4 Fiduciary Resolutions for 2024

A brand new year awaits us – and with the New Year comes an opportunity to assess and reassess – for some when, resolutions for the cessation of bad behaviors and the beginning of better ones are in vogue. Here are some for plan fiduciaries for 2024 – that could benefit plan outcomes for years to come. 

See if your target-date options are over-weight(ed) 

 

Flows to target-date funds have continued to be strong – and little wonder, what with their positioning as the qualified default investment alternative (QDIA) of choice for most 401(k)s. That said, the vast majority of those assets are still under the purview of an incredibly small number of firms – nearly all of which (despite marketing brochures to the contrary) appear to share very similar views as to what an appropriate glidepath is supposed to look like – and nearly all of which have embraced the notion that a target-date is little more than a speed bump along the “through” target-date glidepath. 

 

A target-date fund is, of course, a plan investment. 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 (don’t take my word for it – that’s coming straight from the Labor Department). Particularly in view of recent market volatility, it’s worth (re)examining the asset allocations – and perhaps most significantly those that are applied to target dates that are near-term – and ask yourself – should an individual within five years of retirement have that much invested in those options?     

 

Look, the reasons cited behind TDF selection run a predictable gamut: price/fees, performance (past, of course, despite those disclaimers), platform (as in, it happens either to be their recordkeepers or compatible with their program) – and doubtless some are actually doing so based on an objective evaluation of the TDF’s suitability for their plan and employee demographics.  

 

Whatever your rationale, it’s likely that things have changed – with the TDF’s designs, the markets, your plan, your workforce, or all of the above – and it’s probably (past) time you took a fresh look. 

 

Pump up the default rate in your auto-enrollment plan

 

While a growing number of employers are auto-enrolling workers in their 401(k) plan, one is inclined to assume that, a decade and change after the passage of the Pension Protection Act, if a plan hasn’t done so by now, they likely have some very specific reasons. 

 

But for those who have already embraced automatic enrollment, those are plans that have (apparently) overcome the range of objections: concerns about paternalism, administrative issues, cost – some may even have heard that fixing problems with automatic enrollment can be – well, problematic (though things have gotten a little easier on that front). 

 

With more than a couple of decades of experience under our belts (a third of that under the auspices of the Pension Protection Act of 2006), we know a couple of things. First, 3% isn’t “enough” (ironically, that is probably what accounts for its popularity – it’s small enough that it wasn’t thought to spur massive opt-outs by automatically enrolled participants). We also know (or should) that the auto-enrollment safe harbor of the PPA calls for a minimum starting deferral of 3%, which is a floor, not a ceiling. And finally, that – at least according to any number of industry surveys – a default contribution rate twice as high as the prevalent 3% would likely not trigger a big surge in opt-out rates. However, there is a great deal of difference in the retirement outcomes between the two. 

 

On an encouraging note, more than half of the respondents to the 66th Annual Survey of Profit-Sharing and 401(k) Plans now have an initial default contribution rate in excess of 3% - and nearly as many (27.6%) have a rate of 6% as do (29.2%). 

 

Give reenrolling a second thought 

 

There is a natural human tendency to apply change from a point in time forward, to apply a new approach in plan enrollment, like automatic enrollment only prospectively, to workers who join the company after the point in time at which it is effective, rather than retroactively. And sure, workers who have had their chance to enroll voluntarily may well, in their refusal to do so, have spoken their intent not to participate at a previous point in time. 

 

However, that was then and this is now. If they don’t want to participate, it’s easy enough to opt-out. But maybe they didn’t fill out that form the last time because they forgot to, because the investment menu was too complicated or intimidating, or maybe the valid reason(s) they had then no longer applied. 

 

Regardless, don’t you owe them the same opportunity that you are giving your new hires? 

 

Develop a plan budget

 

Most financially-focused New Year’s Resolutions focus on spending (less) or saving (more)—and the really thoughtful ones do both—all tied around the development of a budget that aligns what we have to spend with what we actually spend.  

 

Most (many?) plans have a budget when it comes to the expenditures that require corporate funding. Less clear is how many establish some kind of budget when it comes to what participants have to spend. Now, granted, what they pay will vary based on any number of …variables—but an essential part of ensuring that the fees paid by the plan (for the services provided to the plan) is knowing how much—and for what.  

 

At some level, that means not only keeping an eye on things like expense ratios, the options with revenue-sharing and the availability of alternative share classes (or options like CITs)—but it also means having an awareness not only of the plan features but the usage rates of those plan features. 

 

Because when it comes to retirement plans, there often IS a direct link between spending less and saving more.

- Nevin E. Adams, JD

You Better Watch Out…

“You better watch out, you better not cry, you better not pout…”

Those are, of course, the opening lyrics to that holiday classic, “Santa Claus is Coming to Town.” And while the tune is jaunty enough, the message—that there’s some kind of elfin “eye in the sky” keeping tabs on us—has always struck me as just a little bit… creepy.

That said, once upon a time, as Christmas neared, it was not uncommon for my wife and I to use those images to caution our occasionally misbehaving brood that they had best be attentive to how their (not uncommon) misbehaviors might be viewed by the big guy at the North Pole.

In support of that notion, a few years back—well, now it’s quite a few years back—when my kids still believed in the (SPOILER ALERT) reality of Santa Claus, we stumbled across an ingenious website that purported to offer a real-time assessment of their “naughty or nice” status. Indeed, nothing we said (or did, or threatened) 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 lump of coal he so surely “deserved.”[i]

In similar fashion, most of those responding to the ubiquitous surveys about their retirement confidence and preparations don’t seem to do 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 Stst. Nick, but that’s essentially how they behave—or more accurately, don’t. 

I’m talking about the majorities who—asked to assess their retirement confidence—express varying degrees of doubt and concern about the consequences of their “naughty” behaviors—but like my son in that week before Christmas, they tend to only worry about it—far 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.

