What’s Top of Mind for Retirement Plan Advisors?

One of my favorite parts of the NAPA 401(k) Summit is a comprehensive annual survey we do of advisors in attendance at the Summit I call the Summit Insider.

It’s a unique opportunity to get the perspective of hundreds of retirement plan-focused advisors in a unique window of time. A chance, if you will, to see what’s on the collective minds of a very special group of individuals.

Like the networking experience of the Summit itself, it’s a chance to see what is actually on the minds and driving forces for the nation’s leading advisors. Sometimes it’s a validation—sometimes a repudiation—but it’s always insightful, all the more so in view of this year’s (record-breaking) response to the Summit Insider questionnaire.

Over the past couple of weeks, I’ve shared some insights in the NAPA-Net daily—but if you’re looking for a quick sense of the advisor perspective(s) on business practices, industry trends, team building, or future focus—well, here you go:

• There have been BIG shifts in sentiment regarding cryptocurrency (from positive to negative game changers) and state-run IRAs (ditto). 
• Managed accounts continue to be viewed negatively—a sharp and sustained turnabout from three years ago (when they were actually seen as a positive game changer).
• ESG remains the most over-hyped trend—but advisors are split as to whether it is a negative or positive game changer.
• Indeed, when it comes to over-hyped trends, ESG has demonstrated remarkable “staying” power, having topped that most over-hyped list for (now) four years running—and this year drew nearly THREE times as much support for that categorization (last year it was only twice as supported) as the #2—which was, again, cryptocurrency. MEPs/PEPs crept up to the #3 slot, while actually declining in overall ranking from its placement the past two years. 
• Cost loomed large as the biggest hurdle for managed accounts, though not far ahead of “participants lack understanding of how they work.” Most see the future of these as being offered by the advisor’s firm.
• Plan sponsor interest in retirement income options really hasn’t changed, hovering somewhere between “minimal” and “occasional.” Something else that hasn’t changed; portability remains the dominant advisor concern with these solutions. 
• Roughly two-thirds are now incorporating HSAs (health savings accounts) into financial wellness curriculums—though a third of those do so only if they consulted on the specific solution. 
• Nearly a quarter (24%) say their team’s work/life balance is “better than ever.”
• “Attracting and retaining talent” alongside “scaling your practice” remained the big issues for advisor practices over the next 12 months. Perhaps somewhat ironically, succession and advisor consolidation were in the “not important” category.
• Among support from DC wholesalers, “plan tools and resources” slightly edged out “competitive info” as valued services.

Thanks once again to all who took the time to share those (your?) perspectives and insights on the pages that follow. Thanks for being part of the 2023 NAPA 401(k) Summit—and thanks particularly to the sponsors of this year’s NAPA Summit Insider!

And please—like, share and comment! Check out the rest of the 2023 NAPA Summit Insider at https://bit.ly/23Summitinsider1

See you (all) in Nashville April 7-9 for the 2024 NAPA 401(k) Summit!

- Nevin E. Adams, JD

The True ‘Cost’ of ‘The True Cost of Forgotten 401(k) Accounts’

An update of a so-called “study” has been making the rounds—again—and its authors have doubled-down (and then some) on the assumptions in an updated version.

I’m referring to something called “The True Cost of Forgotten 401(k) Accounts (2023)”—an update to a report circulated about a year ago of the same title (sans the “2023” qualifier) by a firm called Capitalize. The first report claimed that there was $1.35 trillion in “forgotten” 401(k) accounts—the latest iteration has upped that number to $1.65 trillion.

That’s right, $1.65 TRILLION.

Not that the report’s authors make it hard to be incredulous about their results. Their executive summary claims that a full 25%—that’s a full QUARTER—of all 401(k) plan assets are, by their definition, “forgotten.” And if you’ve ever “left behind” a 401(k) account at a previous employer—well, apparently you’ve “forgotten” that account by their definition.  

Now if that definition of “forgotten” winds up being more credible than the one hinted at a year ago—the notion that these balances were truly lost, a.k.a. the “orphan” accounts that individuals truly have lost track of—a category that the Employee Benefit Research Institute (EBRI) has estimated[i] at $1.5 trillion OVER A 40-YEAR TIME PERIOD—well, the underlying assumptions—not to mention the mathematical extrapolations based on those underlying assumptions—are not. 

