IMHO: Change of “Hearth”

We made a provider change last week.

We really hadn’t been focused on making a change, though the subject had come up from time to time. In fact, considering how long we had been thinking about making a change without actually doing anything about it, the change itself felt almost accidental in its suddenness. So sudden, in fact, that, in hindsight, I found myself wondering if we were “hasty”—perhaps too hasty.

Make no mistake—we had been happy enough with our current provider, certainly at first. In fact, we had been with them for a number of years and had, over time, expanded that relationship to include a fully bundled package of services. That made certain aspects simpler, of course—though we discovered pretty quickly that the “bundle” presented more seamlessly than it actually was delivered. Still, net/net, we were ahead of the game financially, and certainly no worse on the delivery side; we were just a bit disappointed in the disconnect between the sale and the service levels.

And all was fine for a while—or so it seemed. Looking back, there were signs of trouble that we could have seen—if we had been looking. There were unexpected charges on the invoices, and services that we were sure had been described as being part of the bundle that turned out not to be. There was the monitoring service that was supposed to be in place that we found out wasn’t—quite by accident, and months later. Over time we cut back on the services included, but the prices just kept going up. We were, quite simply, getting less and paying more, and getting less than we thought we were paying for. And it grated on us.

In hindsight, I wish we had been more vocal about our discontent. That we had called up and questioned those invoice charges. But, in the overall scheme of things, the charges weren’t large, just not what we expected. We figured that perhaps we had been the ones to misunderstand—and didn’t want to look “stupid” by calling to complain about a charge that some fine print in some document somewhere said was perfectly legitimate. Meaning always to go check that out sometime, the time to do so never materialized. Instead, we talked about how aggravating it was—and how we should do something about it…sometime.

Unfortunately, change is painful and time-consuming. The emotional and fiscal toll these changes took, while annoying, simply wasn’t enough to put change at the top of the to-do list. So, we talked about a change—and every so often asked friends and acquaintances about their experience(s). Of course, it was hard to find someone else who was in exactly the same situation—and a surprising number simply empathized with our plight, being stuck in much the same situation themselves. All of which conveyed—to us, anyway—a sense that, uncomfortable as we might be with the service package, we were probably about as well-positioned as we could be.

Then, one day, out of the blue, an opportunity presented itself. We weren’t looking for it, as I said earlier, but the months of frustration left us open to a casual message from an enterprising salesman—who not only knew his product, he clearly knew the problems that others like us had with the provider we were with. He did more than empathize with our situation. He did not pump me for information about what I was looking for, or what I didn’t like about my current situation. Rather, he was able to speak about the features/benefits that his firm offered…and, to my ears anyway, essentially ran through the list of concerns I had—but had not articulated—with our current situation. In fact, before our conversation was done, he had pointed out to me things that his firm offered as a matter of course that my current provider hadn’t even mentioned to me in all the years we had been associated—things I had assumed we couldn’t get, or couldn’t get without paying a lot more.

We made the change this past weekend—and while it’s early yet, I’m thrilled with the results.

Now, I realize I never gave my current provider the option of retaining my business. Moreover, I know that, had I simply made a call to tell them about the package/price we were getting from the new provider, they would have matched, if not bettered, the deal. Ironically, both points were made—and made somewhat obnoxiously, IMHO—when we called to tell our former provider about their change in status (ironically, by being a jerk about the whole thing, it only served to affirm our decision).

Ultimately, our former provider set themselves up by taking our business for granted, for (apparently) caring more about attracting new customers than in attending to our concerns, and for (apparently) assuming that “quiet” meant satisfied.

Are YOUR customers happy, content, and “quiet”? Or have they just quit complaining?

—Nevin E. Adams, JD

Editor’s Note: For the record, the provider change recounted above involves my cable company.

Conference 'Calls'

As I was listening to, and participating in, panels at our Future of Asset Allocated Funds conference in California this past week, I was struck again by how much things have changed in the past year.

For example, at this conference a year ago, when we broached the notion of marrying a risk-based approach with a target-date offering, the general feeling seemed to be that that would be tantamount to taking a perfectly good, clean, and simple concept—and ruining it. This year, the room was not only ready for the idea, there was widespread enthusiasm for it.

Similarly, a year ago, when we asked folks about the wisdom of putting a family of risk-based and date-based funds on the same retirement plan menu, well, the consensus would have been that you would be playing with fire in terms of confusing participants. This year, the notion not only seemed to be that it could be managed—but that it would be a real enhancement to the program.

A year ago, the importance of understanding and being able to benchmark the glide path of a target-fund family was front and center, and the “debate” was all about how much of that 2010 fund should be in stocks. This year, that allocation discussion had “evolved” - into a vigorous debate around whether those glide paths were—or should be—designed to take participants “to” or “through” the stated target date (see “IMHO: When You Assume…” ).

What Plan Sponsors Want

Considering what has transpired over the past 12 months, it’s hardly surprising, IMHO, that we’ve all got a somewhat different perspective. And, when PLANSPONSOR’s annual Defined Contribution Survey is published next month, you’ll see further evidence—strong majorities (among thousands of plan sponsors) expressing an interest in getting more detailed descriptions of glide path AND end date, a greater explanation of underlying funds and asset classes, and a clearer explanation of fund expenses.

You’ll also see a surprisingly robust minority continuing to express doubt that the target-date option available through their recordkeeper is the “most appropriate.” Despite that, I also found it interesting that very few (at least by show of hands) in last week’s audience were enthusiastic about the prospect of a government/regulator-imposed target-date “standard” for these vehicles.

One thing that wasn’t in evidence at our conference: a sense that plan sponsors were giving up on the asset-allocation solutions, or a sense that participants are any better equipped to deal with those investment decisions now than they have ever been. If anything, the events of the past several months seem to have engendered a sense that professionally managed investment solutions are more important than ever. Indeed, the clear sense of those in attendance was that, while some participants may have been surprised—perhaps shocked—at what the market’s slide did to the “target” investments of those nearing retirement, most were still better off in those “one-size-fits-most” vehicles than if they had been left to their own investment devices.

That said, there was a clear sense among those in attendance that participants needed more than just to be “dumped” in a solution, even if it was one “good enough’ to provide qualified default investment alternative (QDIA) protection.

There was, IMHO, a strong sense that there was benefit in an asset-allocated solution that took the individual into account, one that was willing to provide the participant-investor with the opportunity to understand what they were getting into, and to be able to make a conscientious choice about how, and when—and yes, perhaps even “if”—to get out.


- Nevin E. Adams, JD



See also “End” Points?

12 Things You need to Know about Target Date Funds

"Myth" Information

Recently, Time magazine ran a story called “Why It's Time to Retire the 401(k).” For the most part, the article was little more than a tired rehash of criticisms that continue to be trucked out with disappointing regularity by those who, IMHO, should, by now, know better.

Here’s my take on five “myths” that keep being told about the 401(k).

You can’t save enough to retire on in a 401k.

I’ll concede that when one looks at the “average” 401(k) balance today, it’s hard to imagine how anyone could live out the year, much less retirement, on that sum (1). Even if you look at the average balance of a near-retiree (rather than an average that includes the accounts of 25-year old savers), it’s hard to see how most could live for another 20 years on that balance.

That said, there’s a difference between saying you can’t save enough and you haven’t saved enough (2). Every situation is unique, but ultimately, a voluntary savings system “suffers” from the reality that it is voluntary. That isn’t the fault of the 401(k), however—a design that basically allows workers to defer taking (probably spending) and being taxed on pay today as they prudently set it aside for retirement. Of course, we all know the 401(k) was never designed to be the sole source of retirement income (even its critics acknowledge that). IMHO, those, like the authors of that recent Time article, who want to “retire” the 401(k) because it isn’t ready to carry a load it wasn’t designed to do are ignoring the critical role it is playing—and will play—in making a more financially secure retirement possible for millions. They might just as well fault the design of a car that fails to reach its destination because the driver refused to fill the tank.

It’s a tax dodge for executives.

One of the most pervasive arguments of 401(k) critics is that the plans are little more than a tax-sheltering scheme for the very highly paid, one into which only they can afford to contribute to the maximum amounts the IRS permits for the plan.

