Naughty or Nice?

Editor’s Note: There’s so much going on in the world of retirement saving and investing that I never feel the need (or feel like I have the opportunity) to recycle old columns – but this one has a certain “evergreen” consistency of message that always seems appropriate – particularly at this time of year.

A few years back—when my kids still believed in the reality of Santa Claus—we discovered an ingenious Web site that purported to offer a real-time assessment of their "naughty or nice" status.

Now, as Christmas approached, it was not uncommon for us to caution our occasionally misbehaving brood that they had best be attentive to how those actions might be viewed by the big guy at the North Pole. But nothing ever had the impact of that Web site - if not on their behaviors (they're kids, after all), then certainly on the level of their concern about the consequences. In fact, in one of his final years as a "believer," my son (who, it must be acknowledged, had been PARTICULARLY naughty) was on the verge of tears, worried that he'd find nothing under the Christmas tree but the coal and bundle of switches he surely deserved.

Naughty Behaviors?

One might plausibly argue that many participants act as though some kind of benevolent elf will drop down their chimney with a bag full of cold cash from the North Pole. They behave as though, somehow, their bad savings behaviors throughout the year(s) notwithstanding, they'll be able to pull the wool over the eyes of a myopic, portly gentleman in a red snow suit. Not that they actually believe in a retirement version of St. Nick, but that's essentially how they behave, even though, like my son, a growing number evidence concern about the consequences of their "naughty" behaviors. Also, like my son, they tend to worry about it too late to influence the outcome—and don't change their behaviors in any meaningful way.


Ultimately, the volume of presents under our Christmas tree never really had anything to do with our kids' behavior, of course. As parents, we nurtured their belief in Santa Claus as long as we thought we could (without subjecting them to the ridicule of their classmates), not because we expected it to modify their behavior (though we hoped, from time to time), but because, IMHO, kids should have a chance to believe, if only for a little while, in those kinds of possibilities.

We all live in a world of possibilities, of course. But as adults we realize—or should realize—that those possibilities are frequently bounded in by the reality of our behaviors. This is a season of giving, of coming together, of sharing with others. However, it is also a time of year when we should all be making a list and checking it twice—taking note, and making changes to what is naughty and nice about our savings behaviors.

Yes, Virginia, there is a Santa Claus—but he looks a lot like you, assisted by "helpers" like the employer match, your financial adviser, investment markets, and tax incentives.

Happy Holidays!

- Nevin E. Adams, JD
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The Naughty or Nice site is STILL online (at http://www.claus.com/naughtyornice/index.php.htm). An improved site and much better internet connection speeds produce a lightning fast response – more’s the pity. I used to like the sense that someone was actually going to the list, and having to check it twice!

The Measure of the Plan

Not so long ago, plan sponsors gauged the success of their defined contribution offerings by a single metric: participation rate. It’s not that they didn’t pay attention to other criteria, but participation rate is objective, easy to calculate, and, certainly for a voluntary savings program, it’s not an inappropriate gauge of the program’s perceived value.

Over the past couple of years, a growing number of plan providers have brought to market a new set of plan diagnostic measures, measures that not only show individual and plan balances, but also project those balances out to an estimate of what those balances will provide in retirement income, or presented as a measure of retirement readiness—compared with an established level of income replacement.

It’s not a new idea, of course. Heck, there has even been legislation introduced to place—on participant statements—a projection as to what the participant’s monthly retirement income would be. Meanwhile, despite long-standing fears that participants, confronted with the stark realities of their savings situation, would abandon the cause, the realities seem to be quite different. One might well expect the providers touting such wares to extol the virtues of the approach (and they do), but I have yet to meet a plan sponsor who had adopted these enhanced gauges of retirement readiness who said it had had a negative impact.

That said, there are still many plan sponsors that have not yet taken that step. At the PLANSPONSOR National Conference this past June, I asked the audience of some 200-plus plan sponsors if they had established any kind of target replacement ratio as part of their program design. While the survey sampling was admittedly unscientific (though I would suspect skewered toward more-active, involved, engaged plan sponsors) a whopping 78% said “no.” Just one in 10 said yes, while the remaining 12% responded “not explicitly, but it’s in the back of our minds.” (1)

Based on that result, I wasn’t too surprised that just 28% said their participants will be able to retire comfortably, while 43% said “maybe” (the polling was anonymous). (2)


Now, most of us have a hard enough time answering that comfortable retirement question for our individual situation, much less an entire employee populationbut I was struck by how many of those in that particular attendance didn’t even seem to have a rough notion in the back of their mind. As I explored that poll result with the audience, a couple of themes emerged: First, plan sponsors only know so much about an individual participant’s lifestyle, sources of income, and/or plans for retirement, and generally don’t have the time or inclination to know any of that, anyway. Second, these are voluntary programs, and while plan sponsors take seriously their responsibility to see that they are well, reasonably, and efficiently run, most don’t see it as their responsibility to make sure that participants are doing what they need to do (in fairness, most plan sponsors have their hands full just trying to make sure that THEY are doing what they need to do).

In casual conversations with plan sponsors about these types of programs and their reluctance to embrace them, it isn’t the cost or complexity that holds them back, nor is it concern about the response of newly enlightened participant-savers. Rather, it’s an underlying concern that, once those retirement replacement goals have been established at a plan committee level, and once those readiness results are presented in black and white (or multi-color) to plan fiduciaries, they could be held accountable for the results and/or shortfalls. Ignorance, to some it seems, is not only bliss, it’s a litigation shield.