The authors mostly took the baseline they conjured up a year ago (see “Compounding the Problem(s))—this includes some assumptions not only about the rationale for the decision[ii] to leave the account where it is, but an alleged fee differential between IRAs and 401(k)s (they claim IRAs are less expensive), make a swag assumption about the average size of those accounts, and cut that alchemy in half (to be “conservative”). The new version builds on that shaky foundation by applying some assumptions about job turnover from the Great Resignation—and, no surprise, job turnover (apparently) means (even) more 401(k) accounts “left behind.”

The Assumptions

At a high level, they assume: 40% of workers cash out[iii] their 401(k) (with no apparent allowance for account balance), say they used IRS data on rollovers to determine rollovers, assume 2-3 million workers rollover their 401(k) (based on GAO data that said 401(k) to 401(k) rollovers account for 10-15% of total rollovers, and “impute” (their word) the number of “newly forgotten 401(k)s based on the difference between the total number of 401(k) accounts tied to job-changers and those who cash out, roll over to IRAs, or roll over into 401(k)s.” Bearing in mind that they will then take the number of accounts, and multiply THAT by the average account balances they derived earlier. 

Now, that might explain why they wind up with a number that represents a jaw-dropping quarter of 401(k) balances allegedly “forgotten”—but fails to explain why any credence should be put on that derivation. It is, quite simply, math that takes questionable assumptions, pulls a number out of the middle of those, and multiplies it by other questionable assumptions, producing a large number that is then said to be drawn from credible sources. But even credible sources are quickly waylaid by bad assumptions concocted from some kind of unarticulated triangulation.

Yet another example is the $115 BILLION they say is the “potential collective opportunity cost” from these accounts left behind—the result, they claim, “as a result of poor allocation and above average fees these accounts could experience.” To get to that number, they take the number of accounts they’ve conjectured (29.2 million in 2023) and then multiplied THAT “by the foregone savings one of these accounts would experience in a single year based on our scenario analysis (~$3,900).” “One of those accounts” being that $55,000 average they started with. I kid you not.   

The Motivation?

That said, this time around, the motivations behind the report from Capitalize are to my eye more obvious than they were a year ago. Their assertions are primarily that these balances left behind are paying fees in excess of what they might—presumably in the warm embrace of firms such as firms like Capitalize that offer a rollover solution. This time the report wastes no time highlighting the potential issues with leaving your 401(k) balances “behind”; that it becomes harder to track fees, allocate funds, and that your fees may be larger if you leave it with the plan of a smaller employer. They even invoke the notion that “unlike retail accounts” you may have limited choice with regard to fees “or other preferences.”

Honestly, I have tried to ignore this aberration. The number is nonsensical on its face, even with the most liberal definition of “forgotten.” But, it’s August—a slow news month—and journalists scrambling for a catchy lead apparently just can’t resist the opportunity. More distressing (at least to me) is the number of ostensibly well-meaning industry professionals who (continue to) share links to the uncritical coverage of this report.   

Interestingly enough, the dictionary defines “capitalize” as “to take the chance to gain advantage from.” 

Hmmmm….

- Nevin E. Adams, JD

 

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[i] As a stand-alone policy initiative, EBRI has projected that the present value of additional accumulations over 40 years resulting from “partial” auto portability (participant balances less than $5,000 adjusted for inflation) would be $1.50 trillion, and the value would be $1.99 trillion under “full” auto portability (all participant balances). Under partial auto portability, those currently age 25–34 are projected to have an additional $659 billion, increasing to $847 billion for full auto portability. But that picks up all potential rollovers, and they certainly aren’t “forgotten.”

[ii] Full disclosure—the author CONSCIOUSLY left behind every single one of his 401(k) accounts until recently. For account balances above $5,000 it was the easiest thing to do (e.g., “nothing”), for some of them it was a matter of appreciating the institutional pricing and/or options available there versus the new 401(k), and for at least one it was simply the aggravation involved in trying to get the funds from the old 401(k) mailed to me in a check. I’m happy to say that the process has improved somewhat over the years, though all three prior providers insisted on mailing me a hardcopy check (two, where Roth balances were involved). Oh, and I never “forgot” a single one.  

[iii] Don’t get me wrong; “leakage” is a real concern, and rollovers, for the most part, remain a tedious process for your average participant. Too many smaller (and perhaps some larger) balances do, in fact, get lost or overlooked, and “attribution” via escheatment or force outs does occur.

