3 Things That (Seem to) Scare Plan Sponsors

Halloween is the time of year when one’s thoughts turn to trick-or-treat, ghosts and goblins, and things that go bump in the night. And sometimes it’s just a good time to think about the things that give us pause—that cause a chill to run down our spine. 

In that category, here are three things to ponder…

Getting Sued

Plan sponsors will often mention their fear of getting sued (actually, their advisors frequently broach the topic), and little wonder. The headlines are (still) full of multi-million dollar lawsuits against multi-billion dollar plans—the pandemic has, if anything, seemed to accelerate the pace. If relatively few seem to actually get to a judge (and those that do have—to date—largely been decided in the plan fiduciaries’ favor), they nonetheless seem to result in multi-million dollar settlements. Oh, and not only has this been going on for more than a decade, the issues raised are evolving as well.

It's not that the fear is unfounded—plan fiduciaries certainly can be sued, and that includes responsibility for the acts of co-fiduciaries, and liability that is personal, to boot (see 7 Things an ERISA Fiduciary Should Know).

Of course, most plan sponsors won’t ever get sued, much less get into trouble with regulators. And those who do are much more likely to drift into trouble for things like late deposit of contributions, errors in nondiscrimination testing, or not following the terms of the plan.

Still worried about getting sued? As one famous ERISA attorney once told me, you might as well worry about getting hit by a meteor. Unless, of course, you have more than $1 billion in plan assets.

ESG

In fairness, it’s not ESG—environmental, social & governance—investing per se that seems to “scare” plan sponsors from offering these options, but rather concerns as to their level of accountability for choosing to do so. Indeed, there’s plenty of survey data to suggest that workers want these options, particularly younger workers. That said, workable, consistent definitions of ESG remain fluid, and perhaps as a result, the adoption rate among defined contribution plans has been tepid—and the take-up rate among participants even lower. Fewer than 3% of plans offer an ESG option, according to the 62^nd annual Plan Sponsor Council of America survey, and less than 0.2% of plan assets have been invested in those options. 

Many think the hesitancy comes from confusion about how the Labor Department views these options, or more precisely the prudence of including them as a participant investment option. For a long time there had “only” been Interpretive Bulletins (IBs) (in 1994, 2008 and 2016) and, more recently, a 2018 Field Assistance Bulletin (FAB) on this subject. And while the 2016 IB was read as encouraging consideration of ESG factors (or at least discouraging the discouraging), the 2018 FAB was widely viewed as pulling back on that stance, in the process establishing what had been called the “all things equal” standard, which meant that so long as two otherwise identical investments met all the requisite prudence standards, a fiduciary could (prudently) pick the one that (also) had ESG attributes. 

And then in June, noting its concern “that the growing emphasis on ESG investing may be prompting ERISA plan fiduciaries to make investment decisions for purposes distinct from providing benefits to participants and beneficiaries and defraying reasonable expenses of administering the plan,” the Labor Department proposed a new rule to “clarify” things.

Now the rule itself is pretty standard stuff—but the Labor Department wrapped that in about 60 pages worth of preamble and impact analysis that conveyed what many (including this writer) saw as a clear sense of skepticism about the prudence of those options, or at least a concern that plan fiduciaries might be inclined to lower the prudence bar in order to accommodate the inclusion of these options. And if there was any doubt as to the concerns of the Trump administration, the rule specifically calls out ESG as unsuitable as a focus in qualified default investment alternatives (QDIA) (not that I am aware of any that have yet taken that step, and perhaps the rule was intended to forestall that). All this at a time when the Labor Department has made a series of (allegedly separate and unrelated) inquiries to both plan sponsors and RIAs about their current  processes regarding ESG consideration and review.

As one might expect in view of the billions of dollars (already) committed to ESG—not to mention its increasing prominence in the focus of a growing number of investment managers—that rule drew a ton  (more than 8,000) of comments (most critical), but is now back for review at the Office of Management and Budget (OMB) in a timeframe so short as to suggest to many that it didn’t undergo much change. 

All of which arguably leaves plan sponsors contemplating a shift to ESG with a great deal of uncertainty. They may not be “scared,” but one can certainly understand a bit of apprehension.

Lifetime Income Options

Speaking of apprehension, while defined contribution plan fiduciaries aren’t exactly scared  of retirement income, DC plans have long eschewed providing those options. There’s no question that participants need help structuring their income in retirement—and little doubt that a lifetime income option could help (certainly with some help from a trusted advisor). 

