A Pension Protection Perspective

It’s hard to believe, but the Pension Protection Act of 2006 will be a decade old next month. And it’s probably done more good for the nation’s retirement security than most realize.

The PPA drew its name from the portions targeted at shoring up defined benefit plans (and PBGC funding, I suppose), though at the time I remember most people thinking it was an ironic name, in that it may have been intended to secure the pensions that were already in existence, but might well accelerate the demise of some on the cusp, and in any event was unlikely to help spur any new growth in that area. Some went so far as to call it the Pension Destruction Act.

Indeed, at a recent panel session featuring the perspectives of a number of the Hill staffers who shepherded the at times controversial legislation through its passage, the emphasis was largely on the DB aspects that, though well-intentioned, had been overwhelmed (if not undermined) by the onset of the 2008 financial crisis and the “historically low” interest rate environment that continues to pressure pension funding to this day.

DC Developments

In contrast, the aftermath of the PPA on the defined contribution side has been nothing short of extraordinary. Sure it was all voluntary – the use of carrots like safe harbors for automatic enrollment, rather than the sticks that accompanied the DB provisions. And yet, seemingly overnight, and without a government mandate or regulatory imperative, the decades-old concept of “negative election” (now “rebranded” as automatic enrollment) became part of every credible retirement plan advisor’s toolkit.

Without relying on a mandate to impose its will, nearly overnight the paradigm on automatic enrollment shifted. Sure, it’s still far more common among larger employers than those downstream – and yet, those larger plans are where most participants are. And if the adoption of contribution acceleration has lagged behind automatic enrollment, it is nonetheless far more advanced than it would have been in the absence of the PPA.

For my money, the biggest long-term positive impact of all may have been the rapid expansion of the qualified default investment alternative (QDIA) as the plan default investment option. One need look no further than the millions of dollars in retirement savings that have been channeled into a range of professionally managed asset allocation solutions to appreciate the impact that change has had. All have significantly and positively moved the needle in helping enhance the ultimate financial security of thousands, if not millions, of American workers.

‘Staying’ Power

However, perhaps the most-overlooked, if not underappreciated, aspect of the PPA was that it made permanent the retirement savings incentives enacted under the Economic Growth And Tax Relief Reconciliation Act of 2001 (EGTRRA), including annual contribution limits for IRAs, Roth 401(k) plans, enhanced portability of retirement benefits, and reduced administrative burdens on plan sponsors. Without that support, all the gains made on those provisions would have fallen back. The PPA also made the Saver’s Credit permanent, as well as resolving legal uncertainty surrounding cash balance plans, and requiring DC plans to permit employees to diversify out of investments in employer securities if the securities are publicly traded.

The work is not done, of course. Innovative retirement income offerings continue to be introduced, but can’t seem to find traction, the focus on outcomes (these days generally under the banner of financial wellness) is still nascent, and the challenges of compliance with the DOL’s new fiduciary regulation lie ahead.

With so much progress made – and yet so much yet to be achieved – it may seem naïve in this exceedingly unusual election year to hold out hope that the nation’s legislative bodies could put their heads together and work together as constructively as they did just a decade ago.

But one can (still) hope.

- Nevin E. Adams, JD 

3 Things Retirement Savers Can Learn from Pokémon Go

If you’re a Millennial (or know one), you’ve surely heard about (or seen in action) the recent outbreak of Pokémon Go.

It’s not even a week old, but it’s quickly dominating social media. If you’ve managed to avoid the media barrage, it’s a new (free) interactive online game that builds on the basics of the Pokémon card and video games past – catching Pokémon, battling at Gyms, using items, evolving your creatures. These creatures (151 unique ones at present) have even been spotted hanging out with a certain renowned ERISA attorney (see below)!

The object of the game is to find these Pokémon (they’re fictional animals – the name is said to be from a contracted Romanization of the Japanese Poketto Monsuta, a.k.a. “pocket monsters”), and then catch them, by throwing a sphere called a Pokéball in their general direction, after which they can grow via battles with other Pokémon in Gyms, and then do battles with still yet more Pokémon in Gyms, etc. All of which is to the benefit of their trainer – you. With Pokémon Go, players can download the free app, then head outdoors using a GPS map in search of Pokémon, using their camera to view creatures “in the wild” and capture them.

