A Retirement Savings Santa Claus?

One could certainly argue that many Americans act as though at retirement 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 snowsuit.

A few years back — well, now it’s quite a few years back — when my kids still believed in the reality of Santa Claus, we discovered an ingenious website 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 we said ever had the impact of that website — if not on their behaviors (they were 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 that year) was on the verge of tears, worried that he’d find nothing under the Christmas tree but the coal and bundle of switches he so surely “deserved.”

In similar fashion, must of those responding to the ubiquitous surveys about their retirement confidence and preparations don’t seem to have much in the way of rational responses to the gaps they clearly see between their retirement needs and their savings behaviors. Not that they actually believe in a retirement version of St. Nick, but that’s essentially how they behave, though a significant number will, when asked to assess their retirement confidence, express varying degrees of doubt and concern about the consequences of their “naughty” behaviors.

Like my son in that week before Christmas, they tend to worry about it too late to influence the outcome.

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 we believed that 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 — 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 your workplace retirement plan, the employer match, and your retirement plan advisor.

Happy Holidays!

- Nevin E. Adams, JD

P.S.: The Naughty or Nice website is still online, here.

6 Stocking Stuffers for Retirement Participants

I can remember as a kid paging through the pages of various Christmas catalogues, earmarking the pages that contained the various things that I hoped Santa Claus (or his emissaries, my parents) would take as hints.

These days such things have been replaced by online “wish lists” – and if they’re not quite as much fun to page through, they’re doubtless more effective.

So, in the spirit of the holiday season, here are some “presents” that I hope participants find in their retirement plan “stockings” during the coming year:

Automatic reenrollment for longer-term workers.

New hires, regardless of age, are these days routinely defaulted into some type of qualified default investment alternative, whether it be a managed account, target-date fund, or balanced fund. However, workers who have been in the plan for awhile are generally not accorded that courtesy. Rather, ostensibly on the premise that they have, at some previous point in their careers, made an affirmative election to be in the funds they are currently invested. Sadly, we all know that regardless of how affirmative that initial decision was, the odds that it has – ever – been reconsidered, much less reallocated, lies somewhere between slim and “are you kidding?” It’s time we gave current workers the same option we give new hires – a good swift shift into a QDIA (with an opportunity to opt out, of course).

An easy way to roll over distributions.

Okay, I know it’s gotten easier. But if it’s actually gotten easy to rollover your 401(k) balance from a former employer to a current employer – well, that would be news worth reporting (I’m sure I’ll hear from someone). We all know how difficult it can be for participants to keep up with even a single 401(k) account. How much harder is it for them to keep up with – or remember – all those stray accounts left behind at prior employers, or rolled into retail-priced IRAs? It’s better for them – and it could well be better for the plan as well.

More time to repay participant loans after job change – or portability of the obligation.

No plan sponsor wants to deal with the processing of manual loan repayments once an individual has left their employ and payroll. But we all know that a major source of leakage from retirement savings comes when a participant who has a loan outstanding from the plan changes jobs. The individual may or may not be in a position to come up with the funds to pay off that loan at termination, but likely won’t, and the ensuing “deemed” distribution inevitably becomes a real one, and that just ensures that the participant will wind up with a big tax bill (that they probably won’t be in a good position to handle, either). More time to repay that obligation – or some expanded portability – would surely go a long way. Though this one is going to require some help from lawmakers.

Automatic escalation of contributions.

Though adoption has plateaued somewhat in recent years, automatic enrollment, and automatic investment in QDIAs has surely made a significant, positive impact on retirement security. What hasn’t been quite so “automatic,” even though it was incorporated as part of the PPA’s automatic enrollment safe harbor, is the auto-escalation of contributions following that enrollment. More’s the pity. This is a chance to let participants set in motion a systematic improvement of their retirement plan fortunes – and with a minimum of effort. Participants who are auto-enrolled at 3% need to be auto-escalated… automatically.

Some kind of retirement income alternative.

