My ‘Retirement’ Thanksgiving

 Thanksgiving has been called a “uniquely American” holiday — 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.

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

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 incentives in SECURE and SECURE 2.0 will continue to spur more to provide that opportunity — and encouraged by the current rate of adoptions.

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. I’m also encouraged (and thankful) by a sense that the automatic enrollment requirement doesn’t seem to have impacted the volume of new plan formation.

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 modestly expanded contribution limits for these programs (I’d have been more thankful if we’d had them sooner) — and hopeful that that will encourage more workers to take full advantage of those opportunities. I’m particularly thankful that the new so-called “super” catch-up limits will provide even more help.

I’m not (completely) thankful for the new cap on pre-tax catch-up savings, though I suspect most will be appreciative of that shift once they get to retirement (seriously — do you think tax rates are going to decline?).

I’m thankful for the Roth savings option that provides workers with a choice on how and when they’ll pay taxes on their retirement savings. “Retirement” has served to remind me that 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’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 in a way that provides a financially sustainable retirement. Trust me, knowing how much your retirement income will be is an essential element in knowing when you can comfortably 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 (though my recent perusal of the age-65 glidepaths for several leading providers leaves me skeptical).

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 that option. However, I’m even more thankful that the existence of those programs continues to engender a greater interest on the part of small business owners to provide access to a “real” retirement plan like a 401(k).

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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)…despite some new voices…(still) hasn’t.

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 the ARA membership, take the time and energy to provide that input.

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

I’m thankful — even in “retirement” — to continue to be able to make a “difference.” I’m thankful for those who seek me out at various events, or via email, to tell me how much they enjoy and appreciate my writing and speaking.

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 understand the concept, this my third year of not working full-time has been a blessing in so many ways (thanks especially Bonnie Treichel, Todd Kading and Kassandra Hendrix). I’m especially grateful to my wife for her encouragement and support throughout nearly four decades (amidst a LOT of sacrifices) as we both “adjust.” 

I’m thankful for the new home we’ve established as a base from which to enter that next chapter — and the “Velocity Blue” Mustang GT in which I get to explore it.  

I’m thankful that I was able to be with my Mom when she passed last year, for the comfort that her faith brought her and us, and the spirit in which our family was able to work together through the process of winding up her estate.

But most of all, I’m once again thankful for the unconditional love and patience of my wife, 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 dear readers… like you.

Wishing you and yours a very happy Thanksgiving!

• Nevin E. Adams, JD

A PEP-spective on Fiduciary Reviews

  Some months back, the Labor Department published an intriguing three-part “proposed rule” that, to my eye, offered helpful fiduciary tips that go well beyond pooled employer plans (PEPs).

The title alone — “Pooled Employer Plans: Big Plans for Small Businesses” — told you all you needed to know about the motives behind the publication. And, true to form, both the data provided on the current state of pooled employer plan adoption and the focus of the request for information (RFI) included were very much in the spirit of removing barriers to PEP adoption, if not outright promotion of the same.

But what I viewed as the third part of the publication (though it’s labeled V. Fiduciary Tips for Small Employers Selecting a PEP) was, to my eye, the most intriguing aspect, in no small part because it served as a valuable reminder that there ARE fiduciary considerations in making that choice — something that purveyors of that option have been known to gloss over.

As I was recently scanning these — it occurred to me that these admonitions could — and should — be broadly applied to pretty much any new plan option — and not just for small employers.

To that end, consider the following as a fill-in-the-blank template, replacing the word PEP with, say — alternative investments, cryptocurrency, retirement income, or a managed account. Consider:

The Considerations

1. Consider what ________ [i] has to offer you and your employees.

The PEP-focused explanation emphasizes an opportunity to leverage economies of scale, as well as to free up time for plan fiduciaries to run their business “…while simultaneously providing your employees with an opportunity to save and achieve retirement security.”  While that buries the lead a bit, it’s a reminder that your actions need to be prudent and in the best interests of plan participants and beneficiaries” — but mostly a reminder to consider the benefits and costs of the service(s) under consideration.

• Make sure you understand the type of ____________ under consideration.

The PEP-focused explanation notes that, while this option has certain things in common, they aren’t all the same, and don’t operate in the same way — that plan fiduciaries should consider the needs and best fit, and the importance of considering several before making a choice. The same thing is true with pretty much every option that might be under consideration, as the labels retirement income, alternative investments, and managed accounts are widely applied to very different products and operational considerations.

• Make sure you consider the experience and qualifications of the _______.

While the pooled plan provider (PPP) is mentioned here, every service offering is delivered by a provider of some type, and as this tip reminds, “understanding the experience and qualifications” of this entity “…is one of the most important — if not the single most important — aspects….” That means you need to ask and understand “questions relating to the quality of their services, customer satisfaction, prior litigation or government enforcement matters…” as well as “the number of employers and participants in the plan and the amount of its assets….” Basically, you want to make sure that the entity is capable — and has a track record — to fulfill the promises that have been made, and the needs of your plan.

• Make sure you ask questions about ________ fees.

This one really doesn’t need any more explanation, other than a reminder not only to find out what the fees are and who pays them, but also who is getting paid, notably any third parties — or third parties that might be providing compensation to the provider you’ve hired.

• Make sure you understand the investment options.

Of course, for some of the possibilities noted above, this (alternative investments, crypto) is the investment option under consideration and definitely should be understood. Ditto retirement income, which comes in many shapes and sizes (and was recently included in the executive order regarding alternative investments).

• Ask questions about your exposure to fiduciary liability for investments.
• Ask questions about your exposure to fiduciary liability should you join _____.
• Don't forget to monitor ________ on an ongoing basis.

One of the interesting call outs in the PEP document was that “under federal law, employers joining a PEP are legally responsible as fiduciaries for the proper selection of investment options for their employees unless the pooled plan provider hires an investment professional to act as a fiduciary with respect to investment selection.”  Interesting in that, again, some of the purveyors of those options have tended to gloss over/downplay this aspect.

That said it’s good to remember that, barring some kind of special provision, you are personally liable for the prudent selection and ongoing monitoring of all plan investments and services. All of which are embodied in the three tips listed above.

• Make sure you fully inquire about the implications of exiting _____.

I’ve heard it said that it’s a lot easier to get INTO a PEP than to get out of it (though that may just be a nasty rumor, and is doubtless a function of the PEP you have gotten into) — but the same could apply to any number of the other services outlined above, notably retirement income and alternative investments.

The tip here notes that it’s good to ask about any timing or penalty-imposed restrictions from a PEP, but similar impediments might, of course, be found with retirement income or different types of alternative investments. The bottom line here is that while you may not need to exercise an “exit” strategy, you need to know what the implications for the plan and participants would be if it came to that.

In Sum

So there in a nutshell you have it. For any/every product service being considered, make sure you know what benefits/costs it brings to the plan/participants, the capabilities/sustainability of the entity providing it, the fees (and who’s getting them), the process/costs for exiting — and that you have an ongoing personal liability/responsibility for monitoring the services, once engaged.

• Nevin E. Adams, JD

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[i] Just fill in the blank with the applicable service/product under consideration: managed account, retirement income, alternative investments, crypto, etc.

Let's Stop Shaming the Claiming

  The most recent “debate” was inspired by a recent Wall Street Journal article by Derek Tharp — an associate professor of finance at the University of Southern Maine — titled “Why Delaying Your Social Security Benefits May Not Make Sense.”

Shortly thereafter, Schroders 2025 U.S. Retirement Survey stated that 44% of non-retirees plan to file for Social Security benefits before reaching age 67 (the full retirement age for everyone born in 1960 or later) — and “just” 10% plan to wait until age 70 (when an individual reaches their maximum monthly benefit). And, sure enough, the retirement industry commentary that followed was largely in the vein of “can you believe people are ignoring all this free money?”

But it was the Wall Street Journal article that appeared to draw the most critical fire — largely from academics, and mostly (it seemed to me) quibbling about some of Tharp’s math assumptions (when you’re guessing, even rationally, at things that can’t be precisely quantified, there’s always going to be room for “quibbling”), and his apparent presumptions about relative levels of risk. But the critiques that I saw were more focused on his temerity in suggesting that there might actually be legitimate rationales for not waiting till age 70. Even though the subtitle of the article was a fairly innocuous “Most people don’t actually wait until age 70. For at least some[i] of them, it makes a lot of sense.” 

Indeed, it’s hard to read an article about Social Security these days that doesn’t proclaim the financial benefits of waiting till 70. Oh, there are caveats such as “if you can afford to wait…,” but the clear message is the “right” answer is to wait. And, at least to my ears, anyone who suggests otherwise is just being…dumb at worst, or selfish[ii] at best.

There’s little question that waiting till age 70 gets you a higher monthly benefit. However, waiting till age 70 does NOT guarantee that you’ll collect more in benefits, in that some people don’t live as long as the actuaries predict they will — and likely some choose to claim earlier than they might because they fear (or know) that will be the case. Meaning some simply want to maximize the total dollar value of the benefits (or its “utility”), rather than take a chance on their longevity.

Moreover, some folks can’t afford to wait — some are concerned that Social Security benefits will be reduced and/or means-tested (more) if they wait[iii] — some would rather take the money now and invest it — and some just don’t see any reason to wait to collect their “full” retirement benefit. 

I understand and appreciate that for those who haven’t managed to save enough, it’s been suggested that a good strategy is to use the savings you do have until you’re 70 — bridging that savings gap till you can maximize your monthly Social Security benefits for the remainder or your retirement. There’s also the consideration of a spouse, who might well outlive you, and who would presumably appreciate and/or need the higher benefit you get from waiting.

But it occurs to me that many in the financial services industry — and certainly in the media that quotes them — are increasingly prone to labeling those who take those well-earned benefits “on time” as being foolhardy at best — or stupid.

To that point, I’d like to suggest that there is actually a “right” answer that is not 70 — it’s what the folks that structured the program envisioned — your full retirement age, or FRA.[iv] If you take it earlier than that, you get penalized by getting a smaller monthly benefit. If you wait past that date, you get a proportionately higher benefit, but only until age 70. In theory, the actuaries say those decisions all add up to the same benefit — but for “regular” people, the answer is a reality, not a theory.

That’s not because of the logic or assumptions that Professor Tharp laid out — there’s plenty of “wiggle” room in the math to argue either way. But there’s more to these types of decisions than “the math” — and I think some people get so caught up in a slide rule[v] exercise they forget that there are real, rational, personal reasons for the timing of the claiming decision.

Let’s be straight with people about the tradeoffs — acknowledge the financial realities, and respect — individually, if not collectively — that there actually might be legitimate reasons for claiming those hard-earned benefits at different points in time.

But please, let’s quit “shaming the claiming” until/unless we know the particulars of their individual situation(s).

• Nevin E. Adams, JD

 

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[i] Italics mine.

[ii] Selfish in that they’re — and here the culprit is usually a male — not considering how important that larger benefit will be to their surviving spouse.

[iii] Yes, I know nobody thinks anybody who ever wants to be reelected will ever let current benefits be cut, but these days one can hardly be blamed for opting for a “bird in the hand” solution.

[iv] At this point I should “confess” that I started claiming at MY FRA — with no regrets.

[v] A dated reference, for sure — but check it out.