When You Assume…

Somewhere in the course of your professional life, you have no doubt heard (or used) the expression about what happens when you assume(1).

Well, over the past couple of weeks, I’ve heard a lot of discussion around target-date funds, most recently at the PLANADVISER National Conference (PANC). Without question, plan sponsors and participants—and perhaps not a few retirement plan advisers—were caught off-guard by the varied designs and resulting experiences of these popular investment offerings in recent months (2).

That many participants assumed these offerings were a no-maintenance solution to their retirement security is understandable, IMHO, certainly in view of how they were promoted by their manufacturers, sanctioned (from a design standpoint, anyway) by regulators, and positioned on retirement plan menus. But let’s face it, what happened in the markets last fall happened pretty much everywhere and to everyone (at least everyone who was invested in the markets).

And, while there’s no way to truly quantify this, my sense is that some of those 2010 participants who were, unfortunately, caught in that market maelstrom were nonetheless well-served in the months ahead of that downturn, and perhaps since, by having their savings invested in a truly diversified portfolio.

There remains, however, the “smoking gun” issue—what DID participant-investors “know,” and when did they know it? Or, perhaps more precisely, when SHOULD they have known it? That and, were they really given the information they needed to know it?

“To” Versus “Through”

The “to” versus “through” retirement debate—the notion of whether the target date is an end point for target-date investment or merely a point along the investing continuum—remains unresolved in target-date circles. Frankly, I have heard arguments (some better than others) on both sides, and, personally, I see no reason that informed and educated investors shouldn’t be able to make their own determination as to the approach that best suits their situation.

What troubles me—aside from the reality that offerings so different in composition, design, and intent have names that are disquietingly similar—is that the assumptions underlying the glide path are so often unarticulated.

I’m not talking about the relative mix of exotic asset classes, or the soundness of the balance of equities and fixed-income investments at the date of retirement (or decumulation), though both are impacted. No, I’m talking about the implicit assumptions these various strategies employ to develop those glide paths that purport to deliver on the promise (or premise) of adequate retirement income. Assumptions regarding the age at which investors will truly begin drawing down those savings and at what rate, and—most significantly—assumptions about the accumulation from which they will be working.

See, to me, if you’re promoting an approach that assumes that you will have a certain amount saved, you need to tell people what that amount is. Alternatively, if you are backing an approach that assumes a retirement saver won’t have what is “needed,” but hopes to shore up some of that shortfall, it seems to me that you should be upfront about that as well. IMHO, for all the focus on asset allocation as the be-all-and-end-all of the target-date debate, it’s the assumptions that underpin—or undermine—those decisions that are at the heart of the matter.

Ultimately, whether you are a plan fiduciary or a participant-investor, it seems to me that you can’t—and shouldn’t—make a target-date fund decision until you fully understand what is being assumed—and until you have matched those assumptions with the reality of your particular situation.

Because, as we all know, when you assume….

—Nevin E. Adams, JD

(1) Hard as it is for me to imagine that you haven’t heard this, the expression is “When you assume, you make an a.ss out of u AND me”.

(2) It is certainly worth noting that PLANSPONSOR/PLANADVISER is hosting a conference devoted to the subject of asset-allocated fund solutions next month. See HERE

Under New Management

Sitting in the audience at the ASPPA/DoL Speaks conference last week, I was reminded just how disruptive it can be to have a new boss.

The conference, which, IMHO, remains unique in both the quantity and quality of access to Labor Department exports, featured many panelists it has been my pleasure to meet and get to know over the past several years. However we practitioners may struggle from time to time with the regulations and interpretations these folks put together, you don’t have to spend much time with any of them to appreciate just how smart, hard-working, and dedicated they are.

Still, I can only imagine what it must have been like to have pressed (as they were surely pressed) to wrap up as much of the pending backlog of regulations in 2008. How it must have felt to see that last package—including the final regulations on investment advice—get all the way to the regulatory finish line, only to have it halted dead in its tracks (see White House Executive Order Snares Fee Disclosure, Advice Regs). And then, over a period of weeks/months, have that work rejiggered, perhaps significantly, “simply” because an election, based on factors that had nothing to do with these issues, brought in new leadership (see EBSA Sets Out Carrot, Stick Agenda).

Starting Over?

