Et tu, Shlomo?

 As Halloween approaches, a leading behavioral science academic has embraced a truly scary idea that involves your 401(k) account.

That academic, as you might deduce from the title, is none other than Shlomo Benartzi, professor emeritus at UCLA Anderson School of Management — and more specifically a champion of the application of behavioral finance concepts to retirement plans, notably automatic enrollment and contribution acceleration.

As for that scary recommendation, Benartzi has — in a Wall Street Journal op-ed — effectively backed the notion of creating big government-run pools of retirement savings — where ALL retirement savings would be put.

“We no longer have jobs for life” he rationalizes, though employment tenure in the private sector has been pretty consistent going all the way back to the 1940s. What HAS changed is the predominance of defined contribution savings plans and — ironically — that system’s increasing reliance on the behavioral science designs that Benartzi has long championed. It’s been shown that folks who rely on automatic enrollment — and, more significantly, contribution accelerants — tend not to maintain that rate of saving when they change jobs. Rather, and perhaps not surprisingly, having established a pattern of relying on that default, their contribution rate in the new plan tends to be reset — at the starting default contribution rate.[i]

Benartzi would solve this dynamic by separating the participant from his employer-sponsored plan, sending contributions to some means of central government-run plan. He specifically cites CalSavers (a state-run IRA program), as well as two international “solutions” — the Australian Superannuation funds and the UK’s National Employment Savings Trust (NEST).

Nor is Benartzi unmindful of the implications here. In the op-ed he admits, “Of course, these are effective solutions only if both your former and current employer use the same retirement-plan provider, which isn’t a given in the fragmented American system.” He then goes on to offer a “solution” — “having one provider for all, but that would eliminate market competition, reducing provider incentives to offer better plan features and service.” Ya think?

He cites the Australian model as a solution to that — though it’s a “super” finite list of providers relative to the American market.

Ultimately, however, it’s a solution in search of a problem. Defined contribution savings are already, in fact, portable — if not to a successor plan, then to an IRA — and have always been. Beyond that, automated rollovers as a distribution default is an emerging capability — via networks like the Portability Services Network that already connect a half dozen of the nation’s leading recordkeepers to facilitate exactly the type of job-to-job plan transfer Benartzi seems to think only a centralized government pool could accomplish.

Oddly enough, the big problem he seems to be trying to address is the reset of the default deferral rate at job change but his big government “solution” would — at best — still require[ii] some kind of massive employer-to-employer payroll data transfer — and the op-ed doesn’t even acknowledge the cost or challenges in developing or administering that transfer (or what might go wrong). He points to data that suggests that participants want tools like contribution acceleration to boost their savings — but apparently thinks individuals are unwilling or incapable of relaying that information to their next employer.[iii]

Benartzi concludes that “we need to develop retirement accounts that fit the way we work and live today.”

Somebody should tell him we already have.

- Nevin E. Adams, JD

NOTE: subsequent to the posting of this article, and despite the implications of the comments in the op-ed, Professor Benartzi assured me he is NOT in favor of a government-run retirement system. Here is his "response".

[i] They COULD, of course, override that default rate at any time.

[ii] He also assumes – incorrectly, I believe – that that kind of information is already shared via the CalSavers program during job change. When you change jobs, the new payroll provider and/or recordkeeper (not to mention employer) have no way of knowing what you were deferring previously – unless you tell them.

[iii] Some of his concern is based on a recent report by Vanguard that claims job-changing could cost folks $300,000 in retirement savings – but it’s based on some assumptions and extrapolations that likely exaggerate the impact for the vast majority of real savers and job changers.

Top 10 Pet Peeves About the Retirement Industry — Part II

Last week, I shared five of my Top 10 Pet Peeves about the Retirement Industry. Here’s the rest of the list.

Making “apples to oranges” comparisons of world pension systems.

Let’s face it — nobody wants to be “average.” And yet, there are now a handful of retirement industry consultants that, each year, publish a ranking of how the world’s retirement systems rate — and year after year the United States generally comes in about the middle of the pack.