This is, of course, 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 lives, our relationships with others, and yes, our financial wellness.

So, 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.: I am happy to report that the “naughty or nice” site is still active. I’m even happier to report that, as of this writing, yours truly was rated “super nice,” with the following notation: “Has been nice most of the year (not just near Christmas)! Makes others happy. Could share a little more, however. Politeness is sometimes very good. Can be great listener.”

 

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[i] Fortunately for him (and our parental piece of mind), the site does allow for multiple evaluations—and my son was able to keep trying until he got a more “soothing” response.

Making a Move

My wife and I are in the process of moving to a new home—and it occurs to me that the process of changing homes is a lot like changing recordkeepers. Here’s how.

Know What You’re Looking For

We’ve made about a half dozen moves during our 37-year marriage—all driven by work, anchored by commuting concerns, and—in all but the first and last—school considerations. However, this particular move (my wife swears it’s the last one) literally started with a blank sheet of paper and a “so where would you like to live” conversation. Several conversations, actually. For this move, our high-level priorities involved climate (we’re not fans of snow, hurricanes, wildfires, or earthquakes), ready access to good healthcare (we’re not getting any younger), and proximity to cultural activities/things to do (we’re not THAT old). Indeed, with no particular ties to our current residence, and no external anchoring factors like grandchildren to consider (those with four legs don’t really “count”), we had a quick “oceans or mountains” discussion—and agreed on the latter.

Having established that high-level target, we then proceeded to look for specific houses—and that’s where things got tricky, in no small part because of the current “fluidity” in the real estate market. That said, the house we bought in 2011 to accommodate us, three kids and four dogs (that’s not a typo) was way more than the two of us (and just two dogs) now require. The multiple flights of stairs in our home that were once “interesting” were now a potential concern (particularly as they required scaling every time our dogs wanted to answer nature’s call). Oh, and there was the matter of price. 

That said, we had a geographic target, some guardrails for housing considerations, and while the latter in particular certainly limited our field of consideration(s), it made it easy(er) to conduct preliminary searches online—and ultimately to provide guidance to our realtor.

Effectively—and prudently—searching for a new recordkeeper requires a similar discipline. Simply pushing out a sample RFI or RFP with no clear idea of what you’re looking for (or looking to fix) will likely only confuse, complicate, and extend the process—and in all likelihood leave you with nothing but a general frustration. That means knowing what you like (and don’t) about your current situation, and doing just a bit of blue-skying as to things you’d really like to be able to consider. Who knows, that could be possible, even with your current provider… but you might need to ask.

Don’t Rely on the Marketing Brochures (or the Flowery RFP Responses)

As our targeted area was several hundred miles away, we did a LOT online (following the aforementioned driving around part), and relied pretty heavily on Zillow, where we found lots of good information about the properties, and generally speaking dozens of photographs. That said, it was pretty obvious that the written descriptions were almost pure marketing—flowery hyperbole that, from time to time, was good for a laugh if nothing else. 

The pictures did play a role in our reviews—until we discovered that while a picture may be worth a thousand words, the chosen angle and lens can make a room (or yard) look bigger than it is—and a neighbor’s home…vanish. Indeed, our own listing—though pictures were taken on a cloudy day, were “brightened” via photoshop. A picture may be worth a thousand words—but it pays to see things with your own two eyes. 

As for recordkeeping “homes,” one can hardly blame marketing/sales for putting their offerings’ best promotional foot forward in any commercial endeavor. In fact, those materials may well make statements or performance claims that are 100% accurate, and even understated. But—as was the case with our visualizations, I wouldn’t take any at face value without some level of validation.

Consider a Site Visit

As I noted, our previous moves had all been driven by considerations such as my commute, and we often had to make decisions based on distance and economics, rather than an appreciation for the characteristics of the community. Oh, we'd driven around with a realtor, and done some research online—but we never had (or at least felt we had) enough time to really get to experience what it would be like to live there.

While we were somewhat familiar with our targeted area (eastern Tennessee), that was mostly as tourists, and we hadn’t really had a chance to experience the surrounding communities—where we would actually live. So, earlier this year we made it a point to go spend some time driving around and getting a sense of the various communities. In the process we were able to rule out some as being too remote, others as being too built up, and still others that looked considerably different in person than they did on paper. We weren’t ready to make a decision yet, but having gotten a feel for the realities “on the ground,” it allowed us to better focus our online considerations later.

Admittedly, site visits to providers aren’t always instructive.[i] Let’s face it, however linear and production-flow oriented it may be, this business doesn’t generally lend itself to an assembly line visualization—and walking past row after row of (nearly) identical cubicles might not tell you a lot, however eloquent your guide(s). There is, however, something to be said for actually seeing the place where the “sausage” is made, to see how folks get along, to see the environment in which they operate.   

Hire a Professional ‘Inspector’

Some (perhaps all?) states require an inspection of the property by a licensed inspector. That said, the inspectors we’ve hired over the years have been distressingly inconsistent in the quality and thoroughness of their review (ditto the realtors we’ve engaged, but that’s a story for a different time)—and, generally speaking, (much) less discerning (it seems) than those engaged by the individuals buying OUR house(s). 

That said, this last round our inspector did a world-class review of a property that we’d likely have purchased absent his findings. He went places we didn’t (and in some cases, couldn’t), brought to our attention things I hadn’t considered—and in that process not only documented potential issues, he also noted which were minor and those that would require significant expenditures. Now, admittedly that’s what he was SUPPOSED to do—but we’ve paid more only to have others do less (and then later paid more to remedy the issues they should have identified). It saved us time and money, and I am thrilled that he also did the inspection on the house we chose next. 

