Somebody’s Got To Pay

Much has been made in recent weeks over the so-called Ponzi scheme foisted on the investing public by Bernie Madoff. The classic elements are all there: the promise of future returns that are, in reality, fueled by new investors lured by the promise of future returns that are…well, you know. Of course, the perpetrators of these schemes manage along the way to siphon off their cut from the flow of funds. Human beings fall prey to such schemes all the time, and for a variety of reasons: gullibility, greed, and sometimes a simple willingness to trust the wrong people. Madoff, whose role in worsening the current economic crisis is still surely underappreciated, managed to play on those tendencies better and for longer than most.

We’ve already seen some $350 billion worth of government bailout absorbed by the system like so much water into a thirsty sponge. And, since that didn’t work, the answer apparently is to double down—and then some. Which, IMHO, calls to mind a comment candidate Obama made during the campaign about the definition of insanity….(1)

Now, in fairness, the new spending isn’t being sent in the same direction as the last bailout (or whatever euphemism you’re most comfortable using). Of course, as far as I can tell, that first package (which by most accounts was strongly influenced, if not architected, by the new Secretary of the Treasury) didn’t wind up going in the direction(s) we were told it would—and while we were told that the government needed discretion to administer the funds where it best saw fit, most Americans probably didn’t think that meant it would wind up funding big corporate takeovers and massive golden parachutes. Ultimately—let’s face it—the bill was really about helping financial institutions stay in business, and, once that money was in hand, many proceeded to do just that.

On the other hand, if that first package was ill-approved in haste, the second wave approved by the U.S. House last week was, in almost every respect, IMHO, a slap in the face of American taxpayers. You don’t have to have (or win) the argument about whether infrastructure spending is truly stimulative to the economy or just a necessary investment to realize that much of what the members of Congress (at least the ones who voted for this monstrosity) apparently want us to pay for is—their reelection.

Something’s “Fishy”

What seems to be lost in the furor over needing to DO something—and we’re all surely anxious for things to get better—is that the federal government doesn’t have its own bank account. And for all the talk of the burden we’re leaving our grandchildren, there is a fiscal reality coming, and probably sooner than that. We all know this at some level—just as we all knew that that housing bubble was going to burst eventually, that those paper business plans couldn’t possibly justify that kind of market valuation for technology start-ups, and that there had to be something fishy about how Enron was reporting its revenues.

In sum, we all know this is wrong, if not criminally stupid. Maybe we’re not quite sure what to do, and perhaps we’ve been hopeful that wiser minds than ours can figure something out. However, if this is the best they can do—well, then, IMHO, it’s time to take away their ATM card—which, lest we forget, is wired to OUR bank accounts.

Now, in this, as in life generally, it’s relatively easy to sit on the sidelines and criticize those who don’t have that option. This is the time, even if you’ve never felt the urge before, to weigh in with those making decisions that will affect your job, your investments, your retirement….

Before it’s too late….because, sooner or later, somebody has to pay.

—Nevin E. Adams, JD

(1) He quoted Albert Einstein who noted that doing the same thing over and over again and expecting a different result was the definition of insanity.

Executive "Order"

Those who had been waiting anxiously (or nervously) for that final wave of regulations from the Department of Labor will have (get?) to wait a bit longer, it appears.

Just hours after the inauguration of President Barack Obama, White House Chief of Staff Rahm Emanuel issued a memorandum ordering a temporary moratorium on any regulations set to be published in the Federal Register “until it has been reviewed and approved by a department or agency head appointed or designated by the President after noon on January 20, 2009.” (see White House Executive Order Snares Fee Disclosure, Advice Regs ).

That “snared” pending DoL proposed directives requiring service providers to disclose “fees, compensation, and conflicts of interest” to fiduciaries of 401(k) and other benefit plans (see “EBSA Puts Out Provider Fee Disclosure Proposal” ), as well as a fee disclosure regulation for participant-directed individual account plans, which Labor had published in proposed form last July (see “EBSA Finishes Regulatory Package with Participant Disclosure Proposal”). Not directly impacted perhaps, but a near certainty to be influenced by the shift in control will be the recent finalization of rules regarding participant advice under the Pension Protection Act (see DoL Finalizes Rules on Investment Advice).

