All For One

Looks like James LaRue will get his day in court, after all.

Last week’s Supreme Court result (see Justices OK Individual ERISA Suits in Landmark Ruling) could perhaps have been anticipated – certainly there has been little of late to suggest an interest in depriving participants of their right to sue - but the margin of victory – 9-0 – was striking.

The case - LaRue v. DeWolff – involved a participant that claimed he had instructed his plan administrator to transfer his balances to different funds. Those instructions were either ignored, or never presented in the first place, depending on who you choose to believe – but the lack of attention to those instructions allegedly cost James LaRue $150,000. What really happened, why LaRue chose to sue when he chose to sue, and how much damage was done as a result has yet to be established – the case was dismissed by two lower courts that, relying on an earlier Supreme Court precedents, determined that ERISA did not permit individual participants to bring suit on behalf of their own interests, only on behalf of the plan as a whole.

I can’t say, however, that I was impressed with the rationale presented by Justice Stevens, who authored the court’s decision (he was joined by Justices Souter, Ginsburg, Breyer, and Alito, while Chief Justice Roberts and Justice Kennedy filed an opinion concurring in part and concurring in the judgment, and Justice Thomas filed an opinion concurring only in the judgment, which Justice Scalia joined). Essentially, Justice Stevens admitted that the Supreme Court had previously held in Massachusetts Mutual Life Ins. Co. v. Russell, that ERISA didn’t permit individual participant suits (1) - but that while “Russell’s emphasis on protecting the “entire plan” from fiduciary misconduct reflects the former landscape of employee benefit plans. That landscape has changed.”

Change “Parse”?

How has it changed? Well, to put it simply, because defined contribution plans have individual accounts, and – here I’ll let Justice Stevens speak for himself – “Russell’s emphasis on protecting the “entire plan” reflects the fact that the disability plan in Russell, as well as the typical pension plan at that time, promised participants a fixed benefit. Misconduct by such a plan’s administrators will not affect an individual’s entitlement to a defined benefit unless it creates or enhances the risk of default by the entire plan…. Thus, Russell’s “entire plan” references, which accurately reflect §409’s operation in the defined benefit context, are beside the point in the defined contribution context.”

Of course, defined contribution plans were not “beside the point” when the Russell case was decided, and the justices then ((in an interesting touch, Stevens also authored that opinion) addressed what ERISA allowed, not what it provided for suits brought in a non-individual account context under ERISA. Consequently, to my eye, anyway, it’s as though the Supreme Court sought to “excuse” its prior decision as not being applicable to ALL plans covered by ERISA (you’d think that could’ve been mentioned at the time), or worse – to suggest that because the “landscape” has changed, so has the law.

I suppose some will appreciate the “vitality” such flexible interpretations give the law, but it’s precisely those kind of situational determinations that unduly complicate our lives, IMHO. Defined contribution plans (and those individual accounts) have been with us more than a century, ERISA for a generation. What about the prevalence of defined contribution plans relative to defined benefit programs warrants a reinterpretation of the latter to adequately address the former – other than perhaps the fact that the justices themselves didn’t “get” individual accounts in 1985 when the Russell case was decided? Or, more cynically, that the justices messed up in their Russell decision, and wanted to rationalize what could plausibly be viewed as a repudiation of the previous decision?

A Loss is a Loss

That’s why I much prefer the rationale expressed by Justice Thomas in his concurrence – a concurrence that “is not contingent on trends in the pension plan market. Nor does it depend on the ostensible “concerns” of ERISA’s drafters.” Thomas goes on to affirm the statutory right of a participant, beneficiary, or fiduciary to bring suit (“obtain relief”), and then goes on to state what common sense dictates – losses to individual accounts in a plan are losses of the plan – and recoverable as such (2).

Whatever the rationale, the law of the land now affirms that participants can bring suits based on injuries to their individual accounts. Frankly, the court’s previous sense that an injury to a participant in a plan was not a plan injury smacked of the kind of legal hair-splitting that only lawyers (and I have a JD) and politicians relish. Now, in the wake of the LaRue decision, I can understand and appreciate the concerns expressed on behalf of employers – that this case will simply set off a wave of new and expensive litigation.

No doubt the coverage of the LaRue case will serve to discourage some who were contemplating offering a 401(k), but I doubt that it will lead to the demise of plans already in existence. Much as I hate to contemplate the prospect of more red meat for the plaintiffs’ bar, I suspect the individual participant lawsuit “shield” pierced by the LaRue decision was unappreciated by most plan sponsors. Perhaps most obviously, why else would so many have sought the protections of ERISA’s 404c, but to avoid the possibility of an individual participant suit?

Still, one need look no further than the rash of so-called stock drop cases or the revenue-sharing challenges to see the potential – and the LaRue headlines certainly convey the sense of a new way for workers to sue their employers. But I think plan sponsors – certainly the ones attentive to their fiduciary responsibilities - have long been concerned about participant lawsuits.

Of course, they’re also probably not the ones who should be worried.

- Nevin E. Adams, JD


(1) ERISA Section 409(a) provides: “Any person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries by this title shall be personally liable to make good to such plan any losses to the plan resulting from each such breach, and to restore to such plan any profits of such fiduciary which have been made throughuse of assets of the plan by the fiduciary, and shall be subject to such other equitable or remedial relief as the court may deem appropriate, including removal of such fiduciary. A fiduciary may also be removed for a violation of section 411 of this Act.” 88 Stat. 886, 29 U. S. C. §1109(a).

(2) “The allocation of a plan’s assets to individual accounts for bookkeeping purposes does not change the fact that all the assets in the plan remain plan assets.”

The Not-So-Fine Print

If you watch commercial TV (that is to say, TV with commercials), you’ve no doubt been struck by the proliferation of ads for various prescription medicines. Medicines that you generally can’t buy directly, of course - but you CAN “…ask your doctor or pharmacist about how they might work for you.”

Setting aside my personal disgust at just how many (and how explicit) Via.gra ads are shown (and shown so early in the evening), I’m always struck by the length and content of the disclosures that accompany such promotions. Frankly, IMHO, by the time they’re done reeling off the potential side effects, it’s a wonder anyone actually makes an inquiry about taking them. Truly, the “cure” often sounds worse than the disease.

Disclaimers are also increasingly popular in our industry. There’s the disclaimer that plan fiduciaries are asked to sign if they choose not to follow the counsel of their financial adviser, disclaimers that purport to limit the liability of providers, and exactly why do you suppose those admonitions that past performance isn’t indicative of future results come so intriguingly positioned vis-à-vis the trumpeting of those results? Just ahead of the press toward automatic enrollment, some were requiring that participants physically opt out by acknowledging that they realized the consequences of their decision. Not that they necessarily did, mind you. One would expect that if they did, they wouldn’t opt out, if for no other reason to get the “free money” associated with the company match.

No, like the litany of disclaimers on those pharmaceutical ads, the consequences of not saving for retirement are, for many, simply a reminder that some highly unlikely side effects could, but probably won’t, