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.