There’s a lot that goes into making a change in providers, and it requires information and expertise that most plan sponsors don’t have, and don’t really have an opportunity to become expert in. Change can be difficult, but a change that makes a bad situation worse, or that belies the promises in the marketing brochures and sales pitch—well, that can be a nightmare—albeit one that frequently doesn’t manifest itself right away. All the more so in view of the fiduciary responsibility—and personal liability—for decisions that aren’t in the best interests of plan participants and beneficiaries.

In sum, you’re not required to be an expert in such matters—but ERISA requires that, if you’re not, you engage the services of those who are. And that’s an essential element in “making a move” to a new home—or deciding not to.

- Nevin E. Adams, JD

 

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[i] Failing that, there’s something to be said for the perspective of experts who HAVE made that visit—and/or the references of current (and preferably EX) clients. 

When You Assume...

Over the years, so-called personal finance experts have provided valuable information—but also a smattering of misinformation—but I can think of none quite as egregious as some remarks recently made by Dave Ramsey.

By now I’m sure you’ve heard—or heard about—his “counsel” with regard to acceptable retirement withdrawal rates—and his disparagement of the “supernerds” who would dare to disagree with him. As for that counsel, at a high level, Ramsey maintains that an 8% withdrawal rate is not only doable, but sustainable. All you have to do is be invested 100% in equities—oh, and assume a 12% return.[i]

Of course, such machinations have always been predicated on assumptions—about inflation, about market returns and, most notably, about the length of life itself. That said, this didn’t become a specific focus—a so-called “rule of thumb”—until 1994, when financial planner William Bengen[ii] claimed[iii] that over every rolling 30-year time horizon since 1926, retirees holding a portfolio that consisted 50% of stocks and 50% of fixed-income securities could have safely withdrawn an annual amount equal to 4% of their original assets, adjusted for inflation without… running out of money.

That said, even though it was predicated on a number of assumptions that might not be true in the real world—a 30-year withdrawal period, a 50/50 portfolio mix of stocks and bonds, assumptions about inflation—oh, and a schedule of withdrawals unaltered by life’s changing circumstances—well, with the return of inflation as a reality (rather than a theoretical construct), it now seems that there’s an annual scramble to reassess that “safe” withdrawal rate. Indeed, a couple of years back a Morningstar paper challenged its conclusions in view of “current conditions”—opining that “using forward-looking estimates for investment performance and inflation,” the Morningstar authors said that the standard rule of thumb should be lowered to 3.3% from 4%.

That said, this is something of a moving target, and a few weeks ago Morningstar moved the target back to 4% (after having opined that a starting safe withdrawal rate for a 30-year horizon with a 90% probability of success was 3.3% in 2021 and 3.8% in 2022). Enter Dave Ramsey and HIS assumptions that allegedly support a much higher rate (though I don’t recall him offering a probability figure of savings lasting as long as your life[iv]).

Now, in fairness, even the Morningstar folks allow for some variance in “safe” withdrawal rates—explaining that the increase from 2022 in this “highest safest starting withdrawal percentage” for a 30-year horizon with a 90% probability of success “owes largely to higher fixed-income yields, along with a lower long-term inflation estimate.” Moreover, they assert that it’s predicated on assumed portfolios that hold “between 20% and 40% in equities and the remainder in bonds and cash”—which is, in itself, a fairly sizeable range.

There’s been plenty of evidence—both empirical and anecdotal—that retirement “spends” aren’t nice, even streams. Life’s circumstances change, of course—and our health care, and health care costs, are notoriously variable. There’s a sense that the pace of spending earlier in retirement is more like that anticipated in most retirement education brochures—travelling and such—but that pace slows down as we do.

At its core, once you stipulate certain assumptions about the length of retirement, portfolio mix/returns, and inflation, a guideline like the 4% “rule” is really just a mathematical exercise. A 4% “rule” may be simplistic, but it’s also simple—and when it comes to getting your arms around complex financial concepts and distant future events, there’s something to be said for that.

But—and as Dave Ramsey’s response should remind us—when you “assume” … (or when others assume on your behalf) make sure you understand the assumptions required to make it “work”—and perhaps more importantly, the likelihood/probability that those assumptions will be a reality. 

- Nevin E. Adams, JD

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[i] One of the more humorous—and insightful—rebuttals on all this came from SRP’s Jeanne Sutton: https://www.linkedin.com/feed/update/urn:li:activity:7130951358609838080/

[ii] https://www.forbes.com/advisor/retirement/four-percent-rule-retirement/

[iii] See www.portfolioconstruction.com.au/obj/articles_perspectives/retailinvestor.org_pdf_Bengen1.pdf

[iv] That said, Morningstar’s John Rekenthaler has—and you can read that analysis here

 

Are There Boogeymen in the New Fiduciary Proposal?

Like many of you, I have spent a fair amount of time over the past couple of weeks reading and analyzing the impact and import of the new fiduciary rule proposal—not to mention the legal pundits who seek to tell us what they think it means, or might mean, regardless of what the proposal actually says.

At a high level, it seems to me (and several well-regarded ERISA attorneys) that retirement plan advisors who are today operating under the auspices of PTE 2020-02 should have little to worry about under the new proposal. Indeed, the biggest controversies around the proposed rule seem to be extending the reach of PTE 2020-02 to organizations and entities that hadn’t previously had to adhere to those requirements. 

But if you’re already doing so—and surely if you’re a retirement plan advisor you are—there’s little of concern in the proposal. In fact, you might well draw comfort from the possibility that entities and advisors that have competed with you for rollover business would have to adhere to the same rules and disclosures that are now part of your business, painful though it may have been to adopt them at the time. Of no small consequence is that recommendations to plan sponsors regarding which investments to include in 401(k) and other employer-sponsored plans—advice that is not subject to the SEC’s Regulation Best Interest and right now is not required to be in the customer’s best interest—would be.

Make no mistake, this is a new and considerably revised proposal. One that appears to not only have acknowledged the things that led a federal district court to vacate the 2016 rule—but to actively address and remedy those missteps. 

That said, rumors abound, and some law firms (certainly those that represent the interests of those who would be newly subject to new regulations) have, to my read anyway, been inclined to see plenty of clouds in the silver linings—and to characterize the new proposal as basically being a resurrection of the old one (to that end, the Halloween unveiling made for plenty of “zombie” references)—in the process imagining things that aren’t actually “there.” 

Perhaps the most pernicious is one that they admit isn’t there—but argue it might be; the so-called “private right of action”—which means simply that individuals would be able to sue on their own for a breach of the law. The concerns harken back to comments made during the controversy concerning the 2016 rule that the fiduciary rule was not only opening a new door for litigation, but that the Labor Department was perhaps even counting on it.     

Now, on this, and other points in the new proposal, the DOL acknowledges both the issues raised in the vacating of the rule by the Fifth Circuit, and the deliberate steps they’ve taken to avoid those issues in the new proposal. “The 2016 Rulemaking was significantly different than the current rulemaking,” the DOL explains in the preamble to the proposed rule, “in that it imposed a fiduciary obligation on virtually all investment recommendations specifically directed to retirement investors, imposed demanding contract and warranty requirements in the IRA market, which gave investors a direct cause of action against firms and advisers for breach of the Impartial Conduct Standards, and represented a significant break from the then-existing regulatory baseline.”

To be sure, there is already a cause of action for fiduciary breaches under ERISA for recommendations to plans and participants—and there’s no question that while under a recent decision in a Florida district court, rollover recommendations are not considered fiduciary recommendations under current law—but will be under the proposed rule.

That said, in considering this latest proposal, one notable DC law firm says, for example that the proposal includes “strong enforcement mechanisms, including provisions that give the DOL oversight and authority over firms’ individual retirement account (IRA) business and (although DOL claims otherwise[i]) a potential private right of action.” That’s right—even though the Labor Department specifically says otherwise, this law firm has chosen to read between the lines and see the potential for something the DOL explicitly denies. 

In fact, the Labor Department clearly states in a footnote in the preamble of the proposed rule that (the underline is mine, for emphasis) “Unlike the PTEs that were a part of the 2016 Rulemaking, these PTEs do not, and the amendments would not, include required contracts or warranties that the Fifth Circuit objected to.”  

The footnote goes on to explain that “these prohibited transaction exemptions also do not exempt a party from status as a fiduciary, and therefore, the proposals do not affect the scope of the regulatory definition of an investment advice fiduciary. Rather, the exemption proposals involve an exercise of the statutory authority afforded to the Department by Congress to grant administrative relief from the strict prohibited transaction provisions in Title I and Title II of ERISA for beneficial transactions involving plans and IRAs.”

Now, the standard of care for “conflicted” recommendations to plans, participants and IRAs is the Best Interest Standard—a combination of the prudent man rule and duty of loyalty. If the “conflicted” recommendation isn’t in the best interest of a retirement investor, the protection of the prohibited transaction exemption (PTE) is lost and the advisor isn’t permitted to be legally compensated. That said, the best interest standard in the PTE isn’t actionable.

Another critical “boogeyman” that proposal critics claim to have seen there is an undermining of the ability to enforce arbitration clauses as a precursor to litigation. I say “conjured” because—unlike a controversial provision in the 2016 rule that barred the use of the Best Interest Contract Exemption (BIC) if advisory contracts included an arbitration requirement—there is no mention or reference to that in the current proposal.        

There’s plenty still to analyze and evaluate in this new proposal—and arguably not as much time to do so as we might prefer. Here’s hoping most of that time and energy is spent on the things that are actually in the proposal instead of imaginary “monsters” that aren’t. 

 - Nevin E. Adams, JD

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[i] Their exact words.

A 'Retirement' Thanksgiving

Thanksgiving has been called a “uniquely American” holiday—and so, even in a year in which there has been what seems to be an unprecedented amount of disruption, frustration, stress, discomfort and loss—there remains so much for which to be thankful. And as we approach the holiday season, it seems appropriate to take a moment to reflect upon, and acknowledge—to give thanks, if you will.

While it’s the celebration following a successful harvest held by the group we now call “Pilgrims” and members of the Wampanoag tribe in 1621 that provides most of the imagery around the holiday, Thanksgiving didn’t become a national observance until much later.

Incredibly, it wasn’t marked as a national observance until 1863—right in the middle of the Civil War, and at a time when, arguably, there was little for which to be thankful. Indeed, President Abraham Lincoln, in his proclamation regarding the observance, called on all Americans to ask God to “commend to his tender care all those who have become widows, orphans, mourners or sufferers in the lamentable civil strife” and to “heal the wounds of the nation.”

We could surely stand to have some of that today.  

My List

With all of the strife and turmoil in our world, there remains much for which we can all be thankful. And in this, my first year of “retirement”—well, the list seems even longer this year. 

I’m once again thankful that so many employers (still) voluntarily choose to offer a workplace retirement plan—and, particularly in these extraordinary times, that so many have remained committed to that promise. I’m hopeful that the encouragements of prospective legislation, if not the requirements of same, will continue to spur more to provide that opportunity.

I’m thankful that there are provisions in SECURE 2.0 that will further, and perhaps dramatically, encourage plan adoption.

I’m thankful that so many workers, given an opportunity to participate in these programs, (still) do. And that, under new provisions in SECURE 2.0, those who gain new access to those programs will be automatically enrolled, if not immediately, then in 2025.

I’m thankful that the vast majority of workers defaulted into retirement savings programs tend to remain there—and that there are mechanisms (automatic enrollment, contribution acceleration and qualified default investment alternatives) in place to help them save and invest better than they might otherwise.

