“Breaching” Out?

“401(k) breaches undermining retirement security for millions,” was the headline of a recent article in the Washington Post.(1) No, we’re not talking about some kind of data hacking scandal, nor some new identity theft breach. Rather, those “breaches” are loans and withdrawals from 401(k)s.

Providing the impetus for the article is a new report by HelloWallet(2) that indicates that “more than one in four workers dip into retirement funds to pay their mortgages, credit card debt or other bills.”

While the article primarily deals with the potentially negative aspects of loans and withdrawals, it also touches on some broader concerns—and does so with some factual inaccuracies. For example, the article incorrectly states that “in 1980, four out of five private-sector workers were covered by traditional pensions;” in fact, only about half that many actually were at that point (a correct statement would be that 4 out of 5 covered by a plan at that time were in a traditional pension, which works out to about 2 in 5 of all private-sector workers—which puts the article’s “now, just one in five workers has a pension” statement in a far more accurate context).

The article notes that the “most common way Americans tap their retirement funds is through loans,” although U.S. Department of Labor data indicate that loan amounts tend to be a negligible portion of plan assets and that very little is converted into deemed distributions in any given year. That finding is supported by hard data from the EBRI/ICI 401(k) database, the largest micro-database of its kind: Among participants with outstanding 401(k) loans in the EBRI/ICI database at the end of 2011, the average unpaid balance was $7,027, while the median loan balance outstanding was $3,785.(3)

The Washington Post article cautions that these loans “must be repaid with interest,” but fails to mention that the 401(k) participant is paying interest to his/her own account: Those repayments represent a restoration of the retirement account balance by the participant, as well as a return on that investment. Sure, that interest payment is coming from the participant’s own pocket, but it’s generally being deposited into their own retirement account, and (if it was being used to pay down debt) likely at a much more favorable rate of interest.

The article also notes that those who withdraw money from their 401(k) early (before the authorized age) face “hefty” penalties, and certainly there is a financial price. However, those penalties consist of the 10 percent early withdrawal penalty (that was put in place long ago to discourage casual withdrawals by those under age 59 -½), and the income taxes they would be expected to pay on the receipt of money on which they had not yet paid taxes (which they would likely pay eventually).(4)

The HelloWallet report describes defined contribution (DC) retirement plans as a “marginal contributor to the actual retirement needs of U.S. workers.” However, an EBRI analysis of the Federal Reserve’s Survey of Consumer Finance (SCF) data, looking at workers who are already retired, finds that DC balances plus IRAs—which for many retired individuals were funded by rollovers from their DC/401(k) plans when they left work—represent nearly 15 percent of their total assets (which includes things like houses, but does not include Social Security and defined benefit annuity payments, although DB rollovers are included), and nearly a third of their total financial assets, as defined in the SCF.

The dictionary describes a “breach” as an “infraction or violation of a law, obligation, tie, or standard.” The article quotes the HelloWallet author as noting that “What you have is 401(k) participants voting with their wallets saying they would much rather use this money for other purposes.” However, these reports can’t always know, and thus don’t consider, how many participants and their families have been spared true financial hardship in the “here-and-now” by virtue of access to funds they set aside in these programs(5) (an AonHewitt study,(6) cited both in the article and in the HelloWallet report, notes that just over half of the hardship withdrawal requests were to avoid home eviction or foreclosure).

It’s hard to know how many of these “breachers” would have committed to saving at the amounts they chose, or to saving at all, if they (particularly the young with decades to go until retirement) had to balance that choice against a realization that the funds they set aside now would be unavailable until retirement. We don’t know that individuals who chose to save in their 401(k) plan did so specifically for retirement, rather than for interim (but important) savings goals—such as home ownership or college tuition—that, sooner or later, make their own contributions to retirement security. Indeed, what appears to a be a short-term decision that might adversely affect retirement preparation may actually be a long-term decision to enhance retirement security with a mortgage paid off or higher earnings potential.

In sum, we don’t know that these decisions represent a “breach” of retirement security—or a down payment.

Nevin E. Adams, JD


(1) The Washington Post article is online here.

(2) You can request a copy of the HelloWallet report here.

(3) For an updated report on participant loan activity from the EBRI/ICI database, see “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2011,” online here.

(4) While the Post article states that these taxes would be paid at capital gains rates, in fact, withdrawals are taxed as ordinary income.

(5) See “’Premature’ Conclusions,” online here.

