The 80/20 Rule

Sooner or later in your career, you are exposed to the 80/20 rule or, as purists term it, the Pareto principle. Simply stated, it suggests that 80% of the consequences stem from 20% of the causes. You frequently hear how you get 80% of your revenues from 20% of your clients (and sometimes that 80% of your aggravation comes from that same minority).


Similarly, with all the furor of late focused on cost sensitivity, revenue-sharing, and the call for greater transparency, it’s easy to overlook the fact that most of that scrutiny and regulatory angst is being applied to 20% of the “problem” of retirement plan fees.

"Out of" Proportions

Traditional logic held that the fees on your “typical” retirement account ran like this: 70% for investment management, 20% for recordkeeping, and 10% for miscellaneous things like trust/custody, audit, etc. That apportionment wasn’t perfect, of course, but it was a rule of thumb that has been applied fairly liberally over the years. Investment fees were typically drawn from plan assets and, thus, participants have been bearing more than two-thirds of the costs of these programs for a very long time now.

Of course, over the past 20 years, we have seen a gradual shift where more and more of the remaining third is also paid from plan assets—and then redistributed to the same parties that used to get a check from the plan sponsor. Despite the occasional “study” from the Investment Company Institute to the contrary, 20 years ago, my sense is that mutual fund expenses were pretty much what they are now for the average 401(k) plan, at least for institutional class shares*.

So, while there is a growing sense that the participant is picking up a greater share of the plan costs, I’m reasonably sure that most are paying about what they used to, at least on a percentage basis. What’s different is those shareholder servicing fees that once upon a time simply rolled back into the pockets of the mutual fund complexes - now go to reimburse entities that actually perform those services for a retirement plan.

But while we agonize over how that 25-basis-point shareholder-servicing fee is parsed out between recordkeepers and advisers, the current debate barely acknowledges the fact that 70% or more of retirement plan fees paid by participants are the 50 to 100 basis points that come out of every participant dollar for “investment management.”

I’m not suggesting that investment management isn’t a skill to be highly prized and reasonably compensated. Nor am I suggesting that current investment management fees are disproportionate in every case to the value received. There may even be legitimate reasons why these funds grow from millions – to billions – of dollars in assets with no reduction in the expense ratios.

The 80/20 rule notwithstanding, IMHO, you won’t solve 100% of the problem by probing just 20% of the fees being taken from those participant accounts.

- Nevin Adams

* The misuse of retail class shares, and the liberal application of “R” shares, is a topic for another column.

Another One Bites the Dust?

When Fidelity announced this last week that it was dropping its pension plan, it drew my attention.

Not so much because it was taking that step. By now, there have been enough pension fund freezes—or enough reports about how many pension fund freezes there will be—that the occasional announcement barely fazes me anymore. That Fidelity chose to do so while “riching up” their 401(k) plan (see “Fidelity Investments to End DB Plan”) was also pretty much standard fare for such moves.

But there was a significant difference in this particular announcement—a focus on concerns about paying for health care in retirement. In a Boston Globe report, a Fidelity spokesperson cited data that 71% of Fidelity workers didn’t know how they would pay for health-care expenses in retirement (kind of makes one wonder about the other 29%); and as part of this shift in strategy, Fidelity will be putting $3,000 into health-care reimbursement accounts for each worker—monies that won’t be taxable when withdrawn (ostensibly if used to pay health-care-related expenses).

There’s little question that health care looms large as a concern for most Americans. People routinely make job choices based on the availability and quality of an employer’s health-care program, and there is at least anecdotal evidence that, as workers have been asked to shoulder a larger share of the costs of those programs, they have paid for at least some of that with cutbacks in retirement savings. It’s now seen (or at least reported) as a “good” year when health-care costs increase at only twice the rate of inflation.

A Growing Concern

Moreover, there is a growing sense that the seemingly relentless upward trend in the costs of health care could well jeopardize an already financially precarious retirement lifestyle. A recent study by none other than Fidelity itself projects that an average 65-year-old couple will need $215,000 to cover retirement health-care costs (see “Fidelity Says Retirees Need $215,000 to Cover Health-Care Costs”). Workers have reason to worry; Medicare, the primary medical safety net for many retired Americans, is in more tenuous financial shape than Social Security—and corporate America has been shedding its retiree medical programs for longer and with more “vigor” than their more recent focus on setting aside those traditional pension plans.

It remains to be seen how Fidelity workers will respond to the change. With an average employee age of 35, it’s doubtful that they were emotionally much invested in the pension plan, IMHO. Moreover, a richer 401(k) match and the ability to roll their accumulated pension balances into a more “tangible” (as in one being capable of being touched) profit-sharing account will likely be appealing.

All in all, Fidelity has probably managed to transform a vague, uncertain, future benefit into something that can be appreciated in the here and now—and by putting an emphasis on retiree health-care costs front and center with their own workers, they also may have helped bring visibility to a critical retirement savings need—while there’s still time to do something about it.

- Nevin Adams

When You Assume...

We live in an uncertain world, and when it comes to retirement planning, we are forced to make assumptions about an uncertain world some uncertain number of years in the future.

However, a recent white paper by JPMorgan Asset Management (JPMAM) calls to mind that old adage about what happens when one assumes (see Participant Behavior Matters in Target Fund Strategy).

First, retirement projection tools tend to overlook the reality that many, perhaps most, participants dip into their retirement savings from time to time: some for only awhile—JPMAM’s research found that 20% of participants borrow, on average, 15% of their account balance—and some forever. JPMAM’s data noted that a full 15% of those over the age of 59 ½ (the age when one avoids the 10% premature distribution penalty) withdraw, on average, a quarter of their account balance. The research, which looked at the behaviors of 1.3 million participants in some 350 plans recordkept by JPMorgan Retirement Plan Services, also found that the average participant withdraws over 20% of their account balance per year at, or soon after, retirement—not the even 4-5% drawdown implicit in most projections.

Additionally, most projections also tend to be optimistic about the rate of participant deferral. JPMAM found that, on average, participant deferral rates start at 6%—and stay there for a sustained period—increasing to 8% only by age 40, and not attaining 10% until age 55. More significantly, while most projections still contemplate annual pay increases, JPMAM found that, on average, people only get raises only every two of three years (and I’ll wager that, filtering out the occasionally distortive impact of averages, many aren’t seeing increases that often). Even more troubling—but a reality in an era of soaring health-care costs, rising fuel costs, and the economic squeeze being placed on the “Sandwich Generation”—is that, on average, 10% of participants lowered their rate of deferral—or stopped contributing altogether—each year!

Finally—though the JPMAM paper doesn’t touch on this—in this space, I have previously cast a doubtful eye on the rate-of-return assumptions often applied to participant investment patterns.

Optimistic Undercurrents

Now, there is an undercurrent of optimism associated with the Pension Protection Act—a confidence that its automatic enrollment safe harbor will usher more participants into the discipline of retirement saving; that the associated provisions on deferral acceleration will, over time, transform current savings rates to the requisite levels; that the application of professionally managed asset allocation funds as a default choice will impart a rational investment result to participant savings. Certainly these tools have the ability to modify some of the most egregious savings behaviors, and doubtless they will encourage some—perhaps a significant number—to come off the sidelines and begin a responsible preparation for retirement.

They’re not likely, however, to stem the premature drawdown of retirement savings, or to accelerate the pace or regularity of salary increases. In fact, it’s not beyond the realm of believability to envision how the adoption of these tools could, certainly in the short run, serve to reduce the rate of deferrals (participants auto-enrolled at the 3%, rather than the 6% rate they might have enrolled at if they had completed the form), and perhaps even decrease the rate of return (a more balanced portfolio might experience losses in the short-run that a stable-value-only portfolio might not).

What’s attendant upon us all in this emerging age of “automatic” solutions, IMHO, is to realize that they aren’t.

- Nevin Adams

Mirror Image

For now we see through a glass, darkly. 1 Corinthians 13:12

When St. Paul wrote those words, he was trying to explain to the early Christians that we may not understand why things are the way they are today, because our perspective is clouded. That phrase, to see through a glass—a mirror—darkly, conveys a similar sense in today’s usage: a sense of an obscured or otherwise imperfect vision of reality.

For the very most part, those of us in the business of retirement plans look at the landscape and fret about things like the dismal rate of participation, tepid deferral rates, and inert asset allocations (see “IMHO: ‘Never, Ever’ Land” ). Heck, these days, you don’t have to be in the retirement plan business to wring your hands over the sorry state of retirement savings.

Equally discomfiting to me are the incessant recitations regarding how apparently oblivious retirement savers are about the looming financial disaster. And while “the industry” often comforts itself by noting that those who have taken the time to consider their situation are more confident than those who haven’t, I don’t get that either. Perhaps it is a veiled attempt to encourage participants to do some retirement/financial planning (“You’ll feel better if you do”), but from every objective statistic, it would seem to me that most, perhaps the vast majority of, participants should feel more concerned, not less, after contemplating their situation (one would hope concerned enough to do something about it).