I’m thankful for new and expanded contribution limits for these programs—and hopeful that that will encourage more workers to take full advantage of those opportunities, even if the increases aren’t as big as last year’s (on the other hand, inflation isn’t as high, either).

I’m thankful for the Roth savings option that, for all the negative press and focus on the accounts of a few wealthy individuals, provides workers with a choice on how and when they’ll pay taxes on their retirement savings. There’s a LOT to be said in favor of tax diversification, particularly the way benefits like Social Security and Medicare are means-tested.

I continue to be thankful that participants, by and large, continue to hang in there with their commitment to retirement savings, despite lingering economic uncertainty, rising inflation, and competing financial priorities, such as rising health care costs and college debt—and that their employers continue to see—and support—the merit of such programs.

I’m thankful for the strong savings and investment behaviors (still) evident among younger workers—and for the innovations in plan design and employer support that foster them. I’m thankful that, as powerful as those mechanisms are in encouraging positive savings behavior, we continue to look for ways to improve and enhance their influence(s).

I’m thankful that our industry continues to explore and develop fresh alternatives to the challenge of decumulation—helping those who have been successful at accumulating retirement savings find prudent ways to effectively draw them down and provide a financially sustainable retirement. Trust me, knowing how much your retirement income will be is an essential element in knowing when you can retire.

I’m thankful for qualified default investment alternatives that make it easy for participants to benefit from well diversified and regularly rebalanced investment portfolios—and for the thoughtful and ongoing review of those options by prudent plan fiduciaries. I’m hopeful (if somewhat skeptical) that the nuances of those glidepaths have been adequately explained to those who invest in them, and that those nearing retirement will be better served by those devices than many were a couple of decades ago.

I’m thankful that the state-run IRAs for private sector workers are enjoying some success in closing the coverage gap, providing workers who ostensibly lacked access to a workplace retirement plan have that option. I’m even more thankful that the existence of those programs appears to be engendering a greater interest on the part of small business owners to provide access to a “real” retirement plan.

I’m thankful that figuring out ways to expand access to workplace retirement plans remains, even now, a bipartisan focus—even if the ways to address it aren’t always.

I’m thankful that the ongoing “plot” to kill the 401(k)… (still) hasn’t. Yet. Let’s face it, it has a new name, and some new supporters—but…

I’m thankful for the opportunity to acknowledge so many outstanding professionals in our industry through our Top Women Advisors, Top Young Retirement Plan Advisors (“Aces”), Top DC Wholesaler (Advisor Allies), and Top DC Advisor Team lists. I am thankful for the blue-ribbon panels of judges that volunteer their time, perspective and expertise to those evaluations.

I’m thankful that those who regulate our industry continue to seek the input of those in the industry—and that so many, particularly those among our membership, take the time and energy to provide that input.

I’m thankful to (still) be part of a team that champions retirement savings—and to be a part of helping improve and enhance that system.

I’m thankful for those who have supported—and I trust benefited from—our various conferences, education programs and communications throughout the year—particularly at a time like this, when it remains difficult—and complicated—to undertake, and participate in, those activities.

I’m thankful for the involvement, engagement, and commitment of our various member committees that magnify and enhance the quality and impact of our events, education, and advocacy efforts.

I’m also thankful for the development of professional education and credentials that allow the professionals in our industry to expand and advance their knowledge, as well as the services they provide in support of Americans’ retirement.

I’m thankful for the consistent—and enthusiastic—support of our event sponsors and advertisers.

I’m thankful for the warmth, engagement and encouragement with which readers and members, both old and new, continue to embrace the work we do here.

I’m thankful for the team here at NAPA, ASPPA, NTSA, ASEA, PSCA (and the American Retirement Association, generally), and for the strength, commitment and diversity of the membership. I’m thankful—even in “retirement”—to continue to be able to make a “difference.” I’m especially thankful to have a friend and true professional like John Sullivan ready, willing and able to step in as Chief Content Officer. There are few experiences more miserable than having a job you love taken over by someone who doesn’t. I’m thankful, so thankful that hasn’t been the case here. 

I am, of course, thankful for being able to “retire”—to kick back a bit. While I continue to get good-natured ribbing about how I don’t know how to “retire,” this first year of not working full-time has been a blessing in so many ways. I’m especially grateful to my wife for her encouragement and support throughout nearly four decades (amidst a LOT of sacrifices) and look forward to this next chapter in our lives.   

But most of all, I’m once again thankful for the unconditional love and patience of my family, the camaraderie of an expanding circle of dear friends and colleagues, the opportunity to write and share these thoughts—and for the ongoing support and appreciation of readers… like you.

Wishing you and yours a very happy Thanksgiving!

Shifting the 401(k) ‘Balance’?

A week or so ago, I came across an announcement that IBM was making changes to its 401(k). More specifically that, effective next year they were going to replace their matching contribution in their 401(k) with an employer contribution to a cash balance plan.[i] In the days that followed, the news was picked up in a couple of different trade publications—the implication being that this might be signs of a new shift in plan design. Heck, even Teresa Ghilarducci weighed in, championing the “evolution” to a defined benefit structure from the “flawed” 401(k). She never misses an “opportunity.”

Readers here are likely familiar with the basic concepts of a cash balance design. Technically a defined benefit plan, it’s generally referred to as a “hybrid” because it also has a number of participant-friendly aspects that it shares with a defined contribution plan, notably an account balance (though it’s a “notional” one) that is shared with participants. The benefits accumulate somewhat evenly over time, rather than being more service “back-loaded” as traditional pension plans tend to be. But just like a traditional DB plan, cash balance plans are funded by the employer on an actuarial basis, and the investments are employer-directed, ostensibly with an eye toward the benefit obligations that are accruing. Also, some cash balance plans are insured by the Pension Benefit Guaranty Corporation (PBGC), just like traditional pensions (and yes, the employer has to pay premiums).