Now, it is true that higher-compensated individuals generally do have more disposable income, and thus they are significantly more likely to hit those caps. It is also true that those who are paying income taxes do benefit more from a system that provides for a deferral of those taxes, and those with higher incomes (who pay higher tax rates) benefit even more.

On the other hand, as tax dodges go, the 401(k) is a pretty inefficient way to go, IMHO. Those higher-paid deferrals are hemmed in by discrimination tests, limits on considered compensation, and a hard cap on the annual amount that can actually be deferred into these programs on a pre-tax basis, in addition to maximum annual additions. So, take a second; add up how much (little) can actually be deferred into these programs by those executives. Then, compare that to the base pay of folks who qualify as “highly compensated” (which, in many areas of the country, is all-too middle-income)—and think about what they’ll be trying to replace (at least in part) with the $16,500 (plus match and maybe another $5,500 if they’re old enough to qualify for catch-up).

And then, hope that they don’t do that same math, and figure that there are better ways to spend company resources than in keeping up with a 401(k).

Employers have pushed 401(k)s on workers in place of pensions.

First off, pensions were never as ubiquitous as described in some media accounts (something less than half of private sector workers were covered, even at the peak of their popularity), and even where pensions did exist, the service/vesting requirements (coupled with the tenure typical in most private industries) meant that many workers in the private sector never got as much from those programs as one might think/hope (see . Retirees With Pension Income and Characteristics of Their Former Job)—or, more accurately, as they might have if they had actually worked 30 years for the same company.

That’s not to say, or course, that some workers didn’t—nor does that mean that some of today’s retirees haven’t enjoyed a much more financially secure retirement because they had a pension (certainly in the public sector). But the data suggest that those situations are rarer than we’ve been led to believe by some of today’s wistful news coverage (the data also suggest that the median private-sector pensioner is getting less than $10,000/year from that pension).

Certainly, there have been financial reasons for employers to prefer the relative financial obligation certainty and control associated with a defined contribution approach compared with a defined benefit plan. Moreover, recent changes in accounting rules and regulatory requirements have largely served to discourage the perpetuation of DB plans in the private sector, and have done nothing to spawn the introduction of new programs.

That said, this is not just a corporate decision. I have spent more than a quarter century in this business watching private-sector workers (including myself) “walk away” from pensions. Why? Well, because people make employment decisions for many other compelling reasons. And frankly, even if you have a pension and get a statement that tells you how much that pension is worth, until you have accumulated a couple of decades worth of service (and most don’t), the present value of that benefit is—well, let’s just say it’s not an attention-grabber.

Could we do things to change that? Sure. In fact, I wish we would (unfortunately, we’ll need some help from Congress). But make no mistake: Employers have found it increasingly difficult to offer traditional pension benefits—and IMHO, many, perhaps most, of their workers seem to prefer the 401(k).

401(k)s have been used to shift retirement costs to workers.

In a world where we all once had employer-paid-for pensions that have now been replaced by 401(k)s, this might at least be one way to think about it (see above, however).

On the other hand, if you look at the longstanding pre-401(k) estimates on plan expenses, you’ll find that the general rule was 70% of the expenses were investment related, 20% were attributed to recordkeeping, and the remaining 10% went to things like trustee/custodian, legal, and other administrative matters. And at that point in time, employers frequently wrote a check for everything but the investment fees—which were then, as they are now, largely netted against earnings. These days, it’s not uncommon for the “investment” fees to be the only explicit expense of the 401(k), leading commentators and critics alike to bemoan the “shift” of 100% of the plan fees to participants.

But most defined contribution/401(k) plan participants have always paid 100% of the fund expenses, which, even 30 years ago, typically included administrative expenses, 12(b)-1 fees, and sub-TA expenses (and yes, trading expenses of the fund)—even when the employer was also paying separately for recordkeeping and those other expenses. What has changed is not how much participants are paying (or how they are paying it), but rather how much employers pay. Now, you can certainly argue that the system has worked to reduce employer expenses, but to my eye, participants are still paying what they always paid. It’s just that, these days, the fund company doesn’t keep it all.