Then we get reports like last week’s from the Fidelity Research Institute that suggest that a “typical” worker is on track to replace 58% of their pre-retirement income in retirement (see “Replacement Rate Assumptions Could Be Wishful Thinking”). From what I can discern, 58% is pretty good for typical (to their credit, Fidelity positioned it as a shortfall, not good news). I don’t know that the traditional replacement ratio bogey of 70% is valid (see “IMHO: An Inconvenient Truth”), but Fidelity’s findings would suggest that most aren’t so far off the mark that the gap couldn’t be closed with just a bit more effort/focus. That’s the good news.

The Fine Print

The “fine print” is where it all falls apart. Fidelity’s numbers aren’t drawn from actually looking at people’s balances/savings and comparing them with current compensation levels. Rather, for the most part, they are drawn from what participants report to them as expectations. Among those expectations of a typical household was an $18,000/year pension—from a traditional defined benefit plan. Now, traditional pensions are no longer typical, though they are more prevalent than one might glean from the news. Moreover, $18,000 pensions aren’t typical, either—certainly not outside the public sector (see “Saving While You Still Work”).

Basically, then, not only is 58% likely “short” of what will be required to provide a financially comfortable retirement, the “real” number is likely somewhat short—perhaps significantly short—of the reported 58%. In fact, much of the data in this and other surveys is drawn not from reality, but from participant perceptions of their reality. That may explain why we have expressions of participant “confidence” that seem misaligned with reality.

Ultimately, the concept of retirement security is so individualistic as to defy ready generalization. Our individual expectations are shaped by our past, our health, our careers, our families, our income, and certainly by our preparations for retirement—and the reality, when it comes, will likely be just as individualized. Still, we shouldn’t focus on the status of a typical saver, for there is no such thing. Nor should we rely on the sensibilities of a saver who may be saving what he or she can (or thinks they can), not what they should.

For now, we all see through a glass, darkly. But the time will come when what we’ll see—is all we’ll get.

- Nevin E. Adams

Price "Check"

The good news is, Congress is beginning to take a hard look at 401(k) fees.

Unfortunately, that also happens to be the bad news.

They have a lot of company, of course. The Department of Labor has several initiatives currently under way, the Government Accountability Office (GAO) has called for more transparency, and a number of lawsuits have been filed alleging all sorts of fiduciary malfeasance on the subject (a complaint filed against Cigna last week seemed to suggest that having investment management fees netted against the returns in a mutual fund was some kind of conspiracy - see CIGNA Latest Target of 401(k) Fee Suit). In view of all that activity, last week’s hearing before the House Education and Labor Committee was relatively sanguine (see Congressional Committee Hears 401(k) Fee Disclosure Testimony).

Not that there weren’t points of contention (but not as many as one might have thought)—and even a couple of moments of tension between those offering testimony. All in all, those seemed to be rare, however—after all, we appear to be at a period where everyone agrees that we need to provide participants and plan sponsors with better information about the fees assessed against their retirement plan balances.

Comparison Points

Speaking on behalf of the American Benefits Council last week, Robert Chambers presented an intriguing analogy, noting that an automaker like Toyota no longer made cars—they assembled them, outsourcing the preparation of the various components. He made the point that consumers don’t know—or particularly care—what Toyota paid the individual subcontractors, they’re buying the total product. While it was a compelling image of how today’s 401(k) is put together, the analogy falls apart in two key aspects, IMHO. First, most of us buy our own vehicles, and not from a menu selected by our employer. Second, when I go to buy a car, I may not know (or care) how much the manufacturer paid its subcontractors—but I surely know how much I am expected to pay for that car.

Over the past thirty years, participants, and to a lesser extent, plan sponsors, have been lulled into a false sense of security about the fees they pay for these accounts. I don’t know how many actually believe these accounts are free, but I would imagine that a significant number of participants would be amazed at how much they are paying each year (that doesn’t mean those fees are necessarily unreasonable, by the way).

"Under" Currents

You can hear that same concern just below the surface of comments made by the defenders of the status quo—in between phrases about how “fragile” our current system is, and expressions of concern that participants might be so put-off by those revelations that they will eschew participation altogether. It’s not that I don’t understand what they are trying to say, but I wonder sometimes if they have any idea how that line of reasoning sounds. The implication is clear, even to those who aren’t yet convinced there is a problem: If people actually knew how much they were being charged….

The devil, of course, lies in the details—and concerns about how that information will be constructed and shared (and, trust me, it will be shared) were also just below the surface during the hearing last week. The concerns are twofold; that the mandated structure will be prohibitively difficult or costly to produce, or that the complexity of the information and/or the mandate will render a meaningful disclosure impossible (think prospectus). Indeed, IMHO, the scariest aspect of last week’s hearing was that Congress might feel compelled to roll up its sleeves and “help.”

I’m not altogether sure that the industry can be trusted to heal itself, but I do believe that a growing number are confident enough in the value provided—and their ability to explain it—to do the right thing, to place a visible price tag on those services. After all, if you don’t know how much you’re paying—it’s hard to appreciate how much it’s worth!

- Nevin E. Adams

Option 'Null"

Not too long after my first daughter was born, my wife decided that we needed to have a vehicle with four doors. All other decisions about the car were mine—color, options, make, model, etc.—so long as it had four doors (anyone who has ever wrestled with a car seat, or with getting a child into and out of a car seat, will appreciate why).

In this particular case, even though I hate car shopping, I had done my homework—the service record of the make made it a cinch, the dealership was close, my wife and I saw eye-to-eye on color, and, for my money, there was only one model (in that make) whose four-door version looked sporty enough to satisfy my sense of a car I wouldn’t mind being seen driving. There was just one problem. This particular manufacturer had its model options arranged in three very specific packages. The model that had the features I wanted—for the price I wanted to pay—was the middle option. The one option I really wanted (and I REALLY wanted it) that wasn’t included in that middle option was a sun roof.

Model "Behaviors"

The dealer was able to give me the model I wanted with a sun roof—I would just have to wait some extraordinary period of time to take possession (this at a time when this car manufacturer was, in many cases, commanding a premium above sticker price due to limited availability) and pay more, of course. Oddly, it would wind up costing me almost as much for that modified mid-range model as if I just bought the higher-end version. As it turned out, that was more than I wanted to spend on that car. I didn’t want to wait that long for the modifications, nor did I want some of the “extras” on the higher-end model. Ultimately, I decided that, while I surely wanted the sun roof, I wasn’t willing to be “snookered” into buying the model the dealer surely wanted me to buy.

I’m sure that the manufacturer’s position on such matters was carefully developed, and I’m just as sure now as I was at the time that the desire for a sun roofed vehicle that could be driven off the lot had driven many a buyer to simply “upsize” their purchase. And while I was never really “happy” with that decision (the car worked out fine—the daughter who used to ride in that car seat now drives it), ultimately, I gained the satisfaction of having stood by my principles.

A Growing Concern

Much of the talk at the 401(k) Summit this past week was about fees: transparency, mandatory disclosures, lawsuits. In relatively short order, plan sponsors are going to be able to see how much they are paying for the services their plans receive. For some, that’s going to be a mere formality, of course; but for others—well, I suspect they’re going to feel that they are paying for things they don’t want, and perhaps aren’t getting.

It shouldn’t be all about how much you’re paying, of course. ERISA requires that the fees be reasonable, not dirt-cheap—and the determination of reasonable surely requires not only an awareness of what is being paid, but also an appreciation of the services provided relative to that remuneration. Bundled pricing has, in many respects, made it easier for many to buy (and sell) a retirement plan “package” without delving into those details. However, IMHO, it also has had a tendency to obscure the costs associated with individual components of the package. Like that sun roof, it isn’t that they think it is, or should be, free—but presented with the detailed invoice, they may not think the price is “reasonable.”

It’s not altogether sure to me that plan sponsors will relish the ability to probe those depths—but I don’t think it’s going to be an “option” in the near term, if it ever was.

- Nevin E. Adams

"Never, Ever" Land

It’s an undisputed fact that the vast majority of retirement plan participants never rebalance their accounts. It’s one of the reasons that that initial investment decision, particularly in a default situation, is so crucial. And most of us would guess that those participants who do make changes probably make a mess of it.

However, new research from the Vanguard Center for Retirement Research tells a different story. Their report indicates that “traders” outperformed nontraders by 0.55% on an annualized basis.

