harsh in my assessment of the mathematical acumen of participants, or their interest in pursuing the clarity the proposed regulations purport to offer. And, like it or not, those kind of fee structures, complexities and exceptions have long been standard in what passes for disclosure in the mutual fund industry. The specific disclosure of dollar amounts charged against participant accounts called for by the proposed regulations will be helpful information, IMHO – but that’s generally only a small part of the costs participants are bearing.

Where we are may, in fact, be where we need to begin, in terms of helping participants better understand and appreciate the significance of their retirement savings decisions.

But if we’re expecting a significant response to this kind, and this much, information on the part of participants – well, I wouldn’t hold my breath.

- Nevin E. Adams, JD

No One to Blame

Like most of you, I have found the soaring price of gasoline to be enormously frustrating. Not that we haven’t dealt with this kind of thing before—but in the past, there generally seemed to be a reasonable explanation, whether it be a deliberate shift by OPEC, refineries shut down by a hurricane, or some kind of political turmoil in some far-off nation. This time, we have a series of potential “culprits”—the new economies in India and China, government taxes, greedy oil companies, irresponsible automobile manufacturers, unresponsive legislators, and, more recently, underinflated tires, and even speculative pension fund investments. It seems like everyone—and no one—is to blame for our current predicament (and, as painful as the current situation is, just wait until winter).

Some politicians have already picked up on the shift—and, with luck, their August recess will help them better understand just how angry the American people are about the situation. I wouldn’t for a minute suggest that our current energy pricing issues can be talked into submission—but it is intriguing how just talking about actually doing something in the short term has already served to bring down oil prices.

Talking Points

There are similar motivations at work in the DoL’s recent fee disclosure proposal (see “Know” Way). Not that speculation has (yet) been accused of driving up 401(k) fees—but the DoL specifically states that the proposal’s required disclosures “…[are] expected to result in the payment of lower fees for many participants.”

I’ll get to how much lower in a minute, but it’s worth considering just exactly how much it may cost us to achieve those savings—in no small part because most of the 103-page document that brought that proposal to light is consumed with outlining the various costs and benefits projected to result from the new rules. Suffice it to say, it’s going to be expensive. In fact, under Executive Order 12866, the DoL has determined that this action is “significant” because “it is likely to have an effect on the economy of more than $100 million in any one year.”

How much more? The present value of the costs over a 10-year period is projected to be more than $750 million. On the other hand, the present value of the projected benefits is expected to be about $6.9 billion.

The Costs

So far, so good. But only until you begin to explore the assumptions behind those numbers. First, there’s the cost of getting started. Because the DoL says that “plans may employ service providers for making disclosures and that these service providers are likely to spread fixed and start-up costs across many plan clients,” it applies an hourly legal review rate of $113, and assumes that every participant-directed plan will employ legal services upfront to review the regulation for 30 minutes. That adds up to $24 million, according to the DoL.

The DoL also assumes that each plan will spend 30 minutes of clerical time (at an hourly rate of $26) preparing the disclosures at a cost of $5.7 million. The DoL also assumes that it will take 15 minutes of legal time and 30 minutes of that clerical resource to review and update plan-related information; extrapolates those numbers across 59,000 new start-up plans, as well as 378,000 currently operating ($17.2 million); and assumes that costs associated with additional recordkeeping and of producing actual dollar disclosures will cost $26.5 million in year one, and $9.3 million in subsequent years, based on some 2001 GAO projections. They also incorporate average costs for individual plans to consolidate fee information from various providers (one hour per plan at $60/hour) for another $26 million in 2009 costs, and another $35 million that year to send all these disclosures out to participants (the DoL assumes it will take clerical staff an additional two minutes, and that 38% of disclosures will be sent electronically). Oh—and then there’s the cost of distributing the materials. The DoL assumes that the annual disclosure will be 13 pages for plans not already providing disclosures similar to section 404(c) disclosures, and an extra three pages for those who are. All told (making allowances again for 38% to be made electronically), that adds up to another $8.2 million in 2009. All in all, the DoL projects that their proposal will cost the industry $127 million (and change) in 2009—about $335/plan, if you buy into the DoL assumptions. It gets less expensive each year, but in its least expensive year (2018), it would cost nearly $53 million in today’s dollars, albeit spread across the entire participant-directed plan universe.

The Benefits

While there are certainly assumptions worth questioning on the cost side, the benefit side is where, IMHO, things get really “squishy.” The DoL starts by attributing $307 million in benefits (over a 10-year period) because participants will actually behave differently, now that they have different and/or easier-to-understand information (and assuming that they do, as the DoL assumes, pay 11 basis points more than they should). I think the former assumption is far too generous in terms of extrapolating participant response. On the other hand, the latter—that, on average, they pay just 11 basis points more than they should—strikes me as conservative.

The DoL also thinks that around 29% of participants (the number an EBRI study says acted on information they received from their retirement plans) will spend time researching their options, and will thus benefit from the increased clarity of the disclosures. How much? Well, EBRI claims these participants spent 19 hours per year, on average, researching retirement—and the DoL thinks that the new disclosures would save 90 minutes/year for non-404c compliant programs, and an hour/year for the rest. That adds up to 19 million hours—and, assuming an hourly rate of $31 (the value of a leisure hour), participants would save about $608 million in 2009.

Now, of course, nobody is writing a check for that savings in time—and whether it will save that many people that much time is still anybody’s guess (the DoL has solicited comments on both). But those “soft” cost savings of time combined with the savings attributed to changes in behavior wind up, in the DoL’s projections, to provide nearly $7 billion (yes, that’s a “b”) in savings over the 10-year period.

What’s Next?

Personally, I think the projected costs are too conservative, and the projected benefits far too optimistic, based on my experience working with retirement plan participants. That the gap between the two is narrower than projected, however, doesn’t mean there isn’t a gap, and surely shouldn’t suggest that there isn’t a net benefit to be found in the regulations proposed—or in a later, better version.

We may feel stuck between a rock and a hard place when it comes to fuel prices. But the Department of Labor has clearly laid out the basic requirements and, by my reckoning, made at least some attempt to leverage existing mediums and materials to mitigate the effort and expense. Their assumptions may be “wrong,” but we know what they are, and what they are based on. Their proposed timetable for implementation may be unrealistic, but we have a chance to express those concerns.

And if we don’t take advantage of that opportunity—if we let “others” take the lead in framing the final result—then, IMHO, we have no one to blame for the results but ourselves.

- Nevin E. Adams, JD

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Editor’s Note: the Employee Benefits Security Administration (EBSA) encourages interested persons to submit their comments electronically by e-mail to e-ORI@dol.gov (enter into subject
line: Participant Fee Disclosure Project) or by using the Federal eRulemaking portal at http://www.regulations.gov.

Persons submitting comments electronically are encouraged not to submit paper copies. Persons interested in submitting paper copies should send or deliver their comments to the Office of Regulations and Interpretations, Employee Benefits Security Administration, Attn: Participant Fee Disclosure Project, Room N-5655, U.S. Department of Labor, 200 Constitution Avenue, NW., Washington, DC 20210.

All comments will be available to the public, without charge, online at http://www.regulations.gov and http://www.dol.gov/ebsa and at the Public Disclosure Room, N-1513, Employee Benefits Security Administration, U.S. Department of Labor, 200 Constitution Avenue, NW., Washington, DC 20210.