'Free' Wills

Over the weekend, I reacquainted myself with that episode of the HBO miniseries “John Adams” titled “Independence.” As a writer and editor, I watched with a special appreciation the part where Benjamin Franklin and John Adams are “tweaking” Thomas Jefferson’s draft—and the pain in the latter’s face as his “precisely chosen” words were modified. All in all, a modest sacrifice, to be sure. But I, for one, could feel his pain.

That said, anyone who has ever found their grand idea shackled to the deliberations of a committee, who has had to kowtow to the sensibilities of a recalcitrant compliance department, or who has simply suffered through the inevitable setbacks all too frequently attendant with human existence must have at least a modest appreciation for the trials that confronted not only that document’s authors, but those then living in these not-yet-united states.

Without question, 1776 is one of those turning points in history, not just for this nation but, in the course of time, for the world as well. And yet, from the perspective of those who, in 1776, put not only their property, but their lives on the line to achieve what we will commemorate this weekend, the prospects of success must surely have seemed unlikely. Indeed, 1776 itself was full of disappointments for many supporting the cause of independence—and near disasters for George Washington’s Continental Army. One can garner a sense for the change in tide by noting that Thomas Paine in January of that year published “Common Sense,” but before the year was out had turned his pen to “The American Crisis,” fretting about “sunshine patriots” in “times that try men’s souls.”

However, before the year was out, Washington’s troops would cross the Delaware under unimaginable conditions and win a stirring victory at Trenton, on their way to a series of impressive but largely unappreciated victories against the British army in New Jersey. Not that the worst was behind them: Less than a year later, Washington’s troops would winter at Valley Forge. Independence may have been declared in 1776, but it was not won until 1781, and not official for two years more.

The point, of course, is that we have much to be thankful for this Independence Day: for those who had the courage to stand up for the principles and ideals on which this nation was founded, for those who were willing then to take up arms to defend those principles and ideals against overwhelming odds, and those who have done so to this day.

If we are to preserve those “unalienable rights,” if we are to continue to enjoy the freedoms of “life, liberty and the pursuit of happiness,” we must remember that the truths so eloquently espoused in 1776 may indeed be self-evident, but dictators and tyrants from time immemorial have sought to vanquish them. It is easy to forget amongst the grilling, fireworks displays, and summer temperatures just how precious those rights are, and how rare still in this world.

This Independence Day, we should remember that, “in the course of human events,” the battles that preserve those ideals for us and future generations are never really “won”; they must be fought for every day.

—Nevin E. Adams, JD

For those interested in learning more about the events noted above, I heartily recommend:

“1776” by David G. McCullough
“Washington’s Crossing” by David Hackett Fischer
“Almost A Miracle: The American Victory in the War of Independence” by John Ferling
“His Excellency: George Washington” by Joseph J. Ellis

For those who prefer a “lighter” read (a la historical fiction), check out:
“To Try Men's Souls: A Novel of George Washington and the Fight for American Freedom” by Newt Gingrich, William R. Forstchen, and Albert S. Hanser

QDIA Essentials

PLANSPONSOR’s National Conference last week featured a series of panels titled “Five Things You Need to Know About…” focused on a series of topics.

One of those was qualified default investment arrangements (1), or QDIAs—and while the “five things” that follow are somewhat different from the list presented by that panel, what follows was certainly inspired by the discussion.

Here’s my list:


(1) You don’t need to have a QDIA to get 404(c) protection.

IMHO, one of the most marvellous things about the Pension Protection Act’s defined contribution provisions was that they weren’t imposed on plan sponsors. They provided clarity, structure, guidance, and, yes, protection on things like automatic enrollment, contribution acceleration, and default fund choices—but didn’t require that you embrace these concepts, unless, of course, you hoped to benefit from the protections associated with adhering to those structures. Sure, IMHO, it’s a lot easier to obtain 404(c) protection under the umbrella of the PPA’s qualified default investment alternative (QDIA) provisions—but plan sponsors who had those protections in place before the PPA can still have them by still continuing to doing the things required to retain them today.

(2) You need to pay attention to participant notices.

Among all the fuss over what a QDIA is, and the applicable structures for automatically enrolling participants in those options, it has been easy to gloss over the requirement to notify those defaulting workers that they are being defaulted, and that they have a right to opt out—both upon enrollment and annually thereafter. Failure to provide the proper notices at the proper times has long been an impediment to fulfilling 404(c)’s conditions—and, if you’re not careful, perhaps enough to thwart QDIA’s shield as well.

(3) A QDIA doesn’t have to be a target-date fund.

Admittedly, target-date funds are the low-hanging fruit of QDIA options. While balanced funds, managed accounts, or even target-risk funds are explicitly acknowledged in the regulations, it is also clear that in order to be “qualified,” the QDIA must be structured in such a way as to take into account the age of the participant and/or the workforce (see “IMHO: It’s About Time” at http://www.plansponsor.com/IMHO___It’s_About_Time.aspx). New adoptions seem to be embracing the target-date approach, but, at least anecdotally, it seems that plan sponsors who previously had a balanced-fund default are finding ways to make it work.

(4) The fiduciary requirements to prudently monitor and select a QDIA are no less than for any other plan investment option—and they are fiduciary requirements.