Not that we should draw much comfort from that result. First, only 17% of the one million or so participants in the Vanguard sampling were “active” traders (averaging just a bit under three trades each, but most did only one)—and, according to the Vanguard researcher, on a risk-adjusted basis, these same traders fared no better than nontrading participants. In effect, the extra risk they took on—during the relatively mild investing climate of 2003 and 2004—wiped out the benefit of their trading (though, at the end of the day, I’m not sure participants are willing to undertake the statistical analysis to appreciate that impact).

Realign Mien?

The more interesting conclusions, IMHO, dealt not with trading, but with rebalancing; the realignment of the investment portfolios within a reasonably tight percentage of a target allocation—10 percentage points, in the Vanguard evaluation. This group Vanguard termed “active” rebalancers” because they took action to maintain an asset allocation. Another group, which Vanguard termed passive rebalancers, never traded on their own and invested their entire balance in a balanced fund or a lifestyle fund during the period. Their accounts were presumably rebalanced, but without their involvement or intervention.

Compared with nontraders, on a risk-adjusted basis, these passive rebalancers realized excess annual returns of 84 basis points. The active rebalancers didn’t fare quite as well—but still earned 26 basis points in excess risk-adjusted returns. So, at least on a risk-adjusted basis, rebalancers did better than nontraders—but only 6% of the research sampling were passive rebalancers, and only 3% were active rebalancers. In total, these rebalancers were just half the so-called “active” trader total of 17%. The remaining 72%, of course, were nontraders.

Not So Fast

The research results, while intriguing, must be considered with care. A lucky asset allocation, left unattended, could prove to be quite profitable in the long run. Meanwhile, a more balanced portfolio, rebalanced on a systematic basis, could well experience losses in the short-term that an undiversified portfolio during that same period might avoid. Still, the research would seem to support the notion that a well-diversified portfolio, regularly and professionally managed, can be prudent and profitable.

Moreover, these days, an “active” rebalancing program can frequently be put in place with the click of a button—a passive rebalancing program with the mere selection of an appropriate target-date offering. The challenge is to help move the remaining majority of participants—who never, ever touch their accounts—to a rebalancing model that can make a real difference in their retirement security.

- Nevin Adams


Note: Foregoing the scientific “risk-adjusted” statistical analysis for one participants are more likely to rely on — their side-by-side comparison of participant statements with their neighbor's —it was better to be active than passive, and better to be a nontrader than a passive rebalancer.

Active rebalancers enjoyed an annualized return of 18.86% during the period of study, outpacing the 16.90% of active traders, and the 16.77% of nontraders. Passive rebalancers were at the bottom, gaining just 15.25%. Now, that's not on a "risk-adjusted" basis - but it's real money.

An Inconvenient Truth

There appear to be two great debates of our time—Is global warming (oops, I mean global climate change) real? and How much do people need to save for retirement?

The former is beyond the scope of this column, of course (watching the public debate, I’m not certain but that it is beyond the scope of many so-called experts on the subject). As for the latter point, every so often, some academic emerges with proof that people don’t need to save as much as “common wisdom” suggests they should.

The issue was most recently addressed in a column in the New York Times titled “Are Americans Saving Too Much for Retirement?”—a column that was quickly picked up in syndication across the country. Of course, what are usually taken to task are the assumptions imbedded in those ubiquitous retirement calculators, the notion that one must accumulate a sum able to replace 70% of one’s preretirement income in retirement, and the ministrations of retirement plan providers and advisers who, ostensibly, stand to profit from encouraging a life of hyperactive thrift.

Let me concede a couple of points: Many retirement planning calculators still make assumptions about inflation and market returns that no longer seem founded in reality. They still assume that we’re benefiting from annual cost-of-living increases in our pay, for example. Even applied to costs, does anyone believe that the standard projections are able to keep pace with the escalating costs of health care that we are likely to confront in retirement? As for investment returns, it isn’t that the default investment return is a fiction—it’s just that it is a fiction in view of the way most participants actually allocate their balances (this, IMHO, stands to change with the growing embrace of asset allocation offerings).

As for that replacement ratio of 70%, well, I’ve always wondered if it was high enough, what with soaring health-care costs, the Boomer generation’s notoriously less-than-parsimonious lifestyles, and those refinanced mortgages. But, as averages go, it seems a reasonable place to start.

"Average" Bearing

Therein lies the rub, of course. For the most part, the assumptions on both sides are based on averages of a sort. The “average” 401(k) balance in an individual plan, much less a national average balance, tells you almost nothing about the adequacy of that balance to provide a decent retirement income. To do that, you’d have to know something about that individual’s age, their health, where they live, where they plan to live after they retire, their marital status, their other sources of income, their expectations for spending in retirement….In sum, you have to know something about the individual’s specific situation to have a prayer of estimating how adequate their savings truly are. Besides, averages on things like lifespan tend to gloss over the reality that as many people live beyond that point as not.

Ultimately, like the gas gauge on your vehicle of choice, these calculators can only tell you so much; a full tank in a hummer may not carry you as far as one on that hybrid, a journey up into the mountains may take more than a cruise across the prairie, a car full of family members may need more than that solo trip….In point of fact, a half-tank may do just fine for driving around town, but not for a cross-country vacation. What is “enough” depends largely on where you’re going, and how you’re getting there.

Headlines that claim we may be saving too much belie the reality we see every day, IMHO—and they provide people with a flawed rationalization for their poor savings habits. Let’s face it—the “inconvenient” truth is that most aren’t coming close to saving what those calculators call for. In that sense, claiming that the calculators provide an exaggerated result misses the point entirely. Most people are saving based on what they think they can afford to save or, in many cases, what will allow them to maximize the employer match. In the end, that may be enough—or not.

But, given a choice between a gauge that potentially exaggerates the problem, and one that obscures a harsh reality, seems to me that most would rather be safe than sorry.

- Nevin E. Adams

See “Are Americans Saving Too Much for Retirement?”

See also

“The Lure of Averages”

“Bad Assumptions”

A Little 'Free' Advice

On Friday, the Department of Labor issued a Field Assistance Bulletin on the “Statutory Exemption for Investment Advice.” These FABs, which essentially are designed to give DOL personnel in “the field” guidance on the interpretation of the law, provide incredibly valuable information for anyone who works with qualified retirement programs—and this one is no exception.



Three Issues

This particular FAB dealt with three issues:

• Did the investment advice provisions of the Pension Protection Act “invalidate or otherwise affect” prior DOL guidance on the subject?
• To what extent are the standards for selecting and monitoring a fiduciary adviser (as defined by the PPA) different from the standards applied to those who offer advice outside those provisions?
• For purposes of an “eligible investment advice arrangement” under the PPA, is an affiliate of a fiduciary adviser subject to the level-fee requirement?

The answers to the first two were relatively straightforward. The FAB plainly states that the DOL sees nothing in the PPA’s investment advice provisions that invalidates, or in any way alters, prior guidance—including Interpretive Bulletin 96-1 (which set out the line between investment advice and education), Advisory Opinions 97-15A, 2001-09A (SunAmerica Advisory Opinion that said it was OK for money managers to offer advice on their funds, so long as the asset allocation was determined by an independent firm), and 2005-10A. These “continue to represent the views of the department, and may continue to be relied upon by the employee benefits community,” according to the DOL.

Same Duties

Similarly, the DOL stated that “the same fiduciary duties and responsibilities apply to the selection and monitoring of an investment adviser for participants and beneficiaries in a participant-directed individual account plan,” irrespective of whether the advice is provided by a fiduciary adviser under the PPA or not. That, by the way, apparently not only means that the plan sponsor is expected to be just as diligent in selecting and monitoring the advice provider, but also that the plan sponsor is not liable for the advice delivered to the individual, either under the PPA’s new provisions or existing guidance—a point that might be a surprise to some plan sponsors, who have worried about just that level of liability.

The last issue—fees, and how the restrictions of the PPA might be applied—will draw the interest of most advisers, certainly those who are affiliated with a firm that manages money. Here, it seems to me, the DOL also drew what attorneys are fond of calling a “bright line.” The FAB says that “Congress did not intend for the requirement that fees not vary depending on the basis of any investment options selected to extend to affiliates of the fiduciary adviser, unless, of course, the affiliate is also a provider of investment advice to a plan.” On the other hand, the FAB also noted that “when an individual acts as an employee, agent, or registered representative on behalf of an entity engaged to provide investment advice to a plan, that individual, as well as the entity, must be treated as the fiduciary adviser” under the PPA’s provisions.

Ultimately, IMHO, the DOL has provided some very timely and important information on advice. It reinforces the reality that the PPA’s advice provisions represent an addition to current guidance, rather than a refutation or replacement. Significantly, it should assure plan sponsors that, regardless of their approach on offering advice, they are responsible for the adviser, not the advice. It should also put them on notice that they are fully accountable for the prudent selection and monitoring of the adviser—and it provides a sense of the applicable considerations for doing so.

