"Broken" Premises

 Perhaps because of the recent full moon, the nation’s 401(k) “haters” were out in force.

Yes, last week we were “treated” to a Bloomberg op-ed with ideas on how to “fix” America’s broken retirement savings system, a back-handed compliment (of sorts) on SECURE 2.0 in Forbes from Teresa Ghilarducci, and the trifecta was completed with an academics op-ed in the Washington Post alleging that the current retirement system is “built for the rich.” 

Most of the criticism was focused on the same old myopic view on taxes and tax preferences—all flavored through the prism of a highly biased preference for the involvement of the federal government in such matters, rather than the private sector.

Key Points

So, let me take a couple of minutes to make a few points that always seem to be glossed over:

1. Tax deferral is not tax avoidance. Those contributions and earnings will be taxed (though generally outside the 10-year budget scoring window Congress uses).
2. The ability to save for retirement on a pre-tax basis is a powerful incentive—even, and perhaps especially, for those that academics argue have no rational reason to do so (because, on a net basis, they have no federal income tax liability). 
3. Tax preferences encourage not only plan participation (though it does that), but also the creation/existence of retirement plans—in which lower income workers are 12-15 times more likely to save than on their own. 
4. Non-discrimination tests and legal contribution limits work (as designed) to keep an effective balance between the benefits of higher-paid and other workers. In fact, actual data proves that while higher-income individuals have higher account balances, those balances are in rough proportion to their incomes. They are not “upside down.” 

Now, with those elements in mind (we’ll return to them throughout), what did the “haters” have to say?

The ‘Fixes’

Well, the Bloomberg editors’ “fix” to the system they claim is “broken” involves: (1) making access universal (but wait, what about Social Security?)—with a 3% auto-default rate with an opt out (they cite the UK’s NEST opt-out rate of 8%, though the opt-out rate for comparable state-run IRA programs in the U.S. is three to five times larger); (2) making it “simple” (the federal government’s Thrift Savings Plan, or TSP was cited), ostensibly with an abbreviated fund menu—or perhaps just because it’s a government solution; (3) making it “portable” (actually, they want it centralized, presumably with the federal government, so that it never has/get to be moved/rolled over), and (4) they want it to be “progressive,” which basically means shifting the current deferral of taxes to a straight-up government match to “the lowest earners.”[i]

There’s really nothing new here—the solution seems to be, more or less, a “nationalization” of retirement savings—with a program focused on helping those at the lower end of the income scale, but completely ignoring the vast sea of middle-income savers—for whom Social Security alone likely won’t come close to replicating their retirement income needs. 

The Washington Post op-ed was crafted by Daniel Hemel, a professor at the University of Chicago Law School and a visiting professor at New York University School of Law. He seems quite angered at the bipartisan support for SECURE 2.0 (actually the Securing a Strong Retirement Act of 2022) as some kind of sell-out by Congress to the financial services industry. He has an issue with “mega-IRAs,” but he also takes aim at Roth contributions, the extension of the required minimum distribution timeline, the non-tax refundability of the Saver’s Credit, as well as the scaled increase in the catch-up limits—all of which are characterized as either a giveaway to the rich, a budgetary “gimmick”—or both. He offers no solutions to any of this—though he does suggest that a focus on a strengthened Social Security would be a better use of their time (I, for one, would support that). Nor is there an acknowledgement that somewhere along the way this system “built for the rich” has somehow managed to wind up with roughly two-thirds of its participants in tax brackets that by most measures would fall significantly lower than that label would encompass. Groups for which this “broken” system is a lifeline beyond the baseline of Social Security and the pension benefits they never had. 

And then, just ahead of that article, Teresa Ghilarducci, a familiar critic of 401(k)s, pens an article ostensibly focused on the provisions of SECURE 2.0 (even taking the time to try and explain why it garnered such strong bipartisan support) on her way to pointing out why her proposal (now labeled the Ghilarducci/Hassett/EIG retirement proposal) is superior. Now, most of us would think that legislation—any legislation—that passed the U.S. House of Representatives by a margin of 414-5 would have to be on something as innocuous as naming a post pffice—that it would advance so many aspects of retirement security instead is a testament to the importance of the issue(s), and the potential to make strides in addressing them. 