Now that we’ve gotten you up to speed on the basics, here are some things that will help you in Pokémon Go and saving for retirement.

Your odds improve if you take action.

Though video games have long been criticized for keeping young players indoors, Pokémon Go draws players out into the real world. You can find “wild” Pokémon by physically walking around your area, and looking near what are called “PokéStops,” which tend to be tourist spots, malls or even churches. If you’re looking to hatch some Pokémon eggs, you have to walk to do that as well! You can play it without going outside, but you won’t do nearly as well.

Pokémon character (left) and human ERISA attorney (right)

Lots of workplace retirement plans still rely on voluntary enrollment, which is to say you have to fill out a form to join the plan. Unfortunately, in those plans, if you don’t sign up, you don’t participate.

A growing number of plans do provide for automatic enrollment, which means that you get signed up for the plan unless you fill out a form to opt out. That’s a good thing for folks who are busy, lazy, or are simply befuddled by the choices that you have to make with a voluntary plan (how much to save, how to invest it, who you’d like your beneficiary to be). However, there is a catch: Most of the automatic enrollment plans assume that a 3% contribution from your pay. And, regardless of your pay level or age, that’s almost certainly not going to be “enough” to provide a financially secure retirement.

Said another way, it’s not very “evolved” thinking…

Contributing more can get you to the finish line faster.

Pokémon Go is free – and you don’t need to spend a cent to pick up Pokémon, battle them, accumulate points, and even hatch the new ones. That said, we lead busy lives (yes, even those who find time to play Pokémon Go), and for those who want to get “there” faster, there are ways to do so by spending a little money.

There is, as you might expect, a shop where you can purchase all manner of coin bundles for real-world cash, which can then be traded for Pokémon-luring Incense, more Pokéballs and a few other things. If you’re in a hurry to “catch ‘em all!” And would rather spend money than time.

Saving for retirement doesn’t have to be a big financial commitment (depending on how much you need, and how long you have to save), though it can be if you put it off, or don’t establish a goal that suitable for the amount you need and the time you have to set it aside. Those who would like to get to that point sooner can, of course, “spend” more on retirement by setting aside larger contributions, sooner.

Every so often you need to look where you’re going.

Apparently one of the dangers of the new Pokémon Go is that game players have been spotted looking at nothing but their smartphone screens while they walk around looking for new Pokémons. This even when they are crossing highways, walking over bridges, travelling near bodies of water or – in at least one case – frequently empty parking lots where individuals looking to separate them from their money have been lurking. The bottom line – players are advised to be aware of their surroundings as they search for Pokémon.

When it comes to saving for retirement, whether you’re in an automatic enrollment plan (where the initial investment decision is likely made for you, and directed to a target-date fund), or a voluntary enrollment plan (where you may have made the initial decision, perhaps with some help, but probably haven’t looked at it in a while), those initial investment decisions – however ably made – should be revisited from time to time, at least once a year. The markets are always moving, after all – and that perfect choice of investments has likely shifted over time.

More importantly, you need to keep an eye on how your total savings is adding up to your retirement savings goals, and perhaps make adjustments to the amount you are saving.

After all, even if you get off to a good start, if you don’t look where you’re going, it’s easy to wander off the path and find yourself in trouble.

- Nevin E. Adams, JD

4 Things Plan Fiduciaries Have in Common With the 2nd Continental Congress

Anyone who has ever found their grand idea shackled to the deliberations of a committee, or who has had to kowtow to the sensibilities of a recalcitrant compliance department, can empathize with the process that produced the Declaration of Independence we’ll commemorate on the Fourth.

That said, I think there are things that today’s investment/plan committee share with, and can learn from, the experience of those forefathers who crafted and signed the document declaring our nation’s independence.

It’s hard to break with the status quo.

By the time the Second Continental Congress convened, the “shot heard round the world” had already been fired at Lexington, but many of the representatives there still held out hope for some kind of peaceful reconciliation, even as they authorized an army and put George Washington at its helm. Little wonder that, even in the midst of hostilities, there was a strong inclination on the part of several key individuals to put things back the way they had been, to patch them over, rather than to break things off, and take on the world’s most accomplished military force.