Considering just how diverse these systems and the populations they serve are — one might well wonder at the need to rank them. But rank them they do, employing a relatively complex rating system to do so. The most recent was by Mercer — who, once again — held the U.S. in relatively poor esteem compared with the Netherlands, Iceland, Denmark and Israel. The Nordic countries are a perennial favorite here — though they all happen to be (much) smaller in population, and more culturally and racially monolithic than the U.S.

They all also have different approaches to taxes, and social infrastructure. Said another way, these rankings never consider the cost — both monetarily — to society and the mandatory worker contributions they require — and in terms of pre-retirement access to those funds. No, they myopically focus on the level of benefits provided and the security of those promises — not irrelevant considerations, of course — but one that glosses over some of the choices that might have to be made — or eliminated — in order to achieve them.

Not that Americans might not be willing to make them — if they were told what they were. But labelling the American system (slightly above) “average” isn’t telling the whole story.

Ignoring the existence and impact of Social Security.

Once upon a time, we talked about retirement as having three legs: Social Security, workplace savings/pensions, and personal savings. But to a number of vocal pundits, the full burden has been put … on the 401(k). A system that, as I noted previously, everybody decries as never being intended to be a retirement plan.

Well, before there was a 401(k) — and even before the advent of ERISA — there was Social Security, a program designed to provide retirement income to working Americans. It remains absolutely integral to even the most rudimentary retirement planning calculation, and with good reason. But it too was “never intended” to provide a full replacement of pre-retirement income in retirement, though it does for many lower-income Americans. 

That said, despite a looming financing shortfall — and a fairly widespread notion that those benefits aren't "enough" for a full retirement income replacement, you don't see headlines in the New York Times — or folks going on book tours — proclaiming that program was a "mistake" the way some do about the 401(k). The reality is that Social Security — like the 401(k) — has undergone significant changes in scope, funding, and mission since its 1935 inception. While deliberate, it might fairly be termed “mission creep.”

The (other) reality is that the 401(k) actually does a pretty good job of what workplace savings was always designed to do — supplement the foundation that Social Security provides — and yes, even for lower-income individuals. It has been — and continues to be — an essential element of retirement security for middle-income workers, for whom Social Security benefits alone likely fall short of their pre-retirement income levels and needs. It, like Social Security, is an essential element of the three-legged stool. But we need to quit carrying on like the 401(k) should be expected to be THE retirement income source (and that it’s a failure if it doesn’t).   

Using compounding “Magic” to make mountains our of molehills.

Albert Einstein is said to have called compounding the eighth wonder of the world. While that certainly applies to finances and savings growth, it can also be used to exaggerate financial issues. 

For example, a couple of years back a firm (that was in the business of capturing IRA rollovers) put out a jaw-dropping statistic that claimed there were $1.35 trillion in “forgotten” 401(k) accounts?  That’s TRILLION, with a “T”. 

That jaw-dropping number was the headline from a report titled, “The true cost of forgotten 401(k) accounts,” authored by “the Capitalize research team” — and yes, if accurate, that would mean that about a fifth of all 401(k) assets have been “forgotten.” Sound suspicious? Here’s another data point: The report goes on to estimate that these 24.3 million accounts that have been “forgotten” have an average balance of… $55,400 per account. 

Now, numbers like that are generally reserved for emails regarding a Nigerian prince. Fortunately, these authors showed their “math” — and — suffice it to say they pulled a couple of actual data points, extrapolated a much larger reality from those data points, and did a couple of rounds of multiplication to expand the population impacted, and the compounded the financial impact. And if that weren’t enough, they further extrapolated that impact to be an ongoing annual expansion of the problem. 

More recently, there was a report from Vanguard that claimed that job-changing could cost your retirement $300,000. That was a jaw-dropping number on its own (p.s., if a projection is jaw-dropping, beware) — particularly when you get into the report and find that it’s based on a projection based a median participant making $60,000 per year. 

Most of the coverage focused on the impact resulting from participants who had been auto-enrolled, and then auto-escalated to a point, changed jobs, and then (re)started participation at a new plan, (re)auto-enrolled at a lower deferral rate than where they left off at their old plan. The problem there, of course, isn’t the job change itself, it’s the individual not taking the time/energy to adjust the rate of savings with the new plan. By the way, job changers with VOLUNTARY enrollment saw NO decrease in savings rates. 