401(k)s are dangerous.

The Time article did break some new “can you believe they said that” ground when the author said, “Saving more, another common prescription for fixing the 401(k), has its downside too. That's because of another unpleasant quirk of the 401(k), which was mentioned earlier: the older you are, the riskier a 401(k) gets.”

Huh? What possible correlation could age have with risk? The author “explains” it this way: “In what must seem like a cruel joke to many, the accounts proved the most dangerous for those closest to retirement. During the market downturn, the 401(k)s of 55-to-65-year-olds lost a quarter more than those of their 35-to-45-year-old colleagues. That's because in your early years, your 401(k)'s growth is driven mostly by contributions.”

No, that’s because, in your early years, your 401(k) mostly IS your contributions. Now, if you look at a recent study by the Employee Benefit Research Institute (EBRI) (see “The Impact of the Recent Financial Crisis on 401(k) Account Balances”), you will find some “support” for the author’s position. What you won’t find in the Time article, but will find in the same EBRI analysis, is the following comment: “At a 5 percent equity rate-of-return assumption, those with longest tenure with their current employer would need nearly two years at the median to recover, but approximately five years at the 90th percentile.” Now, that’s not tremendously good news if your retirement savings got caught in the downdraft of the worst market downturn in recent memory just as you were heading into retirement. But it also suggests that recovery is not only possible, it’s likely—specifically if you fill some of that gap by continued, and perhaps increased, savings. Consider also that much of the account “heights” from which we’re now recovering were a result of that same market exposure. What remains critical is that we approach retirement with an eye toward preservation of those gains. Not doing so is like setting your car’s cruise control—and then taking your hands off the steering wheel on a winding road.

Speed without direction is—always—dangerous.

Sort of like believing that myths are reality.

—Nevin E. Adams, JD


(1) those “average” 401(k) balances also don’t include the accumulated balances from other 401(k) plans that workers roll into IRAs.

(2) there remains a heated debate about just how much people need to save in order to retire – see “Scare Tactics”

12 Things You Should Know About Asset-Allocation Funds

Asset-allocation fund solutions have, to put it mildly, exploded on the retirement plan scene—aided in no small measure by the sanction of the Department of Labor’s final regulations regarding qualified default investment alternatives (QDIA). However, the recent market turmoil has drawn a fresh, heightened scrutiny to the philosophy and structure of these popular defined contribution choices and, certainly for plan sponsors, reminded us all that there are differences—significant differences, in fact—in how these vehicles are constructed, how they are managed, and even the philosophies underpinning those designs.

Now, the “right” answer for your program will, in many respects, be unique to your program. On the other hand, there are certain basic questions that plan sponsors should know the answers to in choosing an asset-allocation solution.

Getting Started

1. Are we talking about lifestyle or lifecycle funds?

The terms are used interchangeably all too often. However, funds that structure their allocation based on an individual’s risk tolerance (risk-based) are generally called lifestyle funds. Those that base that allocation on a specific future date (date-based) are referred to as lifecycle funds or, more broadly, target-date funds. While the latter was more prominently cited in the DoL QDIA regulations, a properly structured risk-based fund could work as well—and has seemed to enjoy a much greater receptivity in the marketplace even before those regulations (see #2 below for at least part of the reason). Some plans have both on their plan menu, but that can complicate plan communications. On the other hand, IMHO, risk is going to loom larger on people’s minds going forward.

2. Is a risk tolerance questionnaire part of the process?

In my experience, no matter how short and “approachable” the process of ascertaining a participant’s tolerance for risk, it is never going to be something that is comfortable for most. Still, if you are employing a risk-based solution, you have to have something to base that tolerance on—and you should make sure how comfortable you are with that process/document. Additionally, today there are several risk-based target-date offerings that combine both approaches. I’ve tended to be skeptical about these—IMHO, many still focus more on the risks of losing money than the risks of not having enough money to live on--but, short of imposing some kind of generic sense of tolerance, you have to have some means of assessing comfort with risk if you are going to employ a risk-based alternative.