Now, it’s not unusual for an incoming administration to issue this kind of directive, and, frankly, it’s common sense. After all, if it’s waited until the final weeks of a presidential term to be put into law, why wouldn’t an incoming administration want at least a chance to make sure it fits with their agenda (more ominously, it’s not as though outgoing administrations haven’t been known to create problems/mischief for the next set via the implementation of last-minute regulations).

Having said that, there are some important issues and policies behind these rules – fee disclosure and participant advice – and a period of extended uncertainty likely won’t serve anyone’s interests. On the other hand, it’s not like these issues – and potential solutions – won’t be a focus for the new Congress and Administration. It is, however, unlikely, IMHO, that they will present the same solutions contemplated in the still nascent regulations.

“Safe” to Say?

I think it’s safe to say that we can expect a push for even more fee disclosure – and not just to plan sponsors. Plan sponsors certainly need more information about the fees and expenses associated with their programs, and they could use some help in getting those answers more readily than they do at present. On the other hand, the proposed regulations were hardly a panacea for the problem. IMHO, they were at best a practical response to the realities of the marketplace as DoL understood them at the time. Anyone who thought those were going to provide a completely consistent, transparent, and readily readable presentation of that information simply wasn’t paying attention. But it was a start.

Ditto participant fee disclosure. Setting aside for a moment the issue of whether participants want or will use that much information, IMHO, the regulations proposed would, in all likelihood, probably serve to obfuscate, not clarify the situation – and they would do so at an enormous cost to the system (and to the participants who pay for much of that system). Should participants be able to figure out what their 401(k) accounts cost? Absolutely. Would the proposed solution accomplish that? Probably not - but don’t blame the regulators. Trying to unravel the web of offsets, breakpoints, and revenue-sharing challenges the best of us. Let’s face it: It is a system designed to make it easy to get paid, not to make it easy to understand what is being paid. Still, however onerous the proposed solution was, the clear sense at the time from those in the party now in power was that it didn’t go far enough. Let’s hope the medicine isn’t worse than the disease.

As for participant advice – well, IMHO, it’s something of a miracle that the fiduciary adviser concept made it into the Pension Protection Act in the first place, much less into law. But it did, and Congress – including some members who now so adamantly oppose the concept – had a hand in its passage. You can hardly fault Labor for doing what the PPA mandated it to do (craft regulations regarding how that process was to take place and be overseen) – but you have to understand that there are powerful forces in Congress now who want very much to nip that “mistake” in the bud. I would be surprised if they were not successful in doing so, one way or the other.

Elections matter, after all – and matter they should – though sometimes they matter in unanticipated ways. Ironically, it is easier now to anticipate how the solutions of the new Administration will manifest themselves than it is to estimate when they will emerge, or when their accommodation will be required.

But change is coming, make no mistake – change that will be different, and perhaps “harsher,” than the change previously anticipated. Change that, even then, IMHO, might serve to make things better. Or not.

We’ll see.

- Nevin E. Adams, JD

Lest one think that my trepidations are limited to the future proposals, see:

IMHO: Irreconcilable Differences

IMHO: No One (Else) To Blame

IMHO: “Know” Way

“Focus” Group

A couple of weeks back, I got an e-mail from Robert Powell, who writes on personal finance for MarketWatch, and he asked an interesting question: specifically, what, in my opinion, were the top five retirement priorities that the Obama Administration should focus on?

Now, that’s a more complicated question than you might think at first glance. For instance, if you were to ask me what ONE thing should be dealt with, I could probably pull something hugely critical out of the air. Not that it wouldn’t be hard to come up with just one thing—but there’s a certain clarity to that process. However, once you get going, it’s harder than one might think to keep the list to five. Furthermore, there are LOTS of little things that you know would make the system better, but if you can only come up with five—and five for presidential-level involvement, no less—well, you also tend to focus on the big picture.