What may remain problematic for some is how (and more significantly, if) the fee structures will work with their individual business models, and those of the organizations with which they are affiliated.

Still, it seems to me that things are clearer today than they were a week ago—and clarity is nearly always preferable to the alternative.

- Nevin E. Adams

Field Assistance Bulletin 2007-1 is online HERE

'Over' Blown?

Looks like the pension crisis is finally over.

Well, the funding part of the crisis, anyway. No fewer than three separate studies* were published this past week that essentially said that the pension plans of larger employers are either fully or nearly fully funded again.

For several years now, we’ve been struggling with the impact of the so-called “perfect storm” on pension plans. The catchy nomenclature was borrowed from the 2000 film by the same name (which, in turn, was pulled from the 1997 book on which it was based)—a reference to the 1991 Halloween Nor’easter that resulted from the unusual combination of several forces of nature to create an exceptionally powerful storm across a very large area. A storm—nearly a hurricane—that caught many off-guard.

The so-called perfect storm for pension plans also resulted from an unusual confluence of factors—a slumping investment market, the “vacation” from funding that many plans took during a period when soaring investment returns made such actions unnecessary, and, significantly, an unprecedented decline in the interest rate of the 30-year Treasury bond after the Clinton Administration decided to quit issuing new ones.

Back in the Black

In the intervening years, plan sponsors have benefited from investment returns that exceeded projections—as they frequently do over the long term. Also adding to the value of the assets in these programs, plan sponsors have returned to the process of making regular—and in some cases, extraordinary—contributions to the programs. Finally—and this has had a significant impact on the calculation of the liabilities owed by these plans—the return to something like a “normal” interest rate environment coupled with the use of a blended rate, rather than an artificially distorted 30-year Treasury. It hasn’t been easy, it hasn’t been painless, and it surely hasn’t been “perfect”—but many, perhaps most, large pension plans seem to be back in the “black.”

Not that the funding shortfalls for most were ever as bad as they were portrayed. While there were clearly some villains—and some unsustainable promises dumped on the Pension Benefit Guaranty Corporation—being 85% funded on a pension obligation isn’t all that different from having 85% of your mortgage paid off with 20 years to go (it’s actually better than that).

You’d never have gotten a sense of that from the headlines, or the angst of the legislators. It may be worth remembering that the last time these funds were flush with cash (we’re a long way from that), pensioners were up in arms that the pension surplus should be given to them in the form of higher benefits, analysts were critical of the “gloss” that pension returns lent to financial reporting, and, frankly, plan sponsors were disinclined to make regular contributions in excess of the required amounts.

It’s worth noting that since this last storm “broke,” many plan sponsors have chosen to freeze or terminate their traditional pension plans. The reasons are varied, of course. The confluence of factors cited above may have made the program untenable financially; workplace demographics may have cried out for a different retirement plan design; or they may simply have looked ahead to the future and made a different choice.

Still, it’s hard not to wonder how many were set on that path for no reason more substantive than the relentless pillorying of the funding “crisis” in the media. It was certainly more than a tempest in a teapot—but IMHO, the concerns expressed were always overblown.

- Nevin Adams, JD


* Editor’s note: the studies include reports from:

Towers Perrin (see DB Funding Landscape Starts to Shine in 2006),
UBS (see UBS New Tracker Finds 2006 Pension Improvement), and
Watson Wyatt (see A Return to Better Funding for Pensions in 2006)

"Exit" Strategy

This past week, we passed the “anniversary” of the commencement of bombing strikes in Operation Desert Storm (1991). Now, I was too old—and my kids too young—to have been directly impacted by that action. But I’ll always remember that night.

I was living in North Carolina at the time, and had been invited by a co-worker to my first NCAA basketball game at the “Dean Dome” at the University of North Carolina. Tickets had been hard to come by, and Chapel Hill was a nearly three-hour drive from where I lived (and on a “school” night, to boot)—but I was excited at the prospect. My friend and I got there early—grabbed some refreshments, found our seats, and sat down to watch the warm-ups. We were only about 10 minutes to tip-off when they made the announcement about Desert Storm—and the resulting decision to cancel the game.

Now, unless it is a playoff game, or a remarkably close contest, people have a tendency to exit such events early to “beat the rush.” In this case—and I don’t know how many people can actually fit in the Dean Dome—nobody saw the cancellation coming, so everybody tried to hit the exits at the same time. My buddy and I actually thought we were in a distant enough parking lot that we could beat some of it, but spent the next hour basically one car length from the parking place we started in—and another hour just getting to the exit of the parking lot.

For years, we’ve been worried about the Boomers heading into retirement. We’ve worried what would happen on that day when they would quit working (and cause our economy to come to a halt), worried that they would pull out all of their retirement savings from the stock market and invest it in bonds, and, most of all perhaps, worried that they would simply get to retirement without enough money to live through retirement. And while, on an individual level, those concerns are certainly real, we’ve also rightly worried about what would happen when they all tried to “exit” the working arena for the “home” of retirement at the same time.

Different Paths

A new study by Vanguard affirms what most of us know, at least anecdotally--people’s approach to retirement is about as variable as, well, people. The report highlights six different paths (see “Workers Plan To ‘Downshift’ Into Retirement” at ) but, of course, it’s more complicated than that. The bottom line is this: Working full time until you reach age 65 and then “retiring” appears to be the exception, not the rule. Apparently, people begin gradually cutting back in their fifties (by their late fifties, the rate of full-time workers falls to 62%)—and even by the time you get to the second half of the sixties, 17% are still working.

The good news could be that people are working, and saving, longer—and perhaps deferring tapping into their retirement savings beyond the date(s) that many retirement projections now assume. The bad news, of course, is that workers could be cutting back on work (and compensation) earlier than those same projections contemplate—and not always at the choice of the worker. Note that, among those who returned to work in the Vanguard sampling, more than half did so to meet basic expenses, and a quarter needed to pay for health insurance.

We’ve tended to think of retirement as a cessation of compensated employment and, perhaps simplistically, crafted certain financial assumptions around the notion that that occurs at a specific point in time. IMHO, the Vanguard study reminds us that the individual decisions around employment generally, and retirement specifically, are just that—individual decisions.

Accordingly, I’d like to propose an alternative definition for retirement in the workplace—an “exit” strategy, if you will—“to fall back or retreat in an orderly fashion, and according to plan.”

It’s an exit strategy in which advisers can clearly play an integral role.

- Nevin Adams

Forth "Right"

A couple of weeks ago, we got a panicked call from daughter No. 1, who had, on her way home from work, gotten her first flat tire. Now, flat tires are never fun, but she was clearly unnerved. It was after dark, at the end of a full day of work for her, and even though she was less than two miles from home, and we have motor club coverage, her mother and I piled into a car to change the tire.

Whilst I was attending to the changing of the tire, my wife turned her attention to gaining a better understanding of the events that had led up to the event. I thought that was odd at the time—after all, tires run over objects and go flat all the time. But gradually, and painfully, my wife—who has a mother’s knack for discerning when the kids are being less than forthcoming—wrested the truth. It turns out that daughter No. 1, in her 10-minute drive home, had been adjusting the car radio—took her eyes off the road—and struck a curb at just the right angle. Sure, the tire going flat had been upsetting, but the real problem for her that night was that her actions created the situation. And the real problem for her after that disclosure—as she soon found out—was that she hadn’t been straight with us in the first place.

Now, it could have been so much worse—a pedestrian could have been involved, or another car. Frankly, we retraced her steps later, and it was something of a miracle that she didn’t hit a fire hydrant or tree. Still, as one might expect, we took full advantage of the “opportunity” to explain to her the potential consequences of her actions—and fuller advantage of the opportunity to deal with the real consequences of her reluctance to be immediately “forthcoming” with her parents (not to mention making her dad change a tire in the dark in the middle of the street in the middle of winter).

Less Than Forthcoming

“Less than forthcoming” seems to be at the heart of this recent wave of revenue-sharing lawsuits—those filed by that St. Louis law firm on behalf of plan participants, challenges by the New York Attorney General, and more recently, pushbacks and lawsuits from plan sponsors themselves. Granted, the language in the lawsuits is generally more provocative than that. A lawsuit filed just this past week against ING says that "Those amounts bear no relationship whatsoever to the cost of providing the services or a reasonable fair market value for the services”—language echoed in a separate plan sponsor suit against Principal that claimed that the revenue-sharing practices "bear no relationship to Principal's costs of providing services to plans or participants," and that the firm effectively used “plan assets to generate revenue-sharing kickbacks for Principal's own interest and for its own account."