Well, Ms. Ghilarducci seems to think that while SECURE 2.0 is perhaps better than a poke in the eye with a sharp stick (my words, not hers), but she claims the fixes it provides are too little (and probably too late), compared with her solution (if bipartisanship in the U.S. Congress is quickly dispensed with, she takes great pride in her alignment with conservative economist Dr. Hassett) that would build a TSP-like program for—well, everybody—or at least those who don’t already have a retirement savings plan at work. This particular article doesn’t go into the details of her solution, but we’ve seen (and written) about it before. Mind you, she’s not really worried about what you and I might consider middle-income workers—her focus is on the lower end (less than $52,000 median household earnings). It calls for a government (rather than an employer) match—but one that is only 3%. Now, that’s a number that has appeared in previous proposals she has put forth—and Jack VanDerhei, while at the Employee Benefit Research Institute, projected that it comes in well under where the status quo brings that same group in the current system.[ii]

‘Broken’ Premises

Now, those of us who actually work with real people know that this so-called “broken” system works amazingly well—for those who have access to it—including, most especially, those at the lower end of the income scale. The academics routinely target the well-off in their criticisms, but ignore the needs of middle-income households for whom Social Security will almost certainly not be… enough. And completely discount/ignore the role that the current tax preferences play in fostering the formation and maintenance of these retirement plans. 

Indeed, underneath all of the criticisms, the real issue seems to be that—as we’ve noted repeatedly—not enough working Americans have access to that system. What these critics don’t seem to appreciate is that, rather than closing that gap by encouraging more plan formation and participation, these random op-eds—often based on myopic views and faulty premises—only serve to undermine that goal. But then, perhaps there’s a reason… 

There are plenty of success stories out there—I’ll bet every single one of our 35,000+ readers know one, ten, a dozen, perhaps hundreds… it’s past time we started telling them.

- Nevin E. Adams, JD

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[i] Weirdly, as a throw-in they suggest that folks should be able to “tap their accounts for the occasional emergency expense”—which they claim would “save billions more that would otherwise go toward interest on often-predatory payday loans.”

[ii] My thinking is that, like earlier proposals, her math works because she assumes that any balances not actually withdrawn by the individual (and perhaps their spouse) would be absorbed into the “pool” and used to fund other payouts.

Planes, Trains, and ...U-Hauls?

One of my favorite holiday movies is “Planes, Trains, & Automobiles”—but who thought so many would have to live it? 

The movie I’m referring to is that 1987 John Hughes classic starring Steve Martin and John Candy as a pair of travelers (Martin an advertising exec, Candy a traveling shower curtain ring salesman—and you think you have a hard job) trying to get home for Thanksgiving. There are any number of misadventures along the way—involving the aforementioned means of transportation on the trip from New York to Chicago… via Wichita and St. Louis. 

Well, a couple of weeks back several hundred advisors found themselves reliving that experience as a series of unrelated events emerged to thwart their scheduled travel to the NAPA 401(k) Summit in Tampa. It started early the day before the event with a strike by Alaska Airlines pilots, by mid-morning Southwest Airlines was experiencing ““intermittent performance issues following routine overnight maintenance of some of [its] backend technology,” there was snow in the upper Midwest, and in early afternoon the southeast found itself covered by a massive series of thunderstorms—all of which had an impact—and a ripple impact across the systems of travel—and all at a time when air traffic was arguably even more complicated by a large volume of Spring Break traffic as well. And that’s not even considering the normal issues with mechanical issues that some who missed the other events had to contend with.

As you might imagine, a good part of that Saturday was consumed not only worrying about, but hearing from, and responding to, speakers and staff who were ensnarled in those travel issues. At the same time, I heard from at least a dozen individuals who, on the ground in Tampa, but aware of the travel issues, reached out to me to volunteer their services as a stand-in for speakers who couldn’t get here in time. Meanwhile, there was the “call” to be made with regard to the outdoor activities that were being planned for Sunday (Flo-Rida) and Monday nights.