Does Your 401(k) Need ‘Guardrails?’

A new WSJ op-ed says that 401(k)s “too often lead employees to make financially harmful mistakes.”  And yes, advisors are (apparently) part of the problem.

The “problem”—at least according to the op-ed authors is that, left to their own devices participants are said to be inclined to overindulge in bad investment choices; choices they claim are the result of plan sponsors’ ignorance of how their workforce is actually using the options—an ignorance born of advisors failing to provide that information. Advisors, they comment, who “don’t have any financial incentive to provide such information, or to design plans in ways that would tend to reduce diversification mistakes to begin with.”

Now I can’t speak for every advisor, but I know plenty who are actually devoting a fair amount of time and energy to tracking—and sharing, certainly in the aggregate—the asset allocation decisions of the participants in the plan with the plan committee. Beyond that, no small number of participants are individually counseled in financial wellness sessions toward “better” decisions with their portfolios—and that completely ignores the large (and growing) reliance on professionally managed alternatives like target-date funds and managed accounts by participant-savers.

But these researchers—who turn out to be none other than Professor Ian Ayres[i] of Yale University and Professor Quinn Curtis, a colleague from the University of Virginia—want to put some guardrails on employee choice(s) to solve a problem they detected in a single large plan…back in 2016.

The current op-ed—“inspired” by (or perhaps attempting to inspire sales of) their just-published book “Retirement Guardrails” (which can be obtained for a mere $110 in hardcover, or $34 paperback)—calls out for criticism a retirement system they say allows workers to put portfolios at risk by failing to diversify their investments and choosing investment options with “relatively high fees that eat into their returns.” They “estimate” that about 10% of participants fall prey to one, or both, of those errors.

In fairness (and we’ll accept at face value their factual assertions) once upon a time the University of Virginia’s 403(b) plan had a lineup in excess of 200 fund choices (not an uncommon array in university 403(b) plans, as those who follow litigation in this area can attest)—among them (apparently) one that tracked gold futures. And, in 2016 (when the study was conducted, and at a time when gold, for a while, was arguably an intriguing opportunity—before it wasn’t), the professors claim that a third (35%) of the participants in that program held more than half their savings in that fund—including 11% who were betting their entire balance on, not red, but…gold.[ii]

As noted above, Ayres’ solution for all this is—“guardrails”—basically imposing limits[iii] on how much participants might be permitted to invest in certain funds—funds that, in the estimation of the plan fiduciary MIGHT be harmful in large “doses.” 

What’s more puzzling—and troubling—is that he seems to have bootstrapped (and to my eyes out of thin air) a fiduciary obligation[iv] to not only prudently review and monitor the services and investments offered by a plan, but to track, investigate and, yes, limit the asset allocations of participants among options that are deemed subject to misuse/abuse. Indeed, he basically makes a product liability argument that those who build these menus have an obligation to monitor and remedy their (potential) misuse just like that imposed on a product manufacturer who knowingly distributes a dangerous product. And, by the way—he not only lays this at the feet of the plan sponsor/fiduciary and their advisor—but also as a responsibility for the recordkeeper platform provider (the ultimate “manufacturer”) themselves.

Now, there’s a reason that Preparation H contains a warning that the product is not to be taken orally—and that electric hair dryers bear a label that cautions against using them in the tub (I’m less sure about the labels on pillows warning of dire consequences for their removal). People, being people, do, in fact, sometimes do dumb things, and we know that even with carefully crafted instruments like target-date funds, individuals can (and do) split their investments between those one-size-is-supposed-to-be-enough options.

It’s not so much that “saving participants from themselves” isn’t a laudable undertaking—but one can’t help but wonder just how intrusive and/or expert plan fiduciaries are expected to be in order to strike an appropriate “balance” in such things. Let’s face it—it’s hard enough to make sure that the options on the investment menu satisfy—and continue to satisfy—ERISA’s rigorous standards for prudence—under this solution fiduciaries would also be expected to track (and restrict) the how much?      

Well, the good news—at least for now—is that there wouldn’t appear to be any actual fiduciary obligation to do so. ERISA 404(c) provides both a structure and a means to provide participants with the opportunity for an informed choice, and—as noted above, current plan design trends suggest that there are solid, prudent options aplenty for those unable or willing to do so. 