However, even those who were ready to declare independence weren’t of a single mind on how it should be done, or how those intentions expressed. Committee work is the art of compromise – and had those varying voices not been accommodated, the status quo would likely have prevailed.

As human beings we are largely predisposed to leaving things the way they are, rather than making abrupt and dramatic change. Whether this “inertia” comes from a fear of the unknown, a certain laziness about the extra work that might be required, or a sense that advocating change suggests an admission that there was something “wrong” before, it seems fair to say that plan sponsors are, in the absence of a compelling reason for change, inclined to rationalize staying put.

As a consequence, you see new fund options added, while old and unsatisfactory funds linger on the plan menu, a general reluctance to undertake an evaluation of long-standing providers in the absence of severe service issues, and an overall inertia when it comes to adopting potentially disruptive plan features like automatic enrollment or deferral acceleration.

While many of the delegates to the Constitutional Convention were restricted by the entities that appointed them in terms of how they could vote on the issues presented, plan fiduciaries don’t have that option. Their decisions are bound to an obligation that those decisions be made solely in the best interests of plan participants and their beneficiaries – regardless of any other organizational or personal obligations they may have outside their committee role.

Selection of committee members is crucial.

The Second Continental Congress was comprised of representatives from what amounted to 13 different governments, with everything from extralegal conventions, ad hoc committees, and elected assemblies relied upon to name the delegates. Delegates who, despite the variety of assemblages that chose them, were in several key circumstances, bound in their voting by the instructions given to them. Needless to say, that made reaching consensus on the issues even more complicated than it might have been in “ordinary” circumstances.

Today the process of putting together an investment or plan committee runs the gamut – everything from simply extrapolating roles from an organization chart to a random assortment of individuals to a thoughtful consideration of individuals and their qualifications to act as a plan fiduciary. But if you want a good result, you need to have the right individuals – and if those individuals lack the requisite knowledge on a particular issue, they need to access that expertise from individuals who do.

It’s important to put it in writing.

While the Declaration of Independence technically had no legal effect, with the possible exception of the Gettysburg Address (which was heavily inspired by the former), its impact not only on the establishment of the United States, but as a social and political inspiration for many throughout the world is unquestioned, and perhaps unprecedented. Putting that declaration – and the sentiments expressed – in writing gave it a force and influence far beyond its original purpose.

As for plan fiduciaries, there is an old ERISA adage that says, “prudence is process.” However, an updated version of that adage might be “prudence is process – but only if you can prove it.” To that end, a written record of the activities of plan committee(s) is an essential ingredient in validating not only the results, but also the thought process behind those deliberations. More significantly, those minutes can provide committee members – both past and future – with a sense of the environment at the time decisions were made, the alternatives presented and the rationale offered for each, as well as what those decisions were.

They also can be an invaluable tool in reassessing those decisions at the appropriate time(s) in the future and making adjustments as warranted – properly documented, of course.

Committee members should understand their obligations – and the risks.

The men that gathered in Philadelphia that summer of 1776 to bring together a new nation came from all walks of life, but it seems fair to say that most had something to lose. True, many were merchants (some wealthy, including President of Congress John Hancock) already chafing under the tax burdens imposed by British rule, and perhaps they could see a day when their actions would accrue to their economic benefit. Still, they could hardly have undertaken that declaration of independence without a very real concern that in so doing they might well have signed their death warrants.

It’s not quite that serious for plan fiduciaries. However, as ERISA fiduciaries, they are personally liable, and may be required to restore any losses to the plan or to restore any profits gained through improper use of plan assets. And all fiduciaries have potential liability for the actions of their co-fiduciaries. For example, the Department of Labor notes that if a fiduciary knowingly participates in another fiduciary’s breach of responsibility, conceals the breach, or does not act to correct it, that fiduciary is liable as well. So, it’s a good idea to know who your co-fiduciaries are – and to keep an eye on what they do, and are permitted to do.

Indeed, plan fiduciaries would be well advised to bear in mind something that Ben Franklin is said to have remarked during the deliberations in Philadelphia: “We must, indeed, all hang together or, most assuredly, we shall all hang separately.”

- Nevin E. Adams, JD