Of course, cash balance designs aren’t new, nor are they new at IBM, which (in)famously shifted to one from a traditional defined benefit plan back in the late 1990s. I say “infamously” because it triggered a couple of participant lawsuits from individuals who thought their benefits had been reduced in the move—an age discrimination suit they won, only to lose on appeal. That said, even in finding for IBM the appellate court acknowledged that older workers were generally correct in perceiving "that they are worse off under a cash-balance approach" because such a plan eliminated the possibility of earning larger benefits as they neared retirement. "But removing a feature that gave extra benefits to the old differs from discriminating against them," the judge wrote. 

That controversy notwithstanding, cash balance plans have, in recent years, proven to be quite popular—particularly among smaller employers because they provide more funding flexibility than a traditional DB plan, and the potential for better benefit accumulation than the non-discrimination and top-heavy test limits often allow with defined contribution plans, such as a 401(k). But what IBM has done—basically replacing its 401(k) match with a cash balance plan contribution does appear to be unique—and worth noting.

As for IBM, while external perspectives on the announcement appear to be largely positive,[ii] it remains to be seen how it will be accepted by those it is ostensibly designed to benefit. Some have already commented that the loss of a match will reduce incentives to save in the 401(k)—others that the resulting diminishment in the 401(k) balance will undermine the amounts available for loans and hardships, though that arguably isn’t the purpose for those 401(k) savings, either. On the other hand, all eligible IBM employees stand to get this employer contribution, not just those who contribute to the 401(k) (though with what is said to be a 97% participation rate, it seems that few are left out at present, though we don’t know their contribution rates). You don’t have to be a cynic (though it helps) to imagine that IBM has done the math here, and that the change is either neutral, or inures favorably to their bottom line.

People tend to forget that the contributions defined in a defined contribution plan can be (re)defined each plan year—and while reductions are rare, they are not unprecedented. That said, even in rolling this new benefit out, IBM has (according to an internal communication memo posted online) acknowledged a reduction; “IBMers will also receive a one-time salary increase to offset the difference between the IBM contributions they are currently eligible to receive in the 401(k) Plan and the new 5% RBA pay credit”—though arguably that’s trading a pre-tax benefit for one on which taxes will be due immediately.   

While it’s certainly an interesting move—by a company with a history of interesting benefit moves—and, despite the enthusiastic response of Professor Ghilarducci, it seems unlikely to catch on more broadly.  Retirement savers have not only long understood and appreciated not only the value of an employer match, and so seem unlikely to embrace “losing” that to new plan they don’t understand, however even the tradeoffs are presented. As for plan sponsors—well, inertia is a powerful force in plan design as well—and a big design change that requires sensitive (and likely) ongoing communication will almost surely give pause to even the most innovative.

That said, it should serve as a reminder that plan designs can, and should, serve multiple purposes. It will be interesting to see how this one pans out.

- Nevin E. Adams, JD  

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[i] It’s actually referred to as a Retirement Benefit Account (RBA), though the description fits a cash balance plan, and it’s described as being offered “within IBM’s Personal Pension Plan.”

[ii] Not exclusively, of course—there’s cynicism to be found with regard to IBM’s true motives here. 

Checking Your 401(k) Smoke Detectors

Daylight saving time doesn’t really live up to its name—but as you’re resetting clocks, anxiously awaiting the realignment of circadian rhythms and changing smoke detector batteries, it might be a good time to (re)consider the following.

Do you have fiduciary liability insurance?

I’m NOT talking about the Fidelity Bond required of every ERISA plan (this protects the plan and its participants from potential malfeasance on the part of those who handle plan assets. In fact, the plan is the named insured in the fidelity bond). I’m also NOT talking about the corporate governance policies that many organizations have in place for actions undertaken by organization officials. These may not cover you, and they very likely won’t cover actions taken as an ERISA plan fiduciary even if you are covered. 

What you need to check for is something called Fiduciary Liability Insurance. This policy typically protects the plan’s fiduciaries from claims of a breach of fiduciary responsibilities—an important protection since ERISA plan fiduciaries have personal liability, not only for their actions, but for the actions of their co-fiduciaries. Just remember; the cost of the insurance can be paid by the employer or by the plan fiduciary—but not from plan assets.   

Do you have an investment policy?

Note that I said investment POLICY, not an investment policy STATEMENT. While plan advisers and consultants routinely counsel on the need for, and importance of, an investment policy statement (IPS), the reality is that the law does not require one, and thus, many plan sponsors—sometimes at the direction of legal counsel—choose not to put one in place.

Of course, while the law does not, in fact, specifically require a written IPS—think of it as investment guidelines for the plan—ERISA nonetheless basically anticipates that plan fiduciaries will conduct themselves as though they had one in place. And, generally speaking, plan sponsors (and the advisors they work with) will find it easier to conduct the plan’s investment business in accordance with a set of established, prudent standards—if those standards are already in writing, not crafted at a point in time when you are desperately trying to make sense of the markets.

Are your plan’s target-date funds (still) on target?

Flows to target-date funds (TDF) have continued to be strong—and little wonder, what with their positioning as the qualified default investment alternative (QDIA) of choice for most 401(k)s. That said, the vast majority of those assets are still under the purview of an incredibly small number of firms—with glidepaths that are not as dissimilar as their marketing materials might suggest.

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 (don’t take my word for it—that’s coming straight from the Labor Department). 

That said, TDFs are frequently, if not always, pitched (and likely 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.

The reasons cited behind TDF selection run a predictable gamut; price/fees, performance (past, of course, despite those disclaimers), platform (as in, it happens either to be their recordkeepers, or compatible with their program)—and doubtless some are actually doing so based on an objective evaluation of the TDF’s suitability for their plan and employee demographics.