Sunday morning dawned with a great deal of uncertainty as to what we’d be looking at in terms of attendance and speakers. But what impressed me throughout was just how hard people were working to get to Tampa. And over the three days of the conference people just… kept on coming… 

There were some amazing stories of persistence and perseverance throughout—but the one that made the deepest impression on me was that of Odyssey Financial Group’s Michelle Coble and Adam Bahner. Based in Oklahoma City, OK, they got as far as Atlanta when not one, but two of the flights from there to Tampa were cancelled—and they were told that there were no seats on the flights out to Tampa for two days. There were no rental cars to be had, and the trains—well, they wouldn’t get to Tampa on time. So they rented a U-Haul—and drove that last leg from Atlanta to Tampa! 

When all was said and done, we had an amazing conference. Sure, some couldn’t get there—many despite enormous effort and inconvenience. But it was clear from the opening session all they way through to the close that those who were there were there because they really wanted to be there—and the level of enthusiasm and engagement—and I think the quality of the content and networking—were through the roof[i].

So, my sincere thanks and appreciation to the speakers and sponsors, to those who “stepped up” to fill gaps, and those who volunteered to do so (because even if we didn’t have to call on you, it relieved some planning pressure)—to the steering committee who helped ensure those gaps were filled, to the conference staff for all the extra work (and stress) that accompanied all this uncertainty.

But most especially, my thanks to all who (including those above) made those (extraordinary) efforts to “get there” via planes, trains, automobiles—and even U-Hauls—to be part of what, by any measure, was an extraordinary event! 

p.s.: Mark your calendars now for the NEXT one—April 2-4, 2023 in San Diego!

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[i][i] And, despite all the bad weather on Saturday, the weather during the conference was great, and the outdoor events unaffected!

Not-So-Unforeseen Outcomes

 Thanks to their mother, my kids have grown up with a variety of pets in our house—but none more bizarre than our experience with… a chicken.

My son’s elementary school class had been exposed to the miracle of life over the course of several weeks by watching a set of chicks spring forth from eggs that had been carefully tended by the class. Once hatched and ready to be turned loose, the teacher offered to let selected children take one home—provided they obtained their parent’s permission, of course. My son was smart enough to ask his mother—who, seeing how much it meant to him—and much to my amazement, acquiesced to the request. 

And so “Grr”[i] entered our lives. Mind you, we were living in a residential neighborhood in Connecticut at the time, miles and miles from anything remotely resembling a farm. That said, the little peeping chick was adorable, and my wife persuaded me that, as the chick grew we’d be able to erect a small pen in the back yard. We even joked about being able to have fresh eggs.

Or did until the day we discovered that Grr was biologically incapable of such things—at which point it was clear that while we had thought things might turn out one way—well, we now had a loud, smelly and fairly aggressive bird in our house! It’s not that this was completely unforeseen, but it certainly didn’t take a lot of imagination to see that it could go “wrong.”

In that spirit, there are a couple of initiatives rumbling around in Congress at the moment—arguably well-intentioned, but almost certainly likely to have consequences that are not unforeseeable, though surely not what their champions expect or intend. 

The first of these is an initiative focused on expanding spousal consent—not the beneficiary designation requirement in place since the mid-1980s, but one that would basically require an in-person notarized consent for most distributions. The second revolves around discussions to significantly expand the size and flexibility of emergency savings accounts. 

‘Missed’ Directions

The expanded spousal consent provision is well-intentioned, of course. Much as the beneficiary designation requirement, it is designed to prevent one spouse from taking advantage of the other by wiping out what might well be their life savings without their knowledge or involvement. On the other hand, it doesn’t require much imagination to, in a day when men and women are about equally likely to have a 401(k), envision a situation where an abused spouse, needing to access the funds in their account to escape their situation, would be precluded by this legislation from doing so by the very spouse they are seeking to escape.[ii]

Now as for those emergency savings accounts—while the notion is quite popular these days—the problem lies with an idea being touted by the Aspen Institute. It would establish a sidecar emergency savings account with your 401(k) that could be matched—but that you could basically withdraw for pretty much any reason once you got the match. More on that in a minute.

Now, emergencies come in all shapes and sizes—but the Aspen proposal is calling for $5,000 in those accounts (rather than the $1,000 embodied in legislation such as The Enhancing Emergency and Retirement Savings Act of 2021—and they’re suggesting it as $5,000 every year. Five thousand dollars that could be put in the “emergency” savings account every year (just) long enough to get the match—and then, as mentioned above—withdrawn for pretty much any reason whatsoever. And then the next year they could do it all over again. And again. In fact, it doesn’t require a lot of imagination to see this turning into one of those “Christmas Club” savings accounts that banks offered once upon a time. Which arguably stands to create a whole other type of emergency: retirement plan “leakage”—on steroids.