Now, it’s not at all certain that any of these actions will go to court, much less trial—and one surely can’t assume that the allegations made by plaintiff’s counsel represent a comprehensive, balanced recitation of fact. There are a lot of disparate issues under scrutiny here, even if they do all have a common linkage in the issue of fees. We can’t know now how all this will work itself out. Perhaps some of these arrangements truly are illegal; some may well be violative of the letter or spirit of trust essential to such programs. Some, no doubt, represent nothing more than an opportunistic plaintiff’s bar.

What surprises us most, IMHO, is not that these lawsuits have emerged, but that it has taken so long for some of these “less than forthcoming” practices to draw this level of attention. However, providers and advisers who have, up till now, been “less than forthcoming” would be well-advised to reconsider that approach.

- Nevin E. Adams

====================
See also Paying the Price

Plan Sponsor Sues Principal over 401(k) Fund Revenue Sharing

AIG VALIC Relents on Revenue Sharing Disclosure

FL Pension Plan Accuses ING of Revenue Sharing Fraud
FL Sheriff Sues Nationwide Over Fees
St. Louis Law Firm Files Another 401(k) Fee Suit

The Best Test

I’ve been in this business since before I graduated college (and that’s now been a while) – but my first interaction with a financial adviser didn’t happen until I got to PLANSPONSOR magazine.

Well, sort of. It would be more accurate to say that it was my first opportunity to have an interaction. Like too many plan sponsors out there, we had years earlier been sold the 401(k) by an adviser who, at some point not too long after the sale, went “missing.”

In the real world, employers – even employers that cover the retirement plan industry – have a business to run. Running the retirement plan, as important as it is, generally isn’t part of that business. That’s why, particularly for smaller employers – but increasingly for employers of all sizes – a financial adviser can be such an important addition to the “team.”

That realization has been a growing component of our focus here the past several years. It was part of our decision to launch AdvisorDash in 2003, an integral aspect of the launch of the PLANSPONSOR Institute and the PLANSPONSOR Retirement Professional (PRP) designation in 2005, and an essential factor in our decision to introduce PLANADVISER and PLANADVISER.com in 2006.

It was also, in 2004, the reason we decided to create an award that would acknowledge the best efforts of the best retirement plan advisers in the country. It was a daunting task to contemplate that first year – I wasn’t even sure that we would be able to FIND the best advisers, much less establish the kind of benchmark standards that could truly speak to retirement plan servicing excellence.

I need not have worried – the advisers committed to this space knew us, even when we didn’t (yet) know them. We were blessed with judges who not only knew the space, but the profession. And we received the eager support of plan sponsors who were willing – and in many cases, eager – to share their adviser experiences. Still, every year it gets harder to choose “the best” simply because there are so many good advisers to choose from.

The finalist groups recognized below are indicative of that trend. Over the next several weeks, our judges will be tasked with the challenge of picking one Retirement Plan Adviser of the Year and, in a new category, a Retirement Plan Adviser Team of the Year. It’s not likely to be an easy decision – but how can it not be a good one?

- Nevin E. Adams

You can meet the finalists online at http://www.plansponsor.com/pdfs/RPAYfinalists2006.pdf

Note: We will be announcing the Retirement Plan Adviser of the Year and Retirement Plan Adviser Team of the Year at the 401(k) Summit in San Diego on February 25. Additionally, the Retirement Plan Adviser finalists will join me for an interactive “Best Practices” roundtable at the 401(k) Summit. You won’t want to miss this – find out more about the 401(k) Summit at http://www.asppa.org/archive/conf/2007/2007summit.html

Principle Difference

As the nation mourns the passing of former President Ford this weekend, it’s been interesting to think back on that period. Most of the coverage seems to run in the vein of “He deserves more credit than history has given him”—a nice way of saying that history really hasn’t given him much credit. That’s not unusual, of course. People are often not fully appreciated until well after they have passed from this mortal coil—and the dividends of presidential policies are often long-term investments. One thing he’s not often noted for—but that we in this business benefit from every day—is his signing of the Employee Retirement Income Security Act of 1974 (ERISA), less than a month after taking office.

I wasn’t paying much attention to such matters in 1974. I was more focused on beginning my college education (and paying for same), and worrying how my dating life was going to survive having to pay 55 cents/gallon for gasoline (but relieved I no longer had to wait in line to do so). As presidents frequently are, Gerald Ford was portrayed by the media as a bumbler of sorts. One of our most athletic presidents, he had the temerity to engage in active sports such as skiing—and its companion activity, falling—in front of cameras. For those less prone to watch the nightly news, Chevy Chase, the then-hot ticket on the newly launched Saturday Night Live, transformed his “skill” for falling in front of the cameras into a weekly parody of President Ford during the 1976 presidential race. When press reports emerged quoting former President Lyndon Johnson’s comment that Gerald Ford had played too much football without a helmet—well, we all got the “joke.”

President Ford’s 895-day term as president is perhaps most noted for his pardon of his predecessor. A controversial decision, to say the least, and one that may well have cost him the 1976 presidential election, it still strikes me as one of those tough, principled decisions that we expect our nation’s leaders to make at critical junctures in history. It was, however, a decision that I think Gerald Ford was able to make for the simple reason that he had spent a lifetime establishing a reputation for personal and professional integrity. There may well have been those who suspected a quid pro quo—but while those notions fit nicely amidst concerns of a Watergate conspiracy, those suspicions simply didn’t hold water when applied to Gerald Ford (imagine if Spiro Agnew had granted that pardon).

Not that Gerald Ford was a saint, by any means. Recent reports suggest that his pardon of Richard Nixon may have had personal, as well as professional, motivations; and his decision to release criticisms of the current Administration’s polices—but only after his death—certainly lends a human “pallor” to his reputation, IMHO.

Still, President Gerald Ford lent his reputation and his integrity to a decision that his country needed—at a time when we needed it most.

- Nevin E. Adams

Deal or No Deal?

Deals like the one announced on Friday by The 401(k) Company, Nationwide, and Schwab are the kind of thing that gives advisers—and plan sponsors—heartburn. Not that one in particular, I should hasten to add—one could have the same queasiness about the recent Great-West/US Bank deal (see Great-West Sweeps Up More 401(k) Business), the sale of Southeastern Employee Benefit Services (see First Charter Lets Go of Recordkeeping Unit), or just about any structural change at a 401(k) recordkeeper.

The reasons for that angst are obvious, I would suspect. Change—even change for the better—is frequently disruptive to the human psyche. Most of us tend to drift into comfortable “ruts” of pattern, or perhaps habit—places where we know what to expect and, roughly anyway, when to expect it. And, at least in my experience, the more frazzled your existence, the more one pines for these oases of quiet and relative clarity.

There are few things more disruptive to the peace or clarity of a 401(k) plan than a switch in recordkeepers, even when the change is instigated by a regular, thoughtful, focused evaluation of the alternatives; or even when that change is the product of a desperate quest driven by a truly awful service relationship. But it is perhaps especially disruptive when the change is thrust on the plan by forces outside of its control or instigation. Particularly because, IMHO, that kind of change calls for at least a passing review of what the change means to the plan.

Some changes are less impactful than others on the plan’s daily administration, of course. Changes that trigger a mass departure of key staff can be upsetting, and those that necessitate moving to a new processing platform even more so. Change that requires communication to participants is anathema to most plan sponsors (and trust me, when a local provider engages in a big financial transaction, the media will cover it, and participants WILL ask).

On the other hand, changes that are merely structural in nature can be a big yawn—and changes that result in additional resources, better capabilities, a clearer focus, and a stronger commitment to “the business” are not as rare as you might think (though not as common as the post-announcement press releases would have you believe, either).

Regardless of whether the change appears to be good, bad, or inconsequential on its face, you need to ask—and get an answer to—the question “What does this mean to us?”

And the question only you can answer—“What are you going to do about it?”

- Nevin E. Adams

Naughty or Nice?

A few years back—when my kids still believed in the reality of Santa Claus—we discovered an ingenious Web site that purported to offer a real-time assessment of their “naughty or nice” status. Now, as Christmas approached, it was not uncommon for us to caution our occasionally misbehaving brood that they had best be attentive to how those actions might be viewed by the big guy at the North Pole.

But nothing ever had the impact of that Web site – if not on their behaviors (they’re 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) was on the verge of tears, worried that he’d find nothing under the Christmas tree but the coal and bundle of switches he surely deserved.

One might plausibly argue that many participants act as though some kind of benevolent elf will drop down their chimney with a bag full of cold cash from the North Pole. They behave as though, somehow, their bad savings behaviors throughout the year(s) notwithstanding, they’ll be able to pull the wool over the eyes of a myopic, portly gentleman in a red snow suit. Not that they actually believe in a retirement version of St. Nick, but that’s essentially how they behave, even though, like my son, a growing number evidence concern about the consequences of their “naughty” behaviors. Also, like my son, they tend to worry about it too late to influence the outcome—and don’t change their behaviors in any meaningful way.