(6) See “Leakage of Participants’ DC Assets: How Loans, Withdrawals, and Cashouts Are Eroding Retirement Income 2011,” online here.

Win "Win"

Ravens or 49ers – either way, your stock portfolio could have something to cheer about this year.

According to the Super Bowl Theory, which was invented/popularized by the late New York Times sportswriter Leonard Koppett, a Super Bowl win by a team from the old National Football League is a precursor to rising stock values for the year (at least as measured by the S&P 500), but if a team from the old American Football League (AFL) prevails, stocks will fall in the coming year.

As it turns out both teams in Super Bowl XLVII - the Baltimore Ravens (by way of NFL legacy Cleveland Browns) and the San Francisco 49ers – are NFL legacy – and thus, regardless of which team wins, a legacy NFL team will prevail.

Of course, looking back over the years, the record is a bit, shall we say, “inconsistent.”It “worked”for 12 of the first 13 Super Bowls – and, over 45 Super Bowls, it’s proven to be “accurate” 35 times.On the other hand, over the past 15 years, it has only held true about half the time.

Last year the team from the old NFL (the NY Giants) took on –and took down - one from the old AFL (the New England Patriots, who once were the AFL’s Boston Patriots). And, in fact, 2012 was a pretty good year for stocks.

Looking Back

The year before that the Pittsburgh Steelers (representing the American Football Conference) and the National Football Conference’s Green Bay Packers. Both teams had some of the oldest, deepest, and yes, most “storied” NFL roots, with the Steelers formed in 1933 (as the Pittsburgh Pirates), and the Packers, founded in 1919. So, according to the Super Bowl Theory, 2011 should have been a good year for stocks (because, regardless of who won, an NFL team would prevail). But, as you may recall, while the Dow gained ground for the year, the S&P 500 was –well, flat.

Before that, in Super Bowl XLII the underdog New York Giants pulled off a remarkable victory – but the S&P 500 still shed…well, we don’t really need to relive that here (particularly for Patriots fans).

On the other hand, 2010 turned out pretty well for the markets – a year when the New Orleans Saints bested the Indianapolis Colts, though it was, after all, also a Super Bowl featuring two teams with NFL roots. And it was also the case in 2009 when both Super Bowl teams - the Arizona Cardinals and the Pittsburgh Steelers – shared NFL roots (the Arizona Cardinals by way of one time being the St. Louis Cardinals), AND in 2007 when the S&P 500 rose 3.53% as the Indianapolis Colts beat the Chicago Bears 29-17. That also turned out to be the case in 2006 when the Pittsburgh Steelers (yes, again) defeated the Seattle Seahawks in another battle of two legacy NFL clubs. That turned out to be a good year for equities, with the S&P 500 closing up more than 13%.

Patriot Gains

Times were better for Patriots fans in 2005 when they bested the NFC’s Philadelphia Eagles 24-21. According to the Super Bowl Theory, the markets should have been down for the year. However, in 2005 the S&P 500 climbed 2.55%.

Of course, the 2002 win by those same New England Patriots accurately foretold the continuation of the bear market into a third year (at the time, the first accurate result in five years). But the Patriots 2004 Super Bowl win against the Carolina Panthers failed to anticipate a fall rally that helped push the S&P 500 to a near 9% gain that year, sacking the indicator for another loss.

Consider also that, despite victories by the old AFL Denver Broncos in 1998 and 1999, the S&P 500 continued its winning ways, while victories by the NFL legacy St. Louis (by way of Los Angeles) Rams (with the just-retired Arizona quarterback Kurt Warner calling plays) and the Baltimore Ravens, which Super Bowl Theory proponents might hope would lead to a positive 2013 outcome for stocks, did nothing to dispel the bear markets of 2000 and 2001, respectively.

Remember of course that it “worked” 28 times between 1967 and 1997 –then went 0-4 between 1998 and 2001 – only to get back on track from 2002 on (purists still dispute how to interpret Tampa Bay’s victory in 2003, since the Buccaneers spent their first NFL season in the AFC before moving to the NFC).

As for Sunday – the oddsmakers are giving the nod to the 49ers– though not by much.

It looks like it could be a good game – and that, whether you are a proponent of the Super Bowl Theory or not – would be one in which whoever wins, we all will!