In any event, here’s my list:

(1) Focus on expanding coverage with the ACTIVE involvement of employers.
Everybody realizes that it is a problem that only about half of working Americans have access to a workplace retirement savings plan, and candidate Obama has talked about a mandatory payroll IRA. However, in my experience, while that may make it easier for more workers to save (they would be auto-enrolled, but could opt out), it still will be problematic for the employer to set that up for all workers, only to dump them in a retail-priced IRA. That's better than a poke in the eye with a sharp stick, but they'd be MUCH better served, IMHO, by getting the benefits of institutional pricing/fiduciary oversight that come with an employer-sponsored program.

Additionally, I think the creation of these alternatives to workplace programs will encourage employers that currently offer these plans to "step aside"—and let the government-sanctioned approach take over.

By the way—getting employers involved will mean that the government will need to spend some time understanding why more employers don't offer these programs, and it will mean that they have to understand that there is a difference between making it easIER to offer these plans, and making it truly EASY to do so. How about an “auto-enrollment” program that also makes it easy for plan sponsors to do the right thing?

(2) Shore up Social Security.

It's not only the third leg of that vaunted three-legged stool, it now represents about half of most retirees’ income (the shocking thing is how little income it is for that percentage). The future solution, whatever it is, needs to be based on a solid foundation. This is the place to start.

(3) Establish some kind of national retirement policy.

Pensions were never as widely available, or as "lucrative," as people sometimes mythologize them, certainly not in the private sector. As for 401(k)s, they were never designed to provide a single—or even a primary—source of retirement income. Social Security has "morphed" well beyond its original design and no longer accurately reflects the demographic realities of the nation. Let’s admit it: The “three-legged stool” is a rationalization, not a reality.

We need a plan—a blueprint, a roadmap—rather than the "necessity is the mother of invention" approach we have stumbled along with these past 50 years. I find it ironic that we regularly disparage participants for not developing a plan for retirement financing—when we, as a society, suffer from the same “it will work out somehow” perspective.

That plan needs to articulate what we as a nation expect our obligations—both personally, and as a society—to be. But, whatever plan we develop may—and should, IMHO—need to consider different solutions for varying generations of our society. Social Security may well have to be the primary solution for those over 55, but why should we limit ourselves to that for someone who has just entered the workforce?

(4) Help the free market fix health-care costs.

Several studies have documented the impact of health-care costs on retirement savings. Personally, I don't think a government-based solution fixes the “cost” problem, and it may well "break" the access those with health insurance currently enjoy. But you don't want people to have to drain their retirement savings for one extended stay in the hospital.

(5) Imbed financial education in the elementary school curriculum—and further.

As the father of three, I can tell you that, if kids were exposed to even half as much education about finances and the markets as they are classes on drugs and sex education, we'd all be much better served—and much better prepared to take responsibility for our financial futures, both pre- and post-retirement.

And, ultimately, isn’t that the soundest solution of all?

—Nevin E. Adams, JD

The MarketWatch column (I wasn't the only expert to contribute) is online HERE

“Broken” Record

A few decades ago, I suffered a nasty skiing accident. I was “bored” (the course was, overall, beneath even my modest skill levels), it was late in the afternoon, and—as humans are sometimes wont to do—I found myself trying to make the course more challenging by doing something stupid. Actually, by doing something stupid three times (which, by some definition, is doing something really stupid)—when “fate” intervened and kept me from breaking my neck…by breaking my leg.

It was a difficult lesson to learn (more accurately, it was a difficult way to learn the lesson); I spent the next six months in the middle of a Chicago winter in a cast—much of it in a cast that encased my entire leg, which also happened to be the leg you need to drive.

I learned a lot as a result of that experience—but one thing that never, even for a second, occurred to me was to blame the icy slope, the skis, or the tree I slammed into, though all surely played a significant role in the final result (…perhaps if I had been a lawyer, rather than a law student, at the time…).