Whatever your rationale, it’s likely that things have changed—with the TDF’s designs, the markets, your plan, your workforce, or all of the above. It’s worth checking out.

Is your plan committee capable?

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.

There is, or should be, a legitimate, articulatable reason why each and every member of your plan/investment committee was selected. They, and every other member of the committee, should know that reason. If you can’t articulate that reason (or can’t with a straight face), they shouldn’t be on the committee—for their own sake, and the sake of every other committee member.

Note also that, over time, committees have a tendency to expand, sometimes based more on factors like internal organizational politics than on valuable perspectives or expertise. But human dynamics are such that the larger the group, the more diffused (and sometimes deferred) the decision-making. So, it’s worth revisiting that articulatable reason—and making sure it’s still valid—on at least an annual basis.

Do you need help?

ERISA only requires that the named fiduciary (and there must be one of those) make decisions regarding the plan that are in the best interests of plan participants and beneficiaries, and that are the types of decisions that a prudent expert would make about such matters. ERISA does not require that you make those decisions by yourself—and, in fact, requires that, if you lack the requisite expertise, you enlist the support of those who do have it. 

That’s where qualified retirement plan advisors and/or experienced third-party administrators (TPAs) can make a big difference—both in making sure you have good policies and procedures in place—and that they are kept up to date! 

Think of it as a smoke detector for your retirement plan. It might not save you any daylight—then again…

- Nevin E. Adams, JD

Grading on a ‘Curve’

A recent analysis of world pension systems gave America a passing grade, but not a good one.

The latest—the Mercer CFA Institute Global Pension Index[i]—gave the United States a C+ (though a B in adequacy!) ranking our retirement “system” well down (22^nd) in the list of 47 retirement income systems around the world. 

This particular index is comprised of three sub-indices: adequacy, sustainability and integrity, which the authors say are used to measure each of the retirement systems against some 50 “indicators.”[ii] Of course, people are entitled to establish whatever criteria they think is reasonable in such matters, but those who would accept their grading at face value would be well-advised to consider both the assumptions and weighting applied to derive those outcomes. To the sponsors’ credit, the 144-page document provides lots of opportunity to do just that.

Perhaps the biggest challenge of a system like ours matched up against some of these other systems is the sheer diversity not only of our population, but the system itself. The coverage gap[iii] we’re focused on closing presents a considerable disadvantage compared to systems that employ nationwide mandates.  And, let’s face it, the funding issues of Social Security loom ever larger, and undermine the “sustainability” measure of this index, if not the “integrity.” 

If one were to take the recommendations of these authors to heart, in order to boost our grade, we’d need to make people contribute more, make them wait longer to get their benefits, pay them (particularly lower-income workers) more benefits, increase vesting so that they earn more benefits faster, and limit their ability to tap into those retirement benefits before retirement—both by leakage, but also in requiring that some part of those benefits be taken as an income stream.

Said another way, provide more government benefits and make people put in more (and don’t let them take it out) so that they will have more later. This, by the way, has been a consistent recommendation (though perhaps worded more eloquently) of this index.

One thing that is NEVER mentioned, or even acknowledged in this report is the cost of these measures, the taxes imposed to produce them. Or the willingness of the population to undertake them to the exclusion of other considerations. They aren’t, ironically enough, “means” tested.

That’s not their responsibility, of course. Arguably presenting these retirement system alternatives around the world provides policymakers and the populace alike with a broader perspective—ideas and approaches to consider, albeit those concocted in a pristine laboratory environment where costs and personal choice are of no matter—only the largesse of benefits. 

But for those of us living in the real world, and those still working on implementing the tools in the SECURE Acts—I’d give this assessment a grade of “incomplete.”

- Nevin E. Adams, JD

 

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[i] In case you’re wondering, Netherlands, Iceland, Denmark & Israel topped the list (again), all receiving an “A” grade, at least based on the criteria and weighting adopted by the index. The index has been published for a number of years now, and while Mercer’s role has been consistent, different parties (now the CFA Institute) have partnered in its production over the years.

[ii] The report explains that each system’s overall index value is calculated by taking 40% of the adequacy sub-index, 35% of the sustainability sub-index and 25% of the integrity sub-index—weightings that they say “have remained constant since the first edition of the Index in 2009.”

[iii] Indeed, it would be naïve to gloss over the gaps in retirement security that a largely voluntary system exposes. Not that anything (beyond inertia and human nature) prevents every American worker from opening their own retirement account. But we know, and the data supports, that even modest income ($30,000-$50,000/year) workers are 12-15 times more likely to do so when they have the opportunity to do so via a workplace plan. In fact, there’s plenty of impetus in the provisions of the SECURE and SECURE 2.0 Acts to encourage the formation of those plans.

A Day for TPAs

It might not have made it to your calendar, but last week (October 17) was National TPA Day. 

The timing is no accident—yesterday would have been for many calendar-year ERISA plans the (extended) deadline for filing the annual ERISA 5500 form.[i] Like April 15 for CPAs, that date—and timing—are of enormous consequence. And with that annual deadline in the rearview, third-party administrators everywhere can, perhaps, heave a huge sigh of relief. Maybe even throw a little “party.”

The relationship between advisors and TPAs is complex, and one in which there seems to be little middle ground. For every advisor that tells you how many times their TPA partner has gotten them out of a real mess—and for every TPA that applauds the leadership demonstrated by their advisor teammate—well, there seems to be one that either dismisses the TPA’s propensity for a mistimed focus on minutiae that is the essence of being a dutiful TPA, or one that frets that an advisor’s focus on the “big picture” obscures significant operational and administrative issues.

There is, in fact, a certain yin and yang to the perspectives of the two roles—and just like the concept that originated in Chinese philosophy (describing opposite but interconnected, mutually perpetuating forces)—successful (and legal) plan design and operation require a balance. Where plans often fail is when one or the other dominates. 