But as you look deeper into the report, the researchers also focus on folks getting a raise with the job change (10%, on average, they assume), but not commensurately increasing their deferrals — so, on a relative basis, the report calls this a reduction in savings (this is the way government does tax math, by the way). Moreover, there were job changers that saw even higher raises with the job change — and, according to the math here, “suffered” a commensurately larger decrease in savings — at least relative to the rates at which they were saving previously.

Ultimately, of course, this makes it sound like people are LOSING retirement savings, when in fact it’s really more about leaving money on the table (and they admit that there are a multitude of reasons why folks might legitimately be saving differently along with a job change).

Still, the headlines have been trumpeting this as a scary development — one that some are (already) saying means that the 401(k) design is flawed, and not equipped to deal with today’s job changers. 

Except, of course, that the median job tenure of the American workforce is pretty much unchanged since WWII.   

The bottom line? If the headline is jaw-dropping, go look at the methodology and fine print. 

Claiming that 401(k)s are only for the “rich.”

Well, first off, you need to get those folks to tell you who they consider rich. There’s certainly an argument to be made that those making higher incomes might well get a “bigger” benefit from the pre-tax preferences — but studies have shown that constraints like non-discrimination tests and 402(g) limits bound those in such that the benefits higher income workers receive are in rough proportion to their income(s). 

Indeed, if those “upside-down incentives” were the only forces at work, one might reasonably expect to find that the higher the individual’s salary, the higher the overall account balance would be, as a multiple of salary. However, a couple of years back — drawing on the actual administrative data from the then-massive EBRI/ICI 401(k) database, and specifically focusing on workers in their 60s (broken down by tenure and salary), then-EBRI Research Director Jack VanDerhei found that those ratios hold relatively steady. In fact, those ratios are relatively flat for salaries between $30,000 and $100,000, before dropping substantially for those with salaries in excess of $100,000 (see here).

The reality is that the 401(k) has been remarkably equitable in encouraging participation, even among workers of very modest incomes. For them — and for the middle class, generally — the 401(k) has been the only way they (can) save.

Referring to recordkeeping as a “commodity.”

For years, recordkeeping services — complex and difficult as they can be to provide accurately and consistently (not to mention profitably) — have been characterized (some might say disparaged) as a “commodity,” while fee compression (and the aforementioned complexities) continue to fuel consolidation in that industry. 

Honestly, as a former recordkeeper (though it’s been awhile), I’ve never understood how anyone who had any real appreciation for a business as varied, complex, and demanding as that of keeping up – and keeping up accurately – with individual participant accounts over the course of a working career – would be willing to refer to those services as “interchangeable.” Or why any firm that provides those complex services in these challenging times would be willing to let others do so. Certainly, any participant, plan sponsor, or advisor who has seen the integrity of that data put at risk by clumsy and inattentive hands can attest to the impact that a failure to do so. Indeed, I’m shocked by the leaders in our industry who label it as such — leaders that I think might well feel differently if they had spent even a small amount of time in those shoes.

Without question, recordkeeping is not only a challenging business, it is expensive to stay current with technology, to keep processes and programs current not only with changes both in the laws and regulations, but the nuances of individual plan designs. And as if that weren’t enough, cybersecurity has recently emerged as a significant threat – little wonder in view of the enormous amount of sensitive financial data to which these “commodity” producers are entrusted.

Where recordkeeping does seem to have been “transformed” into a commodity business is in the pricing of those services. Like the gasoline drawn from a pump, economists would tell you that, since commodity products are “interchangeable,” they compete (only) on price – and to do so (profitably) requires that that you have to achieve economies of scale – and the continued downward pressure on fees for those services continues to force firms to exit or flee to the embrace of larger players.

Further fueling those trends, the plaintiffs’ bar has latched onto the “commodity” concept, having (apparently) determined that it is “appropriate” to be compensated for these services by a flat per-participant charge (it started at $35/participant, but has since moved lower). 

Regardless, my personal experience is that those who find themselves working with a service provider or TPA that views those critical services as a “commodity” will, in short order, be looking for a new one.