That said, you never know when a federal district court judge somewhere (or a plaintiff’s attorney) might latch on to the idea. At which point, the statute notwithstanding, there’ll be no putting “guardrails” on the potential for litigation.

- Nevin E. Adams, JD

 

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[i] If those names seem familiar—there’s a reason. You may remember Professor Ayres from an incident several years back when he wrote to thousands of plan sponsors, alerting them that, based on his analysis of Form 5500 data that they were sponsoring a “potential high cost plan.” Not that he was just trying to be helpful in bringing this to their attention (Quinn Curtis was also working with him on that project)—he also told them that he planned to publish the results of his analysis, and to share those with, among others, The New York Times, and The Wall Street Journal—as well as via Twitter with a special hashtag identifying their company. And he did this on the stationary of Yale University.

[ii] There’s another disparity with the 401(k)s they are seeking to impose this solution on; unlike participants in the University of Virginia plan, most 401(k) participants don’t have access to a defined benefit pension plan.

[iii] The notion of such guardrails isn't really innovative, even within the context of retirement plans. Ayres acknowledges the (voluntary) application in situations involving company stock, and similar constraints have (voluntarily) been imposed on features such as a self-directed brokerage account, and among plans contemplating cryptocurrency as an option as well. The difference is that those adoptions were limited in scope and voluntary—unlike the type of guardrails Ayres touts. 

[iv] The book subheading says, “proactive fiduciaries,” but the text implies a deeper obligation, anchored on the authors’ assessment of court rulings.

 

A Glidepath of/for Life

I’ve been getting a lot of … comments … of late about my version of “retirement.”

I heard it both a couple of weeks back speaking at an event sponsored by The Standard—and again last week at the NAPA DC Fly-In Forum—that I was setting a poor example for retirement aspirations (all good-natured, and generally followed by a quick comment that they were glad to see me nonetheless).  So much for long walks on the beach or reading in a rocking chair, I suppose. But it’s my first “go” at retirement, after all—no practice rounds (even my vacations over the years have been a bit “busy”) beyond the “space” provided by COVID’s lockdowns.

That said, my days are definitely different now. And, though it’s perhaps not apparent from the content I (still) produce in any given week (blame the plaintiffs’ bar—if they’d quit suing, I’d have less to write about), I’m pleased to report that I’m (beginning) to ease into new daily patterns; (more) time on the treadmill, actually reading books that have nothing to do with retirement plans/ERISA (or even reality), planning trips, actually putting a bucket list to paper, and yes—even the occasional afternoon nap.  
       

The shift is, admittedly, subtle (my wife would tell you it’s still largely non-existent). But there’s a definite shift in focus from where I’m sitting (albeit not yet in a rocking chair).

To that end, I recently had the opportunity to listen in on a webcast featuring a good friend of mine, Jeanne Thompson, who is now mapping out her own version of “retirement.” Now, I’ve long appreciated Jeanne’s talents for data analysis (and, more significantly, her ability to convey the potential impact and import of that data in a way that “normal” people can grasp)—and on this particular webcast she crafted a perspective on life that mirrored the markets—with both bull and bear passages, but also life choices—as a series of asset allocation decisions. And, as with investing, how the different “markets” of one’s life/career can be influenced by, or sometimes run counter to prevailing forces.

As asset allocation traditionally differentiates between stocks, bonds and cash, Jeanne breaks life down into three major elements: sleep, life and work. Those are broad swathes of existence, to be sure, but when you are talking about something like work/life balance, it’s not a bad place to start from. And, as she graphed out her career experience on that webinar, it was easy to see how life events—promotion to a new position, marriage, the arrival of children, and the “emptying” of that nest were reflected in those allocations of time.

In life, as with the markets, there are external influences that force shifts in those allocations. And yet, we have—or should have—some sense of the allocation we believe to be desirable to meet our goals.  And, if we’re mindful of that compass, we know that adjustments are appropriate from time to time—and that if those adjustments are ignored—well, the results can be…unfortunate.

But, as with any asset allocation decision, it starts with knowing your goals, your time frame(s) to achieve them, an appreciation for the cognizance of the surrounding environment(s), and a commitment to rebalance over time, as appropriate.

And you don’t even have to wait till “retirement” to do so.

- Nevin E. Adams, JD