Just as advisors are often (and inaccurately) seen as the sole fiduciary in a plan once they’re hired, TPAs are generally assumed to be attending to all of the particular details of accurately running the plan; we’re talking about things like ensuring that the terms of the plan document are adhered to, that non-discrimination tests are properly applied, and that contributions are timely deposited. The lines are often blurred between TPA and recordkeeper—the latter technically being a TPA, though these days the level of services can differ dramatically. 

Over time the role of TPA has been diminished in the eyes of many. Sure, they deal with a lot of technical “minutiae”—we’re talking deep in the “weeds” here. The classic reference is you ask what time it is, and they (some, anyway) first want to explain to you how a watch is made. That said, the role of plan administrator—perhaps a better label would be compliance administrator—is essential—critical—to the smooth, effective and efficient running of a plan—and on aspects that,[ii] odds are, your recordkeeper (another critical role, but one often focused on other things) isn’t always. They can even help you find—and keep—clients!

That said, TPAs come in all shapes and sizes—and like advisors—have different service models, areas of specialization and, yes—personalities. If you’ve had a bad experience—you’re not alone. But for my money, if you want to be able to focus on the plan issues that truly require your expertise—rather than your attention—you’ll find that all to be easier with the assistance, support, and guidance of a qualified TPA.[iii]

If you’ve found a good one (or two)—be sure to give them a hug—and maybe a cake. It’s National TPA Day, after all… 

- Nevin E. Adams, JD

Additional TPA Resources: 

Finding the Right TPA Partner

Bundled Versus Unbundled: 5 Myths

Resource ‘Full’?

What’s in a Name?   

 

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[i][i] Credit the folks at John Hancock for—to my eyes, anyway—making TPA Day a “thing.”

[ii] Things like that: 

1. All eligible workers are included in the plan—as required by law—and ineligible workers are not unduly credited with benefits?
2. Compensation used as the basis for contributions and/or eligibility is accurate, in accordance with ERISA and IRS limits, both with regard to amount (how much) and individuals (who)?
3. The plan’s allocation of benefits meets legal requirements and the correct individuals receive the correct amount(s), thus preventing the need for corrective measures and penalties? 
4. The amount(s) allocated to individual participant accounts match the actual dollars deposited into the plan/trust. Additionally, to ensure that contribution deposits are made to the plan/trust in accordance with legal requirements, forestalling legal fines and penalties?
5. The appropriate plan notices are timely delivered to the applicable individuals in accordance with legal requirements, providing them with important plan information and instructions (and preventing the application of penalties for failing to do so)?
6. Employees are properly categorized as to their status as highly compensated employees (HCEs), key employees (for top-heavy testing) and spousal/familial relationships so that the allocation of benefits and eligibility is appropriate and consistent with legal requirements?
7. The tax filings related to the plan (Form 5500, 8955, 5330, etc.) are filed accurately and on time in order to comply with the legal requirements regarding the plan, and thus avoid fines and penalties?
8. The amounts distributed as loans or distributions are consistent with the vesting schedule of the plan, in accordance with plan parameters and legal limits—and that the needed authorizations are obtained?

[iii] And here’s a resource that can help you validate/align expectations of service; HERE.

Mark Your Calendars!

Social media routinely reminds me that I’m teetering on the brink of overlooking key remembrances—days in the year to honor sons, daughters, puppies, dogs, kittens, and…well, you name it. And we have whole months set aside to acknowledge the contributions of women, black history, and Hispanic heritage—but there’s another you might have missed…

As it turns out, October is National Retirement Security Month—a “national effort to raise public awareness about the importance of saving for retirement.” More specifically, to provide an opportunity for employees to reflect on their personal retirement goals and determine if they're on target to reach those goals—and for those who work with those employees to help them do so.

Now, while the need isn’t new, the calendar acknowledgement is, at least relatively so. The notion was raised in 2006 by then-Sens. Gordon Smith (R-OR) and Kent Conrad (D-ND)—though at that time it was “just” a week. However, in 2020, the National Association of Government Defined Contribution Administrators took it even further and updated its legislative priority to advocate to change it to National Retirement Security Month, instead of only the week.   

That said—and despite the hard work, talented designs, and sponsorship of a number of large and reputable financial services organizations, I suspect many of you haven’t even heard of it. More’s the pity.

Key Objectives

Traditionally, the week is focused on three key objectives:

• making employees more aware of how critical it is to save now for their financial future;
• promoting the benefits of getting started saving for retirement today; and
• encouraging employees to take full advantage of their employer-sponsored plans by increasing their contributions.

Now, if you’re reading this (and you are, aren’t you?), odds are that you’re all too aware of the challenges that confront our nation’s retirement savings system. I’d go so far as to wager that just about everybody taking the time to read this post thinks about those items every working day, and doubtless spends a good part of their week trying to advance those causes—so, what’s the point of a month devoted to that emphasis?

What If?

The point, of course, is not for us—but for those who don’t have these issues on their mind every day. Because, even if we should be thinking about this every day of the year, special “events” like National Retirement Security Month give those of us who do a chance to, as a collective group of professionals, remind those who don’t of the importance of thoughtful preparations for retirement.

Better still, with the plan design improvements available today, you might only need one week—or one hour—of getting an individual—or group of individuals—to think about those messages.

Consider, for example, what if that period of focus got an individual (or, better still, a group of individuals) to enroll in their workplace retirement plan? What if it led an employer to embrace automatic enrollment, or, for those who are already enrolled, to increase the default contribution rate, or to reenroll those who have opted out of participation in the past? What if that focus prompted those who are already participating to increase their deferral rate (on their own), or to boost that rate so that they got the full benefit of the employer match? And what if that period of focus—or the actions above—led workers to stop and actually figure out how much they might need to save to sustain their retirement?

What if, indeed? 

- Nevin E. Adams, JD