One More

Well, that’s my list, and while I worked hard to limit it to 10, I have one more to share; what really ticks me off is those who give a microphone (and/credibility) and SHARE those comments (however well-intentioned) to those who say any of the above. And that goes DOUBLE for those in this industry who should know better!

Got one (or more) you’d like to add? Do so in the comments!

- Nevin E. Adams, JD

10 Pet Peeves About the Retirement Industry

 Life is full of annoyances – all the better to appreciate the blessings that surround us. That said, there are things about the retirement industry that really bug me. 

I recently had the privilege of being part of the Leafhouse National Retirement Symposium. The theme was unfiltered – the unvarnished truth.  And it seemed an appropriate forum to share some of the things about the retirement industry that really bug me. 

Here’s the list:

Using the average or median retirement balance as a proxy for retirement readiness.

Generally speaking, retirement plans are comprised of a myriad of individual circumstances – participants of ages that run from late teens to beyond traditional retirement, savings behaviors based on income – and age – and company match… Not to mention that this might be only a half dozen years of a worker’s accumulation, with the rest on some other recordkeeping platform…

Why any rational person would think that combining those disparate elements and then either dividing them by the number of parts, or looking for some kind of middle grouping – well, it defies logic. And yet, this happens with distressing regularity. It’s worse than mush – it’s a mess – a nonsensical number that is easy to calculate, and completely meaningless. 

Asking people who have never tried to do a retirement needs calculation how much they’ll need for retirement – and then publishing that as an actual target.   

There is perhaps of some modest value in knowing how much people think they need for retirement – even if they have never actually sat down and tried to figure it out. Indeed, in recent weeks at least two major providers have done just that with headlines proclaiming that “magic” number. Setting aside for a moment the reality that it’s completely uninformed – the reality is that we know NOTHING about the incomes, lifestyle, health or residence of the individuals behind that “guess” (though USA Today actually took the time to ascertain the political affiliation of the respondents). 

And since we know nothing about their circumstances – and less about how they derived that number (much less how the uninformed choices of the survey population was construed into that final number) – well, why would anybody care? But while this COULD be a teachable moment – where the survey writers point out that the number might be wildly overblown, and the importance of doing an actual assessment…and then there’s…

Using survey results of people who have never done a retirement needs calculation to “prove” there’s a retirement crisis.

The aforementioned “reports” instead choose to present those “pulled out of their…” guesses as a valid conclusion, and one that not only confirms that (a) there is a retirement crisis (and just in case that point was missed, asking them AFTER they provide a retirement number), but that (b) there’s a crisis precisely because folks are never going to be able to achieve that made up number based on the average savings amount (see above).   

Saying there’s a retirement “crisis” without ever defining what that means.

“Crisis” is a word much bandied about these days, most particularly as a label applied to retirement — by foes and fans alike. Indeed, while not so long ago headlines posed that premise as a question (“Is there a retirement crisis?”), it is now generally posited as a current reality (often accompanied by an exclamation point) — even though an examination of objective data and a clinical application of the term “crisis” suggests otherwise.

For most in the retirement industry, it’s meant as a call to action – built on the notion that time is a valuable asset in helping retirement savings grow. But the dictionary definition is of an event or situation where disaster is imminent – something that calls for immediate, and potentially drastic action. And that is how the critics of the 401(k) see it, as they call for immediate drastic action to replace the 401(k) with some alternative (or to defund the 401(k) in order to build an alternative).  Those who claim there is a retirement crisis without context are, quite simply, fueling their fire.

Pretending that everybody used to have a defined benefit plan/pension – and that those who did received a full pension.

This is a hugely exaggerated myth – actually one built on another – and one invoked with growing frequency by those who claim that the 401(k) is an inferior model. One that was “never intended” to be a full retirement plan unlike its defined benefit pension cousin. What gets overlooked is just how few Americans in the private sector were actually covered by a defined benefit pension (29% at the peak), and even among those who were covered, how few actually worked for that employer long enough to qualify for a “full” pension (something on the order of 12% of those who were covered). 

Quite simply, only a very small minority of individuals (in the private sector) who were covered by a pension actually collected a full pension. If that was a plan design INTENDED to be a retirement plan, it didn’t do a very good job of it for most.