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, IMHO, kids should have a chance to believe, if only for a little while, in those kinds of possibilities.

We all live in a world of possibilities, of course. But as adults we realize—or should realize—that those possibilities are frequently bounded in by the reality of our behaviors. This is 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 savings behaviors.

Yes, Virginia, there is a Santa Claus—but he looks a lot like you, assisted by “helpers” like the employer match, your financial adviser, investment markets, and tax incentives.

Happy Holidays!

- Nevin Adams

P.S. The Naughty or Nice site is still online at http://www.claus.com/naughtyornice/index.php

Taking "Sides"

I was trolling around on the Internet last weekend, when I saw a story titled “The Downsides to Your 401(k).” Needless to say, I was intrigued by the headline (I’m sure that was the intention), which turned out to be a lead-in to an interview with Smartmoney.com Editor Ray Hennessey.

There was an interesting pull quote designed to further whet the interest of the casual reader: "If your company goes belly-up, you're left with a lot of company match that you thought was automatic money, (and now) it's gone."

Well, right off the bat, I’m thinking the real downside in this article is its portrayal of the truth—after all, a company’s bankruptcy doesn’t put the match at risk. So, I read on.

Turns out, the pull quote was lifted out of context. The words were accurately quoted, but were presented without the benefit of an introductory sentence that clarified that the match put at risk was a match made in company stock. A situation that Hennessey said occurs “often.” Well, it’s common enough in large companies, of course, but a relative rarity elsewhere (the last statistics I recall seeing on that phenomenon indicated that something like 16% of plans offered it as an option, and I suspect that fewer mandate the match in that currency). And, of course, since the Enron implosion, a growing number of those firms have made it easier for workers to shift money from that investment on their own—and the Pension Protection Act contains provisions designed to deal with the rest.

Another downside: The fees companies charge to manage retirement accounts are “often” too high. Okay, I get fees as an issue. But “often” too high? Is it the same “often” as the company stock match? Are they “too” high relative to what you’d pay for buying similar funds in a retail IRA? What is too high, anyway?

The remaining downsides struck me as a bit contradictory; first, that you’re “forced to choose from the funds that your company decides to participate in”—a menu that might not be sufficiently diverse. The other, that “lots of times” there are too many funds to choose from.

Now, I suppose that having one’s choices limited would feel like a disadvantage to some, even being forced to choose from a menu that has, at least ostensibly, been selected and reviewed by a prudent expert (or one who has enlisted the services of same). I’m not sure how that squares with having too many options to choose among (though with an industry average of nearly 20 options to choose from, there’s certainly merit in a concern about too many). However, I suspect the point would be that you can have too many, and still not access to the one (or two) you want. However, it is a perspective that seems very much less in vogue these days, as participants and plan sponsors alike warm to the allure of lifestyle funds and managed accounts.

Ultimately, the article concludes that one should consider both the good and the bad about their 401(k): “Familiarize yourself with your fund options and the fees involved. Know your investments. After all, it's your future.”

On that, at least, we can agree.

- Nevin Adams

"Reasonable" Doubts

We got yet another call for 401(k) fee transparency last week. The latest – a report from the Government Accountability Office (GAO) at the behest of Congressman George Miller (D-California) – painted a relatively bleak picture of both the impact of fees on retirement savings, and on the ability of plan participants (not to mention plan sponsors and government regulators) to discern what they are paying for. Before the week was out, the Investment Company Institute (ICI) had published a report with a similar focus – but with a much different conclusion.

For the most part, the GAO report didn’t plow any new ground. In fact, IMHO, any self-respecting retirement plan professional could have written the report (or at least bulleted its conclusions) in their sleep. The bottom line: Fees can have a huge impact on retirement savings, but few seem to know what fees they are paying, and they have to work hard to know what little they do know. In contrast, the ICI report conveyed the kind of calm, reassuring perspective on mutual fund investment by 401(k) plans that one would expect from the mutual fund industry’s chief lobbying group. But I would sum it up as follows: Compared with retail mutual fund investors, 401(k) plan participants are getting a good deal.

Plan fiduciaries are, of course, charged with ensuring that both the fees AND THE SERVICES PROVIDED (emphasis mine) are reasonable. I know of no way to fulfill that obligation without a complete understanding of the services you are receiving, and the price you are paying for them. Unfortunately, we live in a world where the vast majority of fees paid by retirement plan participants are funded from a single fee source – the imbedded expense ratios of mutual funds. At some level, most of us can, with at least some effort, as the GAO report notes, know how much we are paying. And, with the assistance and complicity of providers and fund complexes, we can – again, with some effort – discern how much money is going to whom, and for what purpose(s).

Fees, like death and taxes, are a given in the world of retirement plan savings (believe if or not, one of the “key findings” in the ICI report was this little factoid: “Employers offering 401(k) plans typically hire service providers to operate these plans, and these providers charge fees for their services”). Furthermore, despite a growing interest in, and awareness of, the need for transparency in such matters, we still seem to be a long way from the solution – perhaps even in terms of deciding what the problem is that we are trying to solve.

I would suggest that we’re trying to make sure that relatively unsophisticated participants aren’t being ripped off by a system that has been afforded certain privileges to, at least ostensibly, help them. Secondly, we’re trying to arm and/or inform those charged with overseeing those programs – plan sponsors, advisers, and yes, even regulators – with the information they need to provide effective oversight. Finally – and while this goal is perhaps less explicit, it seems most important – I believe we are finally creeping up on the ability to articulate what the “right” answer is when it comes to determining what is “reasonable.”

It’s not likely to be easy, however. Consider that one of the tools referenced in the GAO report was the Department of Labor’s Fee Disclosure Form, and you need look no further than this multi-page template to gain a sense for the challenge confronting this effort – not just to identify the charges, but to understand their applicability to an individual plan – and to be able to compare them against competing platforms and fee structures.

It will take more than mere transparency to get there, of course, but we’ll never know if they are reasonable if we don’t know what those fees are in the first place. It’s the difference between an assurance that fees are reasonable – and having reasonable doubts.

- Nevin E. Adams

The GAO report is online at http://www.gao.gov/new.items/d0721.pdf

The ICI report is online at http://www.ici.org/home/fm-v15n7.pdf

The DOL Fee Disclosure form is online at http://www.dol.gov/ebsa/pdf/401kfefm.pdf


Editor’s Note: Some interesting excerpts from the GAO report:

In fiscal year 2005, Labor received only 10 inquiries or complaints related to 401(k) fees.

Labor officials told us that it is difficult to discern whether a fee is reasonable or not on its face, and therefore, investigators rarely initiate an investigation into a fee’s reasonableness.

Labor’s most recent in-depth review of fees identified some plans with high fees but determined that they were not unreasonable or in violation of ERISA.

In some cases, Labor did determine that participants were paying high fees. It referred these cases—which included insurance products and international equity funds—to a fee expert from academia for further analysis to determine if the fees were unreasonably high. The expert determined that the fees were high, but not unreasonable.

Thanks Giving

Like many of you perhaps, I suddenly realized this past week that this week is Thanksgiving.

For me, 2006 has been an extraordinary year on fronts both personal and professional: turning 50, the death of my father, my 20th wedding anniversary, sending our first kid off to college, #2 turning 16, PLANSPONSOR’s first industry conference, a new adviser magazine…oh, and a little piece of legislation called the Pension Protection Act.

Still, as I sit here today preparing to pick my mother up at the airport for her first Thanksgiving visit with us in the northeast – and look ahead to picking up my eldest at college next week – I’m struck by just how much there is to be thankful for.

First and foremost, I’m thankful for a loving and patient family – who must all too frequently endure the intrusions of my career-long passion for this field into our daily lives.

I’m thankful for the home I have found at PLANSPONSOR, and the warmth with which its loyal readers have embraced me, as well as the many who have “discovered” us during the past seven years, and for all of you who have supported – and I hope benefited from – our various programs and communications throughout the year.

I’m thankful for the ability to make a positive contribution to the efforts of plan sponsors, advisers, and others who share my passion for the important work we do in helping provide for the retirement security of others. I’m thankful that so many gifted professionals have committed themselves to being part of the solution to these issues.

I’m also thankful for having found – so early in my working life – an area about which I could care so deeply, and which provides so much fulfillment, personally and professionally.

Finally, I’m thankful for the protections our democratic form of government affords us all; for the courage and selflessness of those, past and present, who have been willing to make the ultimate sacrifice to preserve those freedoms; and for the grace of a benevolent God in giving us all so much for which to be thankful at this special time of year.

- Nevin Adams editors@plansponsor.com

Wonder Land

However you feel about the results of last week’s elections, there’s little disputing that things are going to be different in Washington. Amazingly, though perhaps not surprisingly, I’m already getting invitations to presentations, or offers to send me assessments, on what all this change will mean for benefit programs generally, and retirement savings specifically.