3. What kinds of history/benchmarks are available?

Just a couple of years ago, there were no benchmarks to speak of in this space (other than those constructed by the firms managing those funds, and those were often composites). Of course, just a couple of years ago, there were not enough funds in this space with enough history to make for a meaningful evaluation. However, time has provided the history many funds were lacking (granted, many would just as soon not have that fourth quarter 2008 result included)—and a new generation of benchmarks and indexes has emerged along with the explosion in these funds. But take note: The benchmarks today are as varied in their underlying philosophy and construction as are the funds themselves. IMHO, you need to first know what you believe about the approach, glide paths, and/or asset allocation before you pick the benchmark.

Fund Construction

4. Are the funds composed of proprietary offerings, or are they “open architecture”?

The “debate” over the relative advantages of open architecture versus proprietary offerings has long been part of retirement plan administration choices, and it is part of the target-date decision as well. Those advocating the benefits of open architecture generally tout the ability to pick “best of breed” investment solutions (while readily being able to dump those that fall short), backed by the notion that no one firm can possibly be that best choice across every asset class. Those pushing proprietary choices take issue with that latter point, while pointing to the benefits of their intimate knowledge of their own product set—not to mention the relative cost efficiencies of a proprietary product. There is no right answer, but the determination should be part of your evaluation.

5. What IS an appropriate asset allocation?

This is the million-dollar question for target-date funds these days. At a high level, this is no more complicated than deciding what is the right mix of stocks and bonds, international and domestic, alternative investments and/or cash for investors at every stage of their investing life—or than picking the firm(s) that you trust to know what that right mix is.

6. How much of what is on your glide path?

The “glide path” sounds like a complicated concept, but it is actually nothing more than how the shifts in asset allocation take place over time. It is the path that these investments take your money on throughout your investing life. Still, for some funds—particularly newer, smaller funds—the asset-allocation strategies outlined in the fund prospectus or fact sheet may still be “aspirational,” may not yet incorporate all the specific strategies that the fund manager has in mind for that time in the future when the funds achieve a certain critical mass. You need to know what the targets are—and know if those targets are part of the current strategy.

Fees

7. Do the funds have a fee “wrapper” in addition to the underlying fund charges?

Particularly when a provider incorporates other funds in their offerings, they frequently charge some kind of fee for their expertise in putting together those other funds. This is a fee generally applied as some kind of basis-point charge in addition to the other, regular fees charged by the underlying funds. You will want to know what this charge is, if any, and consider it as part of the total cost of your selection. This fee is generally smaller (sometimes there is no extra charge) for proprietary-only offerings.

8. What are the fees charged by the funds?

Beyond the aforementioned “wrapper” fee, these funds will have all the same kinds of fees typically associated with retirement plan investments. Bear in mind that some of the fund allocations may include some relatively exotic asset classes—and those may carry higher expenses than you are accustomed to seeing. Additionally, you may find some retail share class funds included, even in institutional share class offerings. The bottom line: Keep an eye on the bottom line.

Plan Design

9. Does it fit your investment policy statement?

Most (though not all) retirement plans have an investment policy statement—that essential blueprint for monitoring and managing the investments you make available on your plan menu, set alongside the objectives you have established for your program. However, the blueprint you set out for your plan investments before you introduced an asset-allocation solution may not take their unique contributions—or considerations—into account.

10. How many “life” options are available on the recordkeeper’s platform?
For many plan sponsors and advisers today, there is a harsh reality at the end of the due diligence rainbow—a limited number of asset-allocation options available on your recordkeeper’s platform. In fact, it was not that many years ago that most plan sponsors could only pick from a single option. Limited choices may seem to make the decision easier, but these offerings are not identical, and you and your plan will be better served if you are able to evaluate and choose from a variety of options.

11. They can be misused.

No matter how hard we try to make these types of solutions “idiot proof”—well, let’s just say that you should take nothing for granted. Odds are that automatically enrolled participants defaulted into a QDIA will not fall prey to such mistakes. But, after years of being counseled that they should not “put all their eggs in one basket,” well-meaning participants have been known to try and split their investments across more than one asset-allocation solution. Fortunately, many recordkeepers today can apply system edits to prevent (or at least warn about) such missteps—and advisers also can certainly play a role in this education.