- Nevin E. Adams, JD

"Churn" Factors

British Statesman and Philosopher Edmund Burke famously commented that “”Those who don’t know history are destined to repeat it.”(1) Indeed, those with experience working with employee benefit plans, can attest to a certain déjà vu-esque quality amidst the recent discussions about tax reform, limiting deductions, and “capping” contributions. These, are, in many ways, old “solutions,”(2) albeit these days arguably applied to a new (or at least different) set of circumstances.

As the 113th Congress begins its work, and the Obama administration readies for a second term, it is perhaps not surprising that the nuances of employee benefit plans and their tax treatment might not be an area of expertise for many on Capitol Hill. However, for all the longevity in tenure frequently assumed regarding those in Congress, a review of the data shows just how much turnover has taken place.

For example, you might not be surprised to learn that no member of the current Senate was in office when Medicare, or even ERISA was signed into law. But, as EBRI President and CEO Dallas Salisbury noted recently for the EBRI Board of Trustees, just three of the current 100 members of the Senate were there when Sec. 401(k) became law, and only 10 were there when the Tax Reform Act of 1986 became a reality. Fewer than half of the Senate were in their current office when the Pension Protection Act of 2006 passed.(3)

The implications for policy making in the midst of that kind of turnover are significant for employers and employees alike. Moreover, in an environment where expanding the transferability of Roth 401(k) balances is positioned as a revenue-generating mechanism to stave off sequestration, it seems increasingly obvious that every item of potential revenue or cost savings will be viewed through a new prism of scrutiny, where the short-term cost of the benefit may well trump the long-term value. And, as the data above suggests, by many who come to these deliberations without the full understanding and appreciation that experience in these complicated matters—a “history”—can provide.

One of EBRI’s founding principles in 1978(4) was the acknowledgement that “an ongoing need exists for objective, unbiased information regarding the employee benefit system, so that decisions affecting the system may be made based on verifiable facts.” And, as EBRI approaches its 35th anniversary, it’s clear that that need for information, and its critical role in making thoughtful decisions, remains undiminished.

- Nevin E. Adams, JD

1) A century later George Santayana would write in his “Reason in Common Sense, The Life of Reason, Vol.1,” that “Those who cannot remember the past are condemned to repeat it.”

(2) In fact, a 1993 EBRI Issue Brief titled “Pension Tax Expenditures: Are They Worth the Cost?” cites a 1991 National Tax Journal article that observed, “Whereas the case for employer-sponsored pensions as an institution is strong, the case for a major tax expenditure is weak…given the demands on the budget, eliminating a tax expenditure that benefits a declining and privileged proportion of the population should be given serious consideration.“ See “Pension Tax Expenditures: Are They Worth the Cost?” online here.

(3) See chart above, which tracks Senate turnover, by party, since 1975.

(4) See Facts about EBRI, online here.

Tenure, Tracked

Sooner or later as a parent you’ll be told—as you doubtless you told YOUR parents—that “that’s not the way things are now!” It’s a potent retort to whatever social more is at issue because, whether it involves a choice in dress, curfew, or even resumé preparation, our perspectives are often shaped (and sometimes distorted) by our recollection of the way things were for us at comparable points in time. Or, as we must sometimes admit, “the way things used to be.”

When it comes to things like working careers, there is a widespread assumption that past generations worked for a single employer for all, or most of his/her working years, and then retired with a pension and a gold watch. In contrast, current American workers are believed to change jobs (much) more frequently. In fact, many champion the defined contribution plan design as a better “fit” for today’s workforce, which—certainly in the private sector—is seen as lacking the kind of tenure necessary to accrue sufficient benefits under a traditional pension design.¹As it turns out, the latest data on employee tenure from the January 2012 Supplement to the U.S. Census Bureau’s Current Population Survey (CPS) show that the overall median tenure of workers—the midpoint of wage and salary workers’ length of employment in their current jobs—was slightly higher in 2012, at 5.4 years, compared with 5.0 years in 1983.

In fact, as a recent EBRI Notes article points out, the data on employee tenure (the amount of time an individual has been with his or her current employer) show that those so-called “career jobs” NEVER existed for most workers. Indeed, over the past nearly 30 years, the median tenure of all wage and salary workers age 20 or older has held steady, at approximately five years.

Looking inside those long-term numbers, different trends emerge. For example, the median tenure for male wage and salary workers was, in fact, lower in 2012, but the median tenure for female wage and salary workers increased (from 4.2 years in 1983 to 5.4 years in 2012). This long-term increase in the median tenure of female workers more than offsets the decline in the median tenure of male workers, leaving the overall level slightly higher over the long term.