Failing “Grades”

There’s been a lot of press devoted lately to the “failure” of the 401(k)—even though, IMHO, like my skis, it hasn’t done anything other than perform as advertised: In fact, it has provided millions of working Americans with a wonderful opportunity and incentive to provide for their own financial future.

It is, of course, that very opportunity that makes the current economic “crisis” so much more painful. Even those Americans not in fear of losing their jobs feel poorer—feel, and rightly so, IMHO, that they have been robbed.

However, it is not the 401(k) that has robbed them. Their 401(k), in a crude analogy, is no more at fault than were my skis (though there were surely some who, like I, were taking foolish risks late in the day). The real culprits are to be found in greedy mortgage lenders, pliable mortgage takers, opportunistic securitizers, and a facilitative government (see “IMHO: Pay “Back”?” ). And, as painful as those losses surely have been, and however much money has been lost in an individual account, I’m pretty sure no one has yet lost everything they ever put in, much less the “cushion” of the employer match. Compare that with Social Security—will you ever get back what was taken from your pay over a lifetime of working (odds are, you’ll also pay taxes on money that has already been taxed)? Let’s face it: Social Security isn’t immune from the economy, or the markets—it’s just that the problem seems like someone else’s to fix (and we know how they’ll fix it, sooner or later).

Let’s be frank: The 401(k) has provided millions of Americans with their first—and only—education about the markets and concepts like tax deferral and the value of compound interest. It has provided an interim source of funds in times of financial stress, and it has provided many with their first—and only—opportunity to invest in our great capital markets. Indeed, each and every 401(k) balance literally represents a conscious decision to forgo compensation in the here-and-now for the security it can (and must) provide in the future. It is a character trait and discipline that Americans are said to lack—and yet, the 401(k)’s tremendous success puts the lie to that conclusion.

Its benefits to the most highly compensated are negligible, barely enough to sustain their ongoing commitment to sponsoring these programs, while it offers those of more modest means a convenient, efficient way to take responsibility for their own financial future.

The bottom line is that, IMHO, the 401(k) has been a marvelous success: It’s a venue where millions of Americans who save nowhere else—and who would save nowhere else—choose to do so, and they do so because it is a system that encourages and nurtures that behavior—both financially and via education.

It is not the only answer to true financial security in retirement—but then, it was never meant to be.

—Nevin E. Adams, JD

Trend Spotting

Here’s a headline you won’t see this week: “Nobody Cut Their 401(k) Match Today.”

That’s right, even though there is a very good chance that it will be an accurate statement on just about every day, I’m betting it won’t even make its way into the business briefs section, much less a newspaper headline.

Not that employers aren’t making decisions to cut back on, or even suspend, their 401(k) match. On the other hand, you don’t have much trouble keeping up with that activity. Regardless of plan size or industry, these days, pretty much any plan that takes that step can count on making headlines—and every article beneath those headlines spends at least a sentence or two recounting the latest list of 401(k) match casualties.

Even in our publications, sadly. Let’s face it, it’s “news.”

With such incessant coverage, it’s hard to shake a sense that we have the makings of a trend—particularly for plan sponsors. Indeed, for employers looking for some respite in one of the more challenging economic times in memory, such coverage surely plants at least the seed of doubt about the necessity of the financial obligations attendant with such commitments.

Those developments notwithstanding, I’m pretty sure that, when it comes to their matching contributions, the vast majority of the tens of thousands of employers that offer 401(k) plans will make them in 2009 at the same level they did in 2008—and as they did in 2007, though you may never see a headline to that effect (a rare exception: “Most Employers Don't Plan to Reduce Contributions”).

That said, I’m not altogether sure where one crosses the line between a series of related occurrences and “a trend”—when the tipping point is reached, the Rubicon crossed….

What I do know is that we are still at a point where the decision to suspend a 401(k) match is “news.” And I dread the day—should it ever come—when it isn’t.

- Nevin E. Adams, JD

See also “IMHO: ‘Out of’ Practice” at