Let’s face it, even in the private sector, managers and CEOs fall out of favor all the time and new ones are brought in, along with their new ideas (and sometimes their old friends). Advisers have seen plenty of that over these past 12 tumultuous months.

But for our industry, a few things seem obvious among those “new” priorities: a continued, and probably more insistent, emphasis on transparency in fees and revenue sharing; the rebuilding of walls between advice and compensation flows that could vary based on that counsel; and greater clarity in the targeting and positioning of target-date funds. But, frankly, while we may now achieve those aims in different ways, IMHO, it is at least arguable that we were already on those paths, or would have been shortly.

Looking Ahead

That said, there is a palpable sense that the new leadership will be less employer-friendly than its predecessors, though that need not mean unfriendly. They may be less willing to accept the rationalizations of those who protest that it is too hard, or too expensive, to provide meaningful information to plan fiduciaries; and, though it’s early yet, they seem more inclined to shield, rather than simply inform, participants. Time will tell.

Change, of course, is not only inevitable, it is frequently for the good. It is nearly always, however, “disruptive” as we shift and resift priorities and focus, certainly in the short-term. However, IMHO, if there’s a more disruptive force than change in our lives, it’s uncertainty.

And, for better or worse, I’m betting that this new Administration won’t leave us guessing for long.

—Nevin E. Adams, JD

Domino Theories

If you want to get a quick sense of just how fast time flies, consider that it was only a year ago this week that Lehman Brothers filed for bankruptcy—the same day that Bank of America announced its plans to acquire Merrill Lynch, and a day on which, not surprisingly, the Dow Jones Industrial Average closed down just over 500 points. That, in turn, was just a day before the Fed authorized an $85 billion loan to AIG—and that on the same day that the net asset value of shares in the Reserve Primary Money Fund “broke the buck.” This was made all the more surreal because it was going on while we—and several hundred advisers—were in the middle of our PLANADVISER National Conference.

Let’s face it—no matter how busy or hectic your week has been, I’m betting it’s been a walk in the park compared to those times.

The funny thing is, looking back (and armed with the prism of 20/20 hindsight), there were lots of signs of the trouble that eventually cascaded like a set of dominos, resetting not only the structures of the financial services industry, but disrupting the businesses and lives of thousands (if not tens of thousands) of advisers, not to mention the retirement plans of millions of workers worldwide.

The question that many of us have been asking ourselves (or perhaps been asked by our clients) these past 12 months is—why didn’t we do something about it?

Now, doubtless, some of you did. And those of you who didn’t can hardly—IMHO—be faulted for not fully appreciating the breadth, and severity, of the financial crisis we “suddenly” found ourselves confronted with. Still, having lived through a number of other “bubbles” during the course of my career, “afterwards” I’m always wondering why so many wait so long—generally too long—to get out of the way.

“Way” Laid?

Greed explains some of it: As human beings, we may later disparage the motives of those that, with leverage and avarice, press markets to unsustainable heights (from which they inevitably fall)—though we are frequently willing to go along for the ride. Some may be explained by human proclivity to stay with the pack, even when it seems destined for trouble, and some surely by nothing more than an inability to recognize the portents that precede the coming fall. When it comes to retirement plan participants, mere inertia surely accounts for most, though some are doubtless waylaid by bad, or inattentive, counsel.

There is, of course, a behavioral finance theory called “prospect theory,” that claims that human beings value gains and losses differently; that we are more afraid of loss than optimistic about gain. An extension of that theory, the “disposition effect,” claims to explain our tendency to hold on to losing investments too long: to avoid acknowledging our investing mistakes by actually selling them. It is, IMHO, an attribute rationalized every time someone says that the losses in our portfolios are “unrealized.” Unfortunately for investors planning for their retirement, unrealized and unreal are NOT the same thing.(1)

We all know that markets move up AND down, of course, and we must do the things we do without the benefit of a crystal clear view of what lies just over the horizon. That said, as we approach the anniversary of the 2008 tumult, it seems a good time to ask: Are you looking out for trouble—as well as opportunity?

—Nevin E. Adams, JD

(1) That said, the markets have, in recent months, recovered a lot of ground. The S&P 500 index is up more than 50%—if one looks back only to its March 2009 lows. On the other hand, that index is still down a third from its 2007 peak, still 20% lower than it was a year ago. Recovery takes a long time.