When you focus on trends among older male workers (ages 55–64), the group that experienced the largest change in their median tenure during the period covered by the report, median tenure fell from a level that would not normally be considered career-length—14.7 years in 196—to just 10.7 years in 2012.

Ultimately, when it comes to job tenure trends,² the way things look today is remarkably consistent with “the way it used to be.” However, as is often the case, a closer look at the underlying data highlights that even the things we expect to be different aren’t always different in the ways we expect.

Nevin E. Adams, JD

¹ See also “The Good Old Days,” online here.

² The EBRI report highlights several implications of these trends: the effect on defined benefit accruals (even for workers still covered by those programs), the impact of the lump-sum distributions that often accompany job change, and the implications for social programs and workplace stability. “See Employee Tenure Trends, 1983–2012,” online here.

"Freedom" From Choice?

You may remember little else about the 1989 film “Field of Dreams,” but odds are you have invoked a version of what is likely its most famous quote, “If you build it, they will come.”

Unfortunately, for many, building retirement savings is more complicated than constructing a baseball diamond in the middle of an Iowa cornfield. Most experts will tell you that the most important decision in retirement saving is deciding how much to save, not how those savings will be invested―and yet, for years, much of the education and discussion about retirement saving has been focused on investing.

Enter the target-date fund (TDF), a type of investment fund apportioned according to what investment professionals deem to be an appropriate age-based blend of stocks, bonds, and other asset classes for an individual within a particular target-date of his or her retirement. Perhaps more importantly, that apportioning is automatically rebalanced over time, as the target date approaches, becoming less focused on growth and more focused on income over time. It’s an approach to which individuals and plan sponsors alike have come to embrace with little of the reluctance that often accompanies new retirement plan designs; one that runs counter to decades of expanding retirement plan menus and education designed to help participants make better use of those choices.

Consider that 72 percent of the more than 64,000 401(k) plans in the EBRI/401(k) database, included target-date funds in their investment lineup at year-end 2011,¹ and that nearly 4 in 10 of the nearly 24 million participants in that database held target-date funds.² That’s sharply higher than 2006, the year that the Pension Protection Act of 2006 included target-date funds in its definition of qualified default investment alternatives (QDIA), when about 57 percent of plans included those offerings on their menus, and fewer than 1 in 5 participants held them in their account(s). Perhaps more significantly, at year-end 2011, 51 percent of participants in their 20s held target-date funds, compared with 32 percent of participants in their 60s.

Recently hired participants―those more likely to be automatically enrolled in their employment-based 401(k), and to have their savings automatically invested in a QDIA (frequently a target-date fund), were, not surprisingly, more likely to hold target-date funds than those with more years on the job: At year-end 2011, 51 percent of participants with two or fewer years of tenure held target-date funds, compared with 37 percent of participants with more than five to 10 years.

In fact, an August 2011 EBRI Issue Brief noted that, among consistent participants in the EBRI/ICI database who were identified as auto-enrollees in 2007, 97.2 percent were still using TDFs in 2008, and 95.7 percent used them in 2008 and 2009. Even among those not identified as auto-enrollees, just over 90 percent continued to use them from 2007‒2009 (see “Target-Date Fund Use in 401(k) Plans and the Persistence of Their Use, 2007‒2009,” online here).

Now, one can find fault with the target-date design: There are different views on what is an “appropriate” asset allocation at a particular point in time; discrete perspectives as to what asset classes belong in the mix; notions that individuals aren’t well-served by a mix that disregards individual risk tolerances; arguments over the definition of a TDF “glide path” as the investments automatically rebalance over time; and even disagreement as to whether the fund’s target-date is an end-point, or simply a milepost along the investment cycle. That said, and as the EBRI/ICI data show, target-date funds, as well as their older counterparts, the lifecycle (risk-based) and balanced fund(s), have become fixtures on the defined contribution investment menu. For a large and growing number of individuals, these “all-in-one” target-date funds, monitored by plan fiduciaries and those that guide them, are likely to be an important aspect of building their retirement future.

Of course, the future they’ll build will likely be better if those investments are properly used, carefully monitored, better understood―and funded by the appropriate amount of savings.


Nevin E. Adams, JD

¹ See “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2011,” online here.

² In addition, 20 percent of the participants in the EBRI/ICI 401(k) database held non–target-date balanced funds, and 3 percent held both target-date and non-target-date balanced funds at year-end 2011.