Personally, I think plan sponsors already carry burdens and responsibilities beyond what many, perhaps most, are compensated for (and some beyond what they are aware). That said, it seems to me that presenting plan participants with specific information about their retirement savings situation, coupled with the kinds of diagnostic tools that accompany most of these offerings (not to mention the counsel of a trusted adviser) not only serves to help them make better decisions sooner, it effectively undermines their ability to later turn on the plan fiduciaries and try to hold them accountable for the participant’s results.

Now, some might argue that sponsoring these programs with no specific goal in mind is not much better than participants who save with no goal or focus to those efforts. Others would go so far as to suggest that failing to administer these programs with those kinds of specific goals in mind runs afoul of ERISA’s fiduciary charge.

For me, it’s not about measuring your program—it’s about seeing how your program measures up.

—Nevin E. Adams, JD ,

(1) While I don’t have a correlation between the responses and the program designs represented, it seems fair to say that many were in the DC-only camp.
(2) As for the rest of the responses, 16% said “no,” 10% were “not sure,” and 3% said “I’ve no idea.”

Fiscal Therapy?

This week I will undergo one of those “you’re getting older” physicals. This has been scheduled for about six months now (yes, that’s how long it takes to get in for a physical these days)—and I have dreaded it, more or less consistently (and, more recently, constantly) ever since the appointment was made.

I know that I’m eating too much of the wrong things, and not exercising enough (at all?)—and while I sincerely meant to alter some of those behaviors over the past six months, other things have taken priority. What remains to be seen is what my doctor will see/say—and what, if any, lifestyle changes lie ahead.

In random conversations over the past several weeks, it was easy to find people who were supportive of the need to do something about the yawing federal deficit, and even easier to find folks who had problems with one—or more—of the recommendations of the so-called Deficit Commission that were made formal last week. Like my trip to the doctor, we all knew that we had some fiscal behavioral imbalances that needed to be addressed—we just didn’t know how painful the cure might be1.

Retirement Plans

Those in our industry were primarily focused on two things: the reduction of tax-favored treatment for benefits (impacting both workplace retirement and health benefits) and changes to Social Security. The latter drew a lot of focus and angst though, at least as I read them, they seemed relatively modest, certainly compared with the 1983 moves (though, make no mistake—in my reading, a large number of decidedly middle-income workers will pay much more and get less in benefits under the proposal).


My issues with the proposed Social Security reform were that they ultimately seemed to be just one more step down the path of institutionalizing it as a kind of uber-welfare program, rather than one that retains at least a modest cognizance of individual contributions to the system. But the real pushback on Social Security reform seemed mostly of the type that has staved off serious discussion for decades 2; to wit, the program is not REALLY in trouble, because it can keep paying benefits for a long time with no changes at all (clearly Social Security isn’t hemmed in by the accounting rules that have been brought to bear on the funding premises of defined benefit pension programs).

Regardless of this proposal’s fate (or its inevitable progeny), sooner or later we all know that the “normal” retirement age will be lifted, the rate of FICA tax withholding imposed will be raised, and more of the benefits paid will be taxed. Like my exercise regimen, the longer we put that off, the bigger the changes will have to be.

The implications for workplace benefit programs that would be sheared of much of their current tax-advantage are more complex. Now, I’ve certainly had in mind the tax preferences accorded my pre-tax contributions when I make them (and the future of tax rates as I begin to slide some into my Roth account)—and, if I’m reading the recommendation correctly (and there’s less than a paragraph of the 66-page report devoted to this3), the individual limitations would still allow most workers to save at the pace they do at present (there’s also a call for an expansion of the Savers’ Credit in the report).

The presumption by some industry advocates was that once the tax preferences for employers sponsoring the programs were removed, employers would no longer sponsor the programs. Also, that the aforementioned change, along with the limitation of tax preferences for individual savings to the lower of $20,000 or 20% of income would, in the words of the American Society of Pension Professionals and Actuaries (ASPPA), “effectively eliminate employer sponsored profit-sharing plans, shifting responsibility for retirement savings to workers.”

Indeed, one has to wonder: If the federal tax incentives for sponsoring workplace retirement (and health care) programs were removed, would employers still sponsor the programs?

The answer to that question is key because, while some of the changes advocated by the proposal might have unforeseen consequences 4, I’m reasonably certain that if employers don’t continue to sponsor these programs, private retirement savings will almost certainly go on a crash diet.

—Nevin E, Adams, JD

1 On an unrelated note, the editor in me was completely perturbed by the Commission report’s misspelling of “Pension Benefit Guarantee Corporation” (it’s “Guaranty”). Perhaps a Freudian slip?

2 Many opponents this time around claimed that, since Social Security doesn’t technically contribute to the deficit, it shouldn’t have been on the table for consideration by this particular commission.

3 You can read the report at http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/TheMomentofTruth12_1_2010.pdf

4 In all likelihood, this effort was doomed from the beginning. The problem it is trying to solve—a $13 TRILLION deficit—is daunting both in its size and scope. Not that the proposal claims to solve the whole problem; rather, it just takes a good “whack” at it (a whack in this case being $4 trillion in savings, through 2020). To get to that result, the proposal cuts a broad swathe through the nation’s tax system and structure; calls for caps, though not cuts, in discretionary spending (albeit at 2011 levels and not until 2012); calls for a near doubling in the federal gasoline tax; and a three-year freeze (though again, no cut) on federal worker pay, among other things.