12. Should everyone who retires in 2020 (or 2010, or 2030, etc.) have the same asset allocation?

The simple answer to that question is, probably not. On the other hand, as an alternative that can broadly and efficiently address perhaps the most daunting participant savings obstacle, it is hard to think of a better solution. That is not to say, however, that this solution cannot, with the engagement and involvement of plan fiduciaries, be made even better.

—Nevin E. Adams, JD
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A SunAmerica Opinion

I am admittedly something of a pension (and regulatory) geek, but when the SunAmerica Opinion was published (December 2001), it was clear that something big had just happened.

Not only did the Labor Department sanction an arrangement that, for the first time, allowed an investment management firm to offer advice on its own funds and be paid for that advice—even if that advice impacted the compensation received—it made the effort to make that decision public; IMHO, signaling to the industry that the model sanctioned in the Advisory Opinion ) could serve as a blueprint for other investment firms (and advisers) to follow in those footsteps. Indeed, it was issued not as a prohibited transaction exemption in a specific situation (though that was what had been requested), but as an advisory opinion on the program’s structure.

Sure enough, in the months that followed, it seemed as though just about every large DC provider put together some kind of program that, like the SunAmerica model, applied some kind of independent asset-allocation computer modeling to their DC platform investment offerings. In no time at all, millions of participants1 who had been looking for a bit of substantive guidance on how to invest their 401(k) balances had an answer—and, it should be noted, generally at a price that they found attractive (it was often included at no additional cost). In fact, after the SunAmerica opinion took hold, it always seemed to me that the urgency around finding a way to provide “advice” to participants was greatly diminished.

That wasn’t the end of the issue, of course—even when then-Assistant Secretary of Labor Ann Combs published the SunAmerica opinion for the world to see, she noted the Labor Department’s continued support for advice legislation long-championed by Congressman John Boehner (R-Ohio), legislation that, in large part, found its way into the (still) controversial fiduciary adviser provisions of the Pension Protection Act (PPA) (see “DoL Lowers Another Advice Barrier”).

Still, I was surprised when Assistant Secretary of Labor Phyllis Borzi invoked the name of the SunAmerica Opinion at a recent conference; particularly when she said she had heard reports that firms had been inappropriately taking advantage of its provisions (see “EBSA Sets Out Carrot, Stick Agenda”). Now, Secretary Borzi didn’t elaborate on any specific firms, but considering that the original opinion contained a number of specific conditions, it is entirely possible that, eight years later, one or more firms have managed to “gloss over” some key elements either in designing or in explaining their program(s). It is even possible, of course, that some have flagrantly disregarded those provisions. Those situations should be dealt with promptly and, IMHO, visibly.

I was also struck by the repeated invocation of the SunAmerica opinion last week in a hearing by the House Ways and Means Committee (see “House Lawmakers Hear DB Funding, Advice Bill Pleas”). Most of the witnesses expressed concerns that legislation recently proposed—the 401(k) Fair Disclosure and Pension Security Act of 2009 (HR 2989)—would, in its attempt to eliminate the fiduciary adviser provisions of the Pension Protection Act (PPA), also, at least effectively, and perhaps unintentionally, lead to the elimination of many advice programs in place prior to the PPA’s passage, including those predicated on the SunAmerica structure. I say “effectively” because the proposed law would basically impose the stricter PPA computer model auditing requirements on any computer-modeled advice—and the concern is that the cost and complexity of doing so will lead firms to disband those programs and/or employers to cease offering them.

It is not clear to me at this point that that was the intent of the proposed legislation, though it may well be the result. No one is in favor of conflicted advice (though we may disagree on what falls within that definition)—but, however complicated we may try to make it, most participants (and plan sponsors) don’t care whether you call it “advice” or “education.”

They just want some help.

—Nevin E. Adams, JD

(1) The Profit Sharing/401(k) Council of America reports that 20 million participants are offered advice through Sun America arrangements.

You can check out the full testimony from the House Ways and Means hearing HERE