Next time: the rest of the list.

- Nevin E. Adams, JD

Preparing for ‘Landfall’

 The images and stories of the horrific path of destruction left by Hurricane Helene have been both eye-opening and heart-breaking – a tragic reminder of the uncertainty of life.

Who would have thought that a hurricane coming off the Gulf would wreak so much havoc in the hills of North Carolina and Tennessee? 

But as the recovery from Helene begins – and we now wonder what Milton will do, perhaps to many already struggling. As we sit here and pray for the best while many prepare for the worst, I’m mindful of my last serious brush with nature’s fury.

It was 2011, and we had just dropped our youngest off for his first semester of college in North Carolina, stopped off long enough in Washington, DC to check in with our daughters (both in college there at the time), and then sped home up the east coast to our then-home in Connecticut with reports of Hurricane Irene’s potential destruction and probable landfall(s) close behind. We arrived home, unloaded in record time, and rushed straight to the local hardware store to stock up for the coming storm.

We weren’t the only ones to do so, of course. And what we had most hoped to acquire (a generator) was not to be found — there, or at that moment, apparently anywhere in the state.[i]

What made that situation all the more infuriating was that, while the prospect of a hurricane landfall near our Connecticut home was relatively rare, we’d already had one narrow miss with an earlier hurricane and had then, as on several prior occasions, been without power, and for extended periods. After each I had told myself that we really needed to invest in a generator — but, as we know, inertia is a powerful force, and reasoning that I had plenty of time to do so when it was more convenient, I simply (and repeatedly) postponed taking action. Thankfully my dear wife wasn’t inclined to remind me of that at the time, but the regrets loomed large in my mind.[ii]

Retirement Ratings?

The headlines about a retirement “crisis” are once again out in full season — but like a tropical storm still well out to sea, there are widely varying assessments as to just how big it is, and — to borrow some hurricane terminology — when and where — it will make “landfall,” and with what force.

Most of the predictions are dire, of course — and while they often rely on arguably unreliable measures like uninformed levels of confidence (or lack thereof), self-reported financials and savings averages — it’s hard to escape a pervasive sense that some are in for rough weather, particularly in view of the objective data we do have — things like coverage statistics and retirement readiness projections based on actual participant data. Suffice it to say that when it comes to retirement — like hurricanes — those who don’t prepare will likely fare worse than those who do. 

Beyond that, the “after” impacts of storms like Katrina, and more recently, Helene — remind us that even those well inland can suffer egregious loss of property — and life. 

Life is full of uncertainty, and events and circumstances, as often as not, happen with little if any warning. Even though hurricanes are something you can see coming a long way off, there’s always the chance that they will peter out sooner than expected, that landfall will result in a dramatic shift in course and/or intensity, or that, as with some (like Helene) — the most devastating impact is what happens afterward, far from the focus on “landfall.”

In theory, at least, that long view tracking provides time to prepare — but, as I was reminded when Irene struck, sometimes you don’t have as much time as you think you have — and sometimes because while you had plenty of time, you just…didn’t.

Doubtless, a lot of retirement plan participants are going to look back at their working lives as they near the threshold of retirement, the same way I thought about that generator. They’ll likely remember the admonitions about (and their good intentions to) saving sooner, saving more, and the importance of regular, prudent reallocations of investment portfolios. Thankfully — and surely because of the hard work of advisors and plan sponsors — many will have heeded those warnings in time. But others, surely — and particularly those without access to a retirement plan at work — may find those post-retirement years (if indeed they can retire) to be a time of regret.

As retirement advisors are well aware, the end of our working lives inevitably hits different people at different times, and in different states of readiness. But we all know that it’s a “landfall” for which we need to prepare while we still can.

 - Nevin E. Adams, JD

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[i] I actually ordered one on Amazon during the drive that was said to be delivered in time – but, of course, wasn’t.

[ii] Ironically, a SECOND trip to the hardware store – this one for batteries for my wife – happened just as a fresh delivery of generators arrived. Bigger than we had planned/discussed, when she called to ask me if we should take one – without hesitation, I said “yes.”  We only used that generator that once, but it sure came in handy.