It’s (still) ironic to me that we spend decades working with participants trying to help them make prudent, well-reasoned savings and investment decisions – and then, at the most critical moment (distribution), most just get pointed in the general direction of a rollover IRA or annuity. Both can be effective, of course, but can be quite the opposite as well. We shouldn’t just leave participants to their own “advices” at this critical juncture – and there is a whole new generation of options to choose from. But here we could use some help from the legislative “elves” as well.

A workplace retirement plan.

It’s easy to overlook this one, particularly for those of us who work with these programs on an ongoing basis. The sad fact is that lots of working Americans (though not the 50% that some still claim) still don’t have access to any kind of workplace retirement plan. That means no convenience of payroll deposit, no assistance from an employer match, no education and/or advice about how to properly invest their retirement savings – and, in all likelihood, no retirement savings.

And that adds up to being a big lump of coal in your retirement stocking!

- Nevin E. Adams, JD

Things That the ‘Common Wisdom’ About Millennials Gets Wrong

To judge by the headlines, if there’s anybody in more trouble when it comes to retirement planning than Boomers, it’s Millennials. But are they really?

Consider this:

Millennials are saving for retirement – likely earlier, and at higher rates than you did when you were their age.

I’ve seen a number of surveys that suggest that Millennials are, in fact, saving earlier – and saving at higher rates than their Boomer parents. A recent Natixis survey says that on average, Millennials first enrolled in a retirement savings plan at age 23, while Boomers didn’t until 31.

Another – this one by Ramsey Solutions – finds 58% of Millennials are actively saving for retirement, and they began saving at an average age of 23. Consider also that, of the Millennials who are actively saving, 39% set aside up to 9% of their income for retirement — $5,000 of the average annual Millennial household income of $55,200.
This higher and earlier rate of saving exists despite high levels of college debt – which, at least one study claims isn’t having a large impact on their decision to save (though it certainly does affect their spending).

Sure, some of that is plan design – automatic enrollment was a relative rarity when their parents were coming into the workplace. And some of it is that – at least supposedly – their parents didn’t need to save because they had defined benefit pension plans to secure their retirement. But, even for those who were covered by those plans (and many weren’t) – the DB promise was of little value at a time when 10-year cliff vesting and 8-year workplace tenures were the order of the day.

But the reality is that younger workers have long had other, shorter-term financial needs to address. The Boomers certainly did. And despite the challenges of the 2008 financial crisis, a sluggish economic recovery, and the overhang of college debt, Millennials seem to have their head in the right place.

Millennials are likely better invested for their retirement than you are – “then” and now.

Okay, as with saving for retirement, surely some of this is plan design – notably the default investment in target-date funds (TDFs) or some other qualified default investment alternative (QDIA) – and their more recent hire date. While data shows that TDF use varies with participant age and tenure, a recent report by the nonpartisan Employee Benefit Research Institute (EBRI) and the Investment Company Institute, younger participants were more likely to hold TDFs than older participants.

In fact, at year-end 2014, 60% of participants in their 20s held TDFs, compared with 41% of participants in their 60s. Of course, recently hired participants were more likely to hold TDFs than those with more years on the job: At year-end 2014, 59% of participants with two or fewer years of tenure held TDFs, compared with about half of participants with more than 5 to 10 years of tenure, and fewer than 30% of participants with more than 30 years of tenure.

One more positive trend: less investment in company stock. The EBRI/ICI data found that at year-end 2014, only about a quarter (26.9%) of recently hired participants in their 20s who were offered company stock invested in that option. In 1998, more than 6 out of 10 in that age bracket had done so.
They might just be the beneficiaries of good plan design. But that is something that plan fiduciaries might want to keep in mind the next time the concept of reenrollment comes up.

Millennials probably aren’t changing jobs any more often than you did.

Do Millennials change jobs more frequently than their elders? Sure. But they didn’t invent the phenomenon; for a variety of reasons, younger workers have long been more inclined (or able) to pull up stakes and seek new opportunities.