Plan fiduciaries can reap significant benefits from the adoption of a QDIA, and participants even more so—if the option is prudently selected and monitored. Now, personally, I think you could make a case that the selection of an investment fund in lieu of any participant direction whatsoever (much less one that studies consistently indicate will likely never be reallocated) should, if anything, be held to a higher standard than that imposed on the “regular” investment options on the retirement plan menu.

But, at a minimum, in the QDIA regulations, the Labor Department made it abundantly clear that “selection of a particular qualified default investment alternative… is a fiduciary act and, therefore, ERISA obligates fiduciaries to act prudently and solely in the interest of the plan’s participants and beneficiaries.”

Moreover, that, “[a]s with other investment alternatives made available under the plan, fiduciaries must carefully consider investment fees and expenses when choosing a qualified default investment alternative.”

(5) Just because a default fund isn’t a QDIA doesn’t mean it isn’t a prudent default choice.

While target-date vehicles are certainly convenient for plan sponsors and well-received by participants—and explicitly acknowledged as QDIA-eligible—they aren’t the exclusive prudent choice for a default option. Of course, choosing something else—a target-risk fund with no age orientation, a balanced offering, or even a stable value fund—won’t afford you the same protections that a QDIA will. On the other hand, a well-chosen, thoughtfully monitored investment default might not require them.

—Nevin E. Adams, JD

(1) Default investments are investment options chosen by plan fiduciaries in situations where participants fail to provide investment instructions, either through some kind of administrative oversight, or in cases such as automatic enrollment. The Pension Protection Act of 2006 (PPA) provided certain specific conditions under which plan fiduciaries would be afforded special protections when certain specific qualified default investment alternatives were provided for that purpose.

'Going' Concerns

“When the going gets tough, the tough get going,” or so goes the old saying.

It’s a saying with the requisite amount of bravado to stiffen one’s upper lip and shore up one’s resolve as we plough through yet another tough market cycle; a period in which, by all traditional measures, “alternative” investments should be a good place to seek shelter from the storm.

This time may be different, of course. Real estate, one of the most popular (at least in terms of its presence in pension portfolios), served to set off most of the recent market tumult, and is still struggling to make its way back (though one should be careful about the level to which one expects it to return). Private equity, writ large, feels a more precarious move at present, and hedge funds—well, many no longer live up to the name, despite their fee structures.

There are, of course, a growing number of alternatives to stocks and bonds—the traditional standard against which an investment is deemed to be “alternative”—but to boldly go where no one else is going is generally anathema to pension plan fiduciaries.


Of course, there will be (and perhaps already are) institutional investors with a perspective and horizon long enough to wade into this storm surge, those whose skins are “tough” enough to make the kind of prudent investment in strategies and sectors that can (and often has) pay big dividends in the long run.

But caution seems to be the watchword of the day, and many—perhaps most—are not altogether certain that we have weathered the storm. The world’s pension obligations loom large, the returns needed to sustain them less certain, the pockets from which new investments arise already “picked.” In a growing number of places, those already dependent on such promises are rioting in the streets (some days it seems likely that those expected to fund those obligations may join them), but those protests will not fill those depleted coffers, nor will they likely have any good effect in ameliorating the current market unsteadiness.

The going’s still tough—but the tough will, as they are wont to do, keep going.

The question, as yet unanswered, is where—and what—they will be going to.

—Nevin E. Adams, JD

“Left” Field

I participate in a number of LinkedIn groups (and “sponsor” a couple). In one of those groups last week, a member said they were interviewing potential new 401(k) recordkeepers/advisers—and asked a provocative question: What is the one question that you will be sure to ask the next time that you interview potential 401(k) providers?

Of course, we all know that the search for a new provider entails a lot more than a single question. And, as I skimmed my way through the suggestions that had already been proffered, there were a number of important and familiar inquiries; things having to do with the fees charged, fee disclosure, the quality of support staff, willingness to stand in as a plan fiduciary…. These are all important—so important, in fact, it was hard to imagine that they wouldn’t be routinely included in even the most casually composed RFP.

Having read the question—and skimmed the answers—I was about ready to move on. Ironically, the way this question was phrased (or at least how I read how that question was phrased) intrigued me; what WAS that one question I would ask the next time?

Now, having spent a fair amount of my career on the other side of that question (including a period of time when the group that prepared RFPs for a large financial services organization reported to me), I can tell you there are a nearly infinite number of ways to respond “yes” (with a clear conscience) without really meaning "yes, all the time"; ways to gloss over things like high turnover, to offer broad organizational-level expositions designed to assuage nagging concerns about profitability or “commitment to the business”; even ways to assure, without committing, on the subject of whether the provider will "stand in" in the event of a lawsuit, audit, or investigation. None of which should discourage or dissuade one from asking those questions, of course.(1)

That said, when it comes down to that one question, I kept coming back to one that gets asked all the time. One that you probably asked on your last RFP. One to which you may have gotten a response, but, I suspect, not an answer.

The question I would ask is, Can I get the contact information for three clients that have left you in the last 18 months?

Not that you'll get it, though you might—or that the selections won't be "tailored"—but the response (or lack thereof) can, IMHO, be "enlightening."

—Nevin E. Adams, JD


(1) If you want to frustrate a potential provider, just make them respond to an RFP where the questions are worded such that the only acceptable answers are “yes” or “no” (or make them put their “explanations” in a separate document). What many (still) don’t seem to appreciate is that most advisers/consultants take all that fancy verbiage and filter it down to a checkbox on a spreadsheet anyway.