You don’t need 20/20 hindsight to know that bringing a chick into a suburban Connecticut home won’t end well. We did it with a genuine desire to do something nice for our son—and hoped in our hearts that it would turn out differently than our brains would acknowledge. It didn’t, of course—but it turned out to be a situation that didn’t last long, and—thanks to a farm-owning colleague—had a (relatively) happy ending.

Something that ill conceived legislation, however well intentioned—can’t—and shouldn’t—depend upon. Particularly when the potential negative outcomes are… not so unforeseen.

- Nevin E. Adams, JD

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[i] While the name eventually seemed to fit his personality, my son simply chose to name it after a favorite character in the “Invader Zim” cartoon series.

[ii] The good news is that the champions of this legislation have decided to study the matter and its potential implications under the auspices of the Government Accountability Office.

A Thumb on the Scale(s)?

Years back I remember being part of a Q&A with a group of plan sponsors—the focus was the challenge of not only getting, but keeping their plans in compliance, while also looking for creative ways to engage and encourage participants. Then at one point, a tired looking gentleman, expressing frustration with the pressures of audits and litigation, said: “I wish the DOL would just tell us what to do.” 

I cautioned him at the time that he ought to be careful what he wished for—that he might just get it.

Sure enough, in mid-March the Labor Department issued a “compliance assistance release” which was unique both in format and, arguably, focus. It reminded plan fiduciaries of the significance of their review and assessment of prudence of plan investments—and then said in no uncertain terms that it had concerns about the ability of cryptocurrency to meet those high standards. Indeed, the release plainly stated that those who did include such options could “expect to be questioned about how they can square their actions with their duties of prudence and loyalty…”—not just as standalone options on the menu, but even through a brokerage account. And so, while not an outright prohibition, it seems fair to say that it’s likely to have what lawyers call a “chilling effect” on cryptocurrency as a 401(k) investment option.

In late December the Labor Department issued a statement on the use of private equity in participant-directed plans—stating that, except in a minority of situations, plan-level fiduciaries of small, individual account plans are not likely suited to evaluate the use of PE investments in designated investment alternatives (DIAs) in individual account plans. It represented a step back from a June 2020 information letter that affirmed that PE investments “as a component of a professionally managed multi-asset class vehicle structured as a target date, target risk or balanced fund” can be offered as an investment option for participants in defined contribution plans under ERISA. It seems likely that some private equity firms (or those promoting such investments) had taken the initial guidance as something of a green light to promote those options beyond the limitations of the original letter—leading the Labor Department to clarify its position—and, arguably, to shut down active consideration of those options, at least by “small, individual account plans.” 

And then, of course, there’s the focus on ESG options, which the Trump administration clearly tried to undermine with its proposed and then (slightly muted) final regulation—and which the Biden administration first announced that it would not enforce, and has since then, with its own proposed regulation, sought to swing the pendulum in favor of those options—arguably to the point of not only encouraging, but requiring, consideration of those factors.

The reality is, of course, that times change. And even if the long-standing precepts of prudence and fiduciary responsibility haven’t changed, the environment in which those determinations are made has. Cryptocurrency wasn’t a “thing” until fairly recently (and it didn’t take long to find its way into 401(k) platforms), and those who may have misapplied (accidentally or “on purpose”) the Labor Department’s statement on private equity needed to be reminded. ESG is certainly a relatively recent—though not brand new—focus—but plan fiduciaries can perhaps be forgiven for feeling a bit “whipsawed” by the shifting sentiments between administrations.

Generally well-intentioned, the perspective of even the most seasoned and expert regulatory professional sometimes fails to appreciate the impact in the “real” world. That’s the value in the access—and influence—that NAPA, armed with the input, insight and perspective of NAPA members, provides to these processes. Insight and influence that allows you to “put a thumb on the scale” in providing a practical and pragmatic perspective on the rules and regulations that guide our industry— now, and in the days ahead. 

- Nevin E. Adams, JD

p.s.: Speaking of which, this would be a great time to get involved via the NAPA DC Fly-In Forum. Check it out—and apply today—at https://napadcflyin.org.