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.