Still, there is a pervasive sense that Millennials are more inclined to change jobs than those in previous generations (setting aside for a moment the reality that as newer hires those decisions might not have been completely within their control). In fact, while it didn’t single out Millennials specifically, a recent report by the Government Accountability Office (GAO) published a paper innocuously titled “Effects of Eligibility and Vesting Policies on Workers’ Retirement Savings.” The report took issue with current workforce dynamics, and challenged the applicability of current vesting and eligibility standards under ERISA as being ill-suited to the current day when the “median length of stay with a private sector employer is currently about four years,” going on to state that ERISA’s rule permitting things like a 6-year vesting policy “may be outdated” (the headlines covering this particular report were much more “strident,” as you might expect).

Really? The data show that median job tenure in the private sector in the United States has hovered around 5 years for the past three decades. Indeed, according to the nonpartisan Employee Benefit Research Institute (EBRI), in recent years it has ticked up, to about 5.5 years (though that’s attributed to women are staying in their jobs longer; job tenure for men has actually been dropping).

So, if those vesting and eligibility standards were outdated for today’s workforce, then they have been so for – well, as long as ERISA has been in place.

Millennials are thinking about retirement. Probably more than you were at their age.

Millennials have never known a time without a 401(k), nor have they lived during a period when a personal responsibility for saving hasn’t been part and parcel of the education around their benefits package. They’ve been worried about Social Security’s sustainability from the time of their first paycheck (what they probably don’t appreciate is that their parents also worried, and arguably – in the early 1980s – with better reason).

While they certainly have options their parents didn’t, they also have their own set of challenges – some unique, but many unique only in that they are young(er). They have tools and innovative plan design, apps and the aptitude to use them, and in many cases access to professional guidance.

They may not know how much they need to save for retirement, they may not yet feel that they can afford to save for retirement, they may not even know how to save for retirement – but you can bet they know they need to.

And, in more cases than they are genuinely credited, with access to workplace retirement plans, the help of good plan design, and professional retirement planning advice, likely already doing so.

- Nevin E. Adams, JD

See also:

• 6 Things You Should Know About Those Millennial Participants
• How the Class of 2020’s Retirement Plans Will Be Different
• 5 Retirement Myths About Millennials

5 Things the DOL Wants You to Know About TDFs – That You May Have Overlooked

Target-date funds continue to expand in usage and popularity – but there are some things the Labor Department wants you to know about TDFs that you may have overlooked.

When the Labor Department published its “Target Date Retirement Funds – Tips for ERISA Plan Fiduciaries” in 2013, I was pleased to see it, and to discover that it could be read ¹ (and understood) in about 15 minutes.

But in preparation for a recent webcast on the topic, I took a fresh look at that document, and found some nuggets that I hadn’t really picked up on the first time around.

It’s Not Just About Fees and Performance

As part of a reminder about the importance of establishing a process for comparing and selecting TDFs, the Labor Department specifically references considering prospectus information, such as information about performance (investment returns) as well as investment fees and expenses.
However, in that same topic point, the agency says that plan fiduciaries should consider how well the TDF’s characteristics align with eligible employees’ ages and likely retirement dates, “as well as the possible significance of other characteristics of the participant population, such as participation in a traditional defined benefit pension plan offered by the employer, salary levels, turnover rates, contribution rates and withdrawal patterns.”

‘To’ Versus ‘Through’ Matters

Considering what can be some pretty significant outcome differences in glidepaths between “to” (those that build to a specific target retirement date) and “through” (those that assume a glidepath to death), I’ve always found it curious that the Labor Department’s tips don’t make more of what seems a pretty big structural difference in these offerings.