There are in-plan options available in the marketplace now, of course, and thus, logically, there are plan sponsors who have either derived the requisite assurances (or don’t find them necessary). Or who feel that the benefits and/or participant need for such options makes it worth the additional considerations. On the other hand, those industry surveys notwithstanding, participants don’t seem to be asking for the option (from anyone other than industry survey takers)—and when they do have access, mostly don’t take advantage. Let’s face it, even when defined benefit pension  plan participants have a choice, they opt for the lump sum. 

It’s ironic that programs designed to provide retirement income pay so little attention to the realization of that objective; only about half of defined contribution plans currently provide an option for participants to establish a systematic series of periodic payments, much less an annuity or other in-plan retirement income option, and that’s despite the 2008 Safe Harbor regulation from the Labor Department regarding the selection of annuity providers under defined contribution plans (which was designed to alleviate, though it did not eliminate, those concerns), not to mention a further attempt to close that comfort gap in 2015 (FAB 2015-02).

Proponents are hopeful that the SECURE Act’s provisions regarding lifetime income disclosures (though many recordkeepers already provide this), enhanced portability (a serious logistical challenge if you ever want to move from a recordkeeper that provides the service to one that doesn’t) and, perhaps most importantly, an expanded fiduciary safe harbor for selection of lifetime income providers, will—finally—put those “fears” to rest. We’ll see.

Don’t get me wrong—there are plenty of things for ERISA fiduciaries to be worried about. The standards to which their conduct must comply are “the highest known to law,” and with good reason. Prudence is often associated with caution, and fiduciaries generally find more comfort in the middle of the trend “pack” than on its fringes.

That said, the standard is to act (solely) in the best interests of plan participants and beneficiaries—even though it may be “scary” from time to time…

- Nevin E. Adams, JD

The Enemy of the ‘Good’

 A reader recently commented, “Nevin: You are continually berating those who question various aspects of 401(k) plans as if the current structure is ‘perfect.’ It isn’t.”

That comment was inspired by a recent column of mine critical of a proposal rumored to be under contemplation by the Biden campaign—one that would “trade” the current tax preferences of 401(k) deferrals for a flat government tax credit. It’s a proposal that is intended to direct more of the same amount of government expenditure (when the government doesn’t take money from your pay, it’s considered an expense) to lower income individuals, in that a flat dollar credit would ostensibly be worth more to lower income individuals than the deferral of taxes under the current system. 

Now that reader went on to offer a comment in support of that intent, explaining that “…one of the biggest challenges we face is getting lower paid people to participate. Credits will give bigger benefits to these people, and maybe, just maybe, spur increased participation,” closing by challenging me to “…work to make 401(k) plans BETTER, and not simply berate those who challenge the current system. It ain’t perfect, my friend. Far from it.”

Now, as it so happens I know this particular reader. And so I know that he cares deeply about retirement savings and retirement savers, that he’s one of the many out there who are truly working every day to make things “better.” 

That said, if he read my criticism of this proposal to be an assertion that the current system has no faults or shortcomings—well, that wasn’t my point. I have never said the current system was perfect, and in fact, dedicate any number of these columns to highlighting needs/opportunity to make it better.

Beyond that, my experience has been that when those kind of assertions are published[i] (even as an “op-ed”) by a reputable news organization—well, left unchallenged, the assertions are often assumed to be accurate. Indeed, every time something like this makes its way into circulation, I will hear from a half dozen different advisors (or more) telling me that the article has been passed on to them by plan sponsor clients (or participants), looking for comment, or response (and often asking me for assistance in that regard). Indeed, those are the kind of things that tend to get routed to those in academia and on Capitol Hill by those who see it as an affirmation of their notion that the current system is inadequate or biased in favor of the well-off. 

However, it’s one thing to press for change, but something else altogether to do so without fully thinking through (or at least acknowledging) the potential implications of that change—what are generously referred to as the “unintended” consequences, but sometimes seem more a willful and deliberate disregard. In this particular case a federal tax credit at the expense of having a workplace savings plan or an employer match doesn’t seem like a good trade-off to me. Moreover, making broad generalizations about fees (that don't seem supported by data) to justify a call for undermining valuable support for participants and employers doesn’t strike me as being a well-reasoned argument for change/improvement. 

To me the biggest shortfall of the current system is that too many working Americans don’t have the opportunity to take advantage of it. Oh, there are plans that still pay too much in fees, that either don’t avail themselves of the services of a plan advisor, or rely on the counsel of one that isn’t qualified, plans run by fiduciaries who either aren’t aware of that responsibility or fail to fulfill it. The system, in total, isn’t perfect—but those who pick at those imperfections to justify its wholesale demise should be challenged and held to account for misstatements and exaggerations, and they should be willing—and able—to consider and respond to questions—and data—about the ripple effect of unintended consequences. 

Never forget that “perfect” is often the enemy of the good. 