My initial reaction was a bit like when I walked into the mall last weekend and was confronted with Christmas displays – it’s too soon for this!

I doubt that many went to the polls with pensions on their minds (even those of us who make our living supporting them), and with the ink on the Pension Protection Act of 2006 still damp, one is tempted to think that we have all the regulatory help we’ll need until after the next election – at least.

Personally, I’m not expecting much out of this Congress, certainly not on pensions (does anyone really think that the momentary comity displayed for the television cameras will last?). We can probably “thank” the airline industry’s pension funding crisis for forcing the issue this past term, but higher interest rates and new pension accounting regulations from the Financial Accounting Standards Board (FASB) will likely grease the skids with no further legislative impetus. For defined contribution plans, there’s little question that the PPA sets a lot of interesting trends in motion – and much of that can proceed without the assistance of Congress. Moreover, if the removal of EGTRRA’s sunset dates doesn’t actually create true “permanence,” it nonetheless, for the time being, removes the ability of Congress to simply allow distasteful (to some) tax breaks to expire. Advice? Well, that was one of the more controversial aspects of the PPA legislatively – and it’s pretty clear that that is one area in which controversy, and just a bit of confusion, remains. I’m not at all sure that that will be resolved in the near term, but one never knows.

Not that a little inaction from Congress would be a bad thing. Most of us will have our hands full assimilating, explaining, and implementing the new provisions of the PPA until well past the 2008 elections. In addition to the Department of Labor’s newly minted proposals on Qualified Default Investment Alternatives , we have yet to see some of the details that will be required to fulfill some new reporting obligations, including quarterly benefit statements, and things like the Roth 401(k) may have a broader appeal now that the EGTRRA sunset has been removed.

But, as we lumber toward our next Presidential election, I wouldn’t be surprised if some began to wonder aloud if automatic enrollment might not be better deployed as a mandatory enrollment – after all, why leave “bad” behaviors to chance? Nor would I be surprised to hear legislators beginning to talk not about the disappointing participation rates of the 44% of working Americans who have the chance to participate, but about why the other 56% don’t have the same opportunity. After all, all taxpayers are, in a sense, subsidizing the programs of the 44% (similar arguments have been made about employer-sponsored health-care programs already, by the way). Could you envision a sort of uber-Social Security program that mandated worker (and perhaps employer) contributions that go into a private account? Maybe not in that particular format today – but there are elements in that design that could garner bipartisan support, IMHO. What might that mean for retirement security? For your retirement business security?

It’s not too early to start wondering – after all, 2008 is just around the corner.

- Nevin E. Adams editors@plansponsor.com

Election Nearing

If you have turned on a TV, walked by a radio, or driven down a residential street in the past month, you will, of course, be aware that our nation will go to the polls tomorrow. Certainly, politics has never been a pretty business, but I doubt that I would get much argument in stating that this particular political season has been as nasty, vitriolic, and personal as any in recent memory—including not a few of those ads where the candidate’s visage appears to say that he or she “approved this message.”

Like a couple of bickering siblings, both sides protest either that they didn’t start it, or that it is the other side’s fault. Lowered to levels of political discourse that once would have gotten your mouth washed out with soap, the verbal free-for-all threatens to obfuscate not only the real issues in this election, but the truth itself. We’re all sick and tired of it—even when they’re dishing the dirt on the candidate we’re hoping is forced to slink off the public stage in disgrace come Tuesday.

Ultimately, of course, these strident pleas represent attempts not only to persuade, but to overcome the historic inertia of the American citizenry, particularly in one of these so-called “off-year” elections. Those of us who struggle to get workers to properly prepare for their own personal retirement security can surely appreciate the challenge, if not the consequences.

However ill we may be of the discourse, there is little argument that this election, more than most, will have a dramatic impact not only on the next two years, but on the 2008 presidential election campaign that is already underway. The political pundits have it all figured out, of course—but they’ve been wrong before. Political punditry spends a lot of time looking back over its shoulders at the past, but as any mutual fund investor knows (or should know), “past performance is no guarantee of future results.” Indeed, whether it is because, or in spite, of the current level of vitriol, the American public’s interest in expressing its opinion by actually taking the time to go to the polls – or in pursuing an absentee ballot—appears to be on the upswing. And, if the last several elections have taught us nothing else, we now know that votes—even a single vote—can matter.

The nation is not so cleanly demarcated into “blue” and “red” as pundits would have us believe, though we surely have our differences, IMHO. I suspect at most levels the voting public is not as polarized in their opinions as those running for political office seem to think. Frequently, that means that we must indeed opt for “the lesser of two evils,” but at least we have a choice—and unlike the brave Iraqis who walked to the polls last December to exercise a right to which they were long-deprived, we can do so without fear of assassination or retribution.

Here’s hoping that—whatever your position on the issues - you take the time to vote this election. It is not only a right, after all, it is also a privilege—and a responsibility.

- Nevin Adams editors@plansponsor.com

"Shop" Talk

This past weekend was Parent’s Weekend at the college where my eldest has now been in residence for the last two months. We’d had a great weekend, but as we went to check out of the hotel, I noticed that the final charges were considerably more than the rate we had been quoted when we made our reservations. Setting aside for the moment concerns that my 14-year-old had discovered the wonders of pay-per-view, closer scrutiny yielded the number I had anticipated—our room charge. But also included in the charges I was now expected to pay were a room tax, a city tax, and an occupancy sales tax.

I suppose one could hardly fault the hotel for those additional charges – they had, after all, provided the room and facilities to my family for the agreed upon rate. I’ll bet that somewhere on their Web site, or perhaps even on the form I signed at registration, the existence of these additional taxes was acknowledged. However, I’m reasonably certain that the hotel was happy to have me think I was getting the base rate when making my booking decision. And, when all was said and done, I’m assuming that comparable hotels in the vicinity had comparable (if not identical) taxes.

In a similar fashion, mutual fund investors have no doubt become a bit desensitized to the disclosure of fees. We talk about investment management fees as a proxy for what we are paying for the actual management of money, but at the same time realize that there are other charges, such as 12b-1s, that go to cover certain required administrative costs of running and maintaining the fund. And, for the most part, we assume that most funds that have comparable administrative structures also have comparable cost structures. We may even assume, as I did with my hotel bill, that those costs aren’t even fees, but simply a recovery of costs.

Well, disclosure isn’t necessarily clarity, and last week we were reminded that there frequently is more than meets the eye even with so-called disclosure. The latest “disclosure,” of course, is the revelations slowly emerging from an SEC investigation into the business practices of some fund company administrators in dealing with the fund complexes (for more details, see HERE). While in most respects, it may not be as monetarily significant, or perhaps not quite as pernicious as the mutual fund trading scandal, it is, nevertheless, one more not-so-shining example of what greed, coupled with an “excess” of funds available to fuel those vices, can yield.

For years, retirement plan investors have been willing to fork over billions of dollars in fees to the mutual fund industry. In turn, we have benefited from professional money management, call-center support, 24/7 access to our accounts via the Internet, the flexibility of daily valuation, the convenience of daily liquidity, and, in many cases, the support of financial professionals to help guide us in the management of our retirement savings accounts. Many of those services have been funded, in whole or significant part, by so-called revenue-sharing arrangements. However, IMHO, many of these mutual fund complexes have either forgotten—or have chosen to deliberately ignore—their obligation to the investing public.

I, for one, am sick and tired of having to fork over redemption fees self-righteously imposed by firms that not so long ago saw fit to profit richly from illicit and profitable arrangements they deliberately struck. I’m weary of 12b-1 fees ostensibly imposed to benefit investors with lower fees resulting from broader fund distributions—but that somehow never seem to achieve that result no matter how broad that dissemination. I’m tired of the oligopolistic mentality that sets a “fair” fee based on whatever the plurality of similarly situated mutual funds already get away with; I’m disgusted with the insidious development of special share classes designed to cloak retail pricing in what appears to be an institutional wrapper, and the sense that investors shouldn’t be troubled with a full, transparent disclosure not only as to how much money is being taken from their accounts, but to what ends, and what parties, it is being directed.

Normally, of course, we don’t seek to delve deep into the product profitability of every dollar we spend. I may have qualms about oil company profitability as I fill my tank—and I may well wonder at the expense of a bag of popcorn at the local cinema—but ultimately, as a consumer, if I believe I am being taken advantage of, I shop somewhere else. A mechanic that appears to gouge me on a simple repair will lose my business forever; a roofer, after repeated attempts to remedy a leaky roof, may gain my ire and a call to the Better Business Bureau.

In recent times, the investment industry has conducted itself in such a way as to not only jeopardize the trust of the investing public, but to suggest that it doesn’t really “get” what the big deal is. Maybe if we started shopping somewhere else, they would.