While the “to” and “through” focus is covered in “Target Fund Basics” in the piece, under the bullet regarding “understand the fund’s investments,” the Labor Department’s information sheet notes that “some funds keep a sizeable investment in more volatile assets, like stocks, even as they pass their ‘target’ retirement dates,” going on to explain that “these funds” are generally for employees who don’t expect to withdraw all of their 401(k) account savings immediately upon retirement, but would rather make periodic withdrawals over the span of their retirement years. That approach is contrasted with the “to” version that the Labor Department says are “concentrated in more conservative and less volatile investments at the target date, assuming that employees will want to cash out of the plan on the day they retire.”

But what’s key here is the closing sentence: “If the employees don’t understand the fund’s glide path assumptions when they invest, they may be surprised later if it turns out not to be a good fit for them.”

Indeed.

Higher Costs Can Be Justifiable

It should come as no surprise that the Labor Department’s tips include an admonition about the need to be attentive to the impact of fees on retirement savings, and the structural layering typically associated with TDFs that can imbed layers of fees as well.

However, rather than merely condemning options that carry higher fees, here the Labor Department notes that, “If the expense ratios of the individual component funds are substantially less than the overall TDF, you should ask what services and expenses make up the difference,” going on to note that added expenses may be for asset allocation, rebalancing and access to special investments that can smooth returns in uncertain markets that “may be worth it.”

Custom TDFs Could Be Viable Alternatives

The Labor Department tips note that “a ‘custom’ TDF may offer advantages to your plan participants by giving you the ability to incorporate the plan’s existing core funds in the TDF,” and that “nonproprietary TDFs could also offer advantages by including component funds that are managed by fund managers other than the TDF provider itself, thus diversifying participants’ exposure to one investment provider.” It does acknowledge that there are some “costs and administrative tasks involved in creating a custom or nonproprietary TDF, and they may not be right for every plan.”

This “tip” was actually pretty plainly spelled out in one of the headlines – and yet, I remember thinking at the time that this wouldn’t be a very popular approach for most. But times are changing, technology continues to advance, and for advisors looking to differentiate themselves in the development of what is likely to become the largest plan investment, custom TDFs would seem to be a more viable solution than ever.

You Might Have to ‘Break Up the Set’

A TDF is, of course, a plan investment, and like any plan investment, if it fails to pass muster, a plan fiduciary would certainly want to remedy that situation, including removing the fund if necessary. That said, TDFs are frequently, if not always, pitched (and I suspect bought) as a package. While each fund in the family is reviewed separately, and certainly should be, breaking up the set certainly carries with it a series of complicated consequences, not the least of which are participant communication issues and glide path compatibility. Not that those can’t be overcome – and not that those complications would be deemed sufficient to retain an inappropriate investment on the plan menu – but it doesn’t take much imagination to think about the heartburn that might cause a plan sponsor.

However, as the Labor Department’s tips remind us, should a TDF’s “investment strategy or management team changes significantly, or if the fund’s manager is not effectively carrying out the fund’s stated investment strategy, then it may be necessary to consider replacing the fund.” That’s right – “the” fund. Similarly, the Labor Department cautions that “if your plan’s objectives in offering a TDF change, you should consider replacing the fund.” Again, note the use of the singular, not the plural.

Finally, one item not included in the piece – but arguably one that applies to every fiduciary situation – is that if you lack the requisite expertise to make the decisions as the prudent expert the law requires, you should engage the services of someone who has that expertise.

- Nevin E. Adams, JD

See also:

• 5 Things You Should Know About Target-Date Funds
• Target-Date Fund Misperceptions Abound

Footnote

1. The key bullets outlined in the DOL tips are simple and straightforward – and to my eyes pretty much fiduciary common sense. They included suggestions/admonitions to: (1) establish a process for comparing and selecting TDFs; (2) establish a process for the periodic review of selected TDFs; (3) understand the fund’s investments – the allocation in different asset classes (stocks, bonds, cash), individual investments, and how these will change over time; (4) review the fund’s fees and investment expenses; (5) inquire about whether a custom or non-proprietary target date fund would be a better fit for your plan; (6) develop effective employee communications; (7) take advantage of available sources of information to evaluate the TDF and recommendations you received regarding the TDF selection; and (8) document the process.