- Nevin E. Adams, JD

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[i] Warning: I’ve been at any number of symposiums or roundtables—and even read the occasional op-ed—where the words of a well-intentioned industry leader are served up as an “admission” of failure of the current system. 

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What's 'Eating" 401(k) Haters?

 Another week, another Bloomberg op-ed bashing 401(k)s—but this time the target is fees—and advisors.

The most recent “shot” is found in an article[i] titled “401(k) Fees Are Eating Your Retirement Savings.” The author, one Ethan Schwartz,[ii] without citation (beyond “various estimates”), tosses out claims as to the “average” fees in 401(k)s (and we know the value of “average” in such matters), states that those fees are “much higher” for then claims to know of “annual expenses well under 0.1%, and often near zero, offered by widely available stock and bond index funds and ETFs in many flavors and stripes outside of 401(k)s”—and then does the math to show how much it all adds to individually, and then he extrapolates it to the whole universe of 401(k) savers to assert that “more than $20 billion annually” is being “taken” from the nest eggs of retirement savers.

Better still, he cites the example of a “close friend” who asked for his help—only to find that “the plan offers a menu of high-priced (and underperforming) actively managed vehicles. Its only index-tracking choices are expensive “collective investment trusts costing about 0.5% more than index mutual funds and ETFs.” Oh, and he also cites as “even more outrageous” the reality that those trusts allow for securities lending (which doesn’t cost the plan money, and in fact probably offsets fees with income).

As unlikely as his generalizations seem to match the 401(k)s I know, it’s impossible to pick apart his portrayal of facts because—the individual situation notwithstanding—they are gross generalities. Not that that dissuades him from offering a “solution”—to “simply eliminate 401(k) intermediaries,” and to “let American workers save for retirement using their choice of designated, IRA-like accounts offering the same, cheap index-tracking funds and ETFs available outside of retirement plans.”

Unlike the other proposals cheered of late, he’s willing to leave the “other incentives that encourage Americans to save through their 401(k)s” intact, “including preferential tax status, employer matching contributions and enrolling employees by default.” He touts as “added bonus,” that “employers would no longer have to spend time and money establishing and monitoring their own, costly 401(k) plans. And employees of small businesses would no longer face a cost disadvantage vis-à-vis the plans offered by large firms, as they do today.”

Now, he anticipates “howls of opposition from the investment management industry,” and—along with a perspective of the industry that seems woefully out of date, he cites the work of none other than Yale Law School professor Ian Ayres and University of Virginia law professor Quinn Curtis. You may remember these guys—and the “love letters” from Yale. Their academic pedigree notwithstanding, these are the guys who used outdated (and limited) Form 5500 data and questionable expense assumptions to make wild accusations about 401(k) fees and the plans that offered them. Accusations that, it bears reminding, were subsequently disavowed by Yale University’s Law School. 

In fact, actual fund data continues to show declining fees among 401(k) plans. It’s not that you can’t find outliers—perhaps even this writer’s colleagues’—but that’s clearly the exception, rather than the rule. In fact, the Investment Company Institute reports in “The Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 2019” that 401(k) plan participants investing in equity mutual funds incurred an average expense ratio of 0.39% in 2019, compared with 0.42% in 2018 and 0.77% in 2000. 

Like so many others who opine from ivory towers far removed from the front lines of workplace retirement plans, this author blithely assumes that workers don’t need the education, encouragement and financial support of employers and advisors. He ignores (or perhaps is simply unaware) of the data that shows how workers of even relatively modest means are 12 times more likely to save in their workplace retirement plan than on their own.[iii]  

Today they’re also well-served by a growing number of automatic enrollment designs to help them get started, a steady increase in the default savings rate, and acceleration in that rate over time, not to mention the expanded availability and utilization of qualified default investment alternatives—enhanced designs that are not only continually finding their way “down market,” but that it seems fair to say are largely due to the involvement and engagement of those savings “eating” intermediaries he characterizes as “largely superfluous.”

What exactly is (still) “eating” 401(k) haters?

Why, instead of looking for ways to undermine a system that works, or pushing for incentives to extend those benefits to everyone—do they seem bound and determined to put those retirement savings on a “crash” diet?

- Nevin E. Adams, JD

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[i] Bloomberg News editorials have been on something of a tear of late; you’ll also want to check out An Article that Doesn’t Make Much Sense and Chiseling Away at the 401(k)… 

[ii] According to Bloomberg, Schwartz has worked as an investment manager and financial services executive for 21 years. He was a special assistant to the deputy secretary of the Treasury in the Clinton administration.

[iii] Vanguard, How America Saves 2018 (DC plan participation), EBRI estimate based on 2014 IRS SOI tabulation (IRA-only participation).