- Nevin Adams editors@plansponsor.com

Fear of Filings

Last week, the elementary schools in Attleboro, Massachusetts, gained a bit of notoriety for their decision to ban kids from playing tag (more specifically, any unsupervised “chase” game). They weren’t the first to do so, but headlines like “Tag, You’re Out!” are just too tempting for journalists to turn their backs on. And, let’s face it, the notion of tag being “outlawed” is the kind of “you’ve got to be kidding me” story that people will read.

The reason for the ban is simple: Recess is "a time when accidents can happen," was a quote attributed to Willett Elementary School Principal Gaylene Heppe, who approved the ban. Having had a dangerous encounter of my own on the school playground during sixth-grade recess (I still have the scars), I can attest to the veracity of the concern. Of course, no one really thinks this is about children’s safety. We all know – and, unfortunately, understand - that it’s about the lawsuits that such accidents will almost certainly engender.

The lunacy of our litigious society is hardly a new phenomenon, but it seems to me that we have entered a new phase. Where once we would have had some kid getting hurt playing tag, the school getting sued, and subsequently banning tag, now we have what is effectively a preemptive action. Like Pavlov’s dogs, as a society, we know what’s coming – and rather than wait for the worst to happen, we take preventive action. Now, there’s nothing wrong with that approach, of course. Properly focused, it’s productive, proactive – even prudent, if not just plain, old-fashioned common sense. But, in a time when the only limits to being sued are the imaginations of a creative litigator and a receptive judiciary, well, you wind up doing things like banning unsupervised tag.

The mindset of retirement plan sponsors is not yet in that vein, so far as I am able to discern. In fact, in my experience, the fear of getting sued is perhaps the strongest consistent motivator of inertia in plan sponsor behaviors. Not that behavioral change is easy to accomplish – after all, when it comes to tough, complicated financial decisions with legal impact, plan sponsors are as inert as any participant.

Still, the fear of getting sued – or, as we tend to euphemistically refer to it, “fiduciary concerns” – remains one of the most frequently cited reasons for inaction. We tend to forgo offering investment advice to participants because we are afraid of getting sued, for instance – and we forestall implementing an investment policy statement – or taking a questionable fund off the menu – for much the same reason.

In fact, while fiduciary awareness is, IMHO, key to innovative, thoughtful plan designs, ironically, fiduciary concerns can be anathema to the same result. Fiduciary concerns are never all that far off a plan sponsor’s radar screen – but motivating good behaviors generally takes more than the fear of getting sued.

- Nevin Adams

"Losing" Propositions

Last week, participants who had brought a company stock suit against their employer won a settlement. No real surprise there, you say? Well, actually, in approving the relatively modest $11 million settlement in the case of In re: Broadwing, Inc. ERISA Litigation, the court essentially said that plaintiffs should take the money and be glad they could get it—since their odds of winning (“prevailing on the merits” in legalspeak) were uncertain.*

Now, admittedly, that might be something of an overstatement. In approving the settlement, the court basically did what courts are supposed to do in approving a settlement—they ran down a checklist of things that purport to establish that the settlement is fair, particularly in a class action, where most of the plaintiffs aren’t in the courtroom. And one of the conclusions courts are basically required to draw in approving such settlements is that it represents the best deal for a plaintiff under the circumstances.

In Broadwing, the action was brought on behalf of some 5,000 participants, and it claimed that the defendants breached their ERISA fiduciary duties by failing to provide employees with information about the firm’s true financial condition. (This, of course, has become an investigation trigger for any firm that has any kind of earnings “surprise” or some suggestion of accounting mal- or misfeasance. And, for good measure, they also typically charge that participants were not adequately informed of the risks of investing in company stock.)

Still, despite the Enron debacle’s financial shenanigans, and the myriad headlines generated each and every time (including in PLANSPONSOR’s NewsDash) a plaintiff’s law firm initiates an “investigation” and then actually finds a plaintiff or two to represent the litigation class, most of these cases seem to wind up one of two ways—a settlement or a finding for the employer/defendant. In fact, in recent days, there have been a series of these cases that have not only gone to trial, but have wound up in the latter category (see “No Breach in Fiduciary Duties of Airlines’ Co. Stock Cases”). This trend was referenced in a recent $100 million settlement for AOL TimeWarner participants (see “Court OKs $100M AOL Time Warner 401(k) Suit Settlement”).

Despite what, IMHO, is a reasonably rational application of fiduciary law in these cases, I’m not sure that plans with company stock investments can afford to be complacent. Their presence on a retirement plan menu draws a disproportionate, if not downright imprudent, interest from participants—not to mention litigators. There are costs to litigation that go well beyond lawyers’ fees**; the distraction from the business of making money, most obviously—and even winning can be losing on the PR front.

And, as an old boss of mine used to remind me, “You can spend a lot of money in court being right.”

- Nevin Adams editors@plansponsor.com

* "Several district court decisions favor the possibility of establishing liability in cases alleging fiduciary breaches concerning holdings of risky company stock in individual retirement accounts, however, few of these cases reached the stage of a decision based on the merits." - In re: Broadwing, Inc. ERISA Litigation

** Not that one should begrudge professionals being fairly compensated for their expertise, but roughly 23% of the $11,000,000 Broadwing settlement will go to plaintiff’s counsel. Now, since contingent-fee cases routinely take a third of the settlement, one could certainly find that 23% is reasonable. However, that would leave, as best as I can estimate, only about $1,700 each for the roughly 5,000 participants.

"Chill" Pill?

Last week, another court rejected claims that a cash balance plan was age discriminatory (see “Cash Balance Plan Not in Breach of Age Discrimination Laws”), though you could perhaps be excused for not noticing that result. In fact, my guess is that a random sampling of the adviser universe would reveal two things about cash balance plans: first, a great ignorance about what they are and how they work (see links below); and second, a general sense that they represent an illegal plan design.

Over the past several years, the conversion – and litigation experience – of a single plan – IBM - has dominated the media’s coverage of these programs. Along the way, Congress has cut off funding for the Department of Labor to issue clarifying regulations on these programs (led by Congressman Bernie Saunders, I-Vermont, in whose state IBM is the largest employer), and the IRS quit issuing determination letters on these plans (basically an approval by the IRS that the plan document passes muster).

They continued to be adopted by employers, of course (see “One Bad Apple”), but it surely couldn’t have been easy given all the bad press regarding those programs. And most of that coverage centered around a single case: Cooper, et al. v. IBM Personal Pension Plan, a case brought in the U.S. District Court of Southern Illinois (see “Murphy’s Law: IBM Loses Cash Balance Ruling”) in 2003.

It’s not the only lawsuit that has been brought regarding cash balance plans – but, until recently, it was one of the very few in which plaintiffs’ counsel had actually been able to convince a court that the plans were illegal (and then only in the context of a conversion from an existing traditional defined benefit plan). And, despite a surprising number of cases in different jurisdictions that came to a completely different conclusion – at least one, Tootle v. ARINC Inc., came to a directly different result – the only one that “the media” seemed to care about was the IBM verdict – and they flogged it relentlessly, IMHO. Consequently, while some employers continued to embrace the cash balance concept, they doubtless did so with trepidation. Countless more - we’ll never know the full effect – employers and advisers likely drew their sense of things from the headlines and simply chose to avoid a potential headache. This “chilling effect” is, of course, exactly the result that cash balance opponents had in mind.

In recent weeks, the landscape has changed dramatically. The Pension Protection Act specifically clears up the age discrimination issue, at least on a prospective basis and, coincidentally, within days of that result, the IBM decision was reversed on appeal. Not that either of these results have been headline news in most cases (the headlines in the IBM case have largely been focused on the plaintiffs’ “determination” to carry their case to a higher court).

And not that cash balance plans are a panacea for what ails our current retirement savings system – but they offer a benefit accumulation that seems more portable than traditional pension plans and more consistent with the working patterns of today’s workforce, is supported by the Pension Benefit Guaranty Corporation (PBGC), and is typically employer-funded. The design is, generally speaking, more balance-sheet friendly than traditional pension plans, and its benefit to participants more readily grasped and communicated.

Automatic solutions alone aren’t likely to be enough to stave off the retirement savings crisis, and we’ll surely draw less support from traditional defined benefit plans in the future than we have heretofore (even for the minority that had that support to begin with). We need new solutions, and we need to consider old solutions in a new light.What’s changed about cash balance plans? Not much. What’s changed about their viability as a plan design alternative? Quite a bit, I hope.

- Nevin Adams editors@plansponsor.com

For more on cash balance plans see:

http://www.plansponsor.com/hp_type2/?RECORD_ID=4910

http://www.plansponsor.com/magazine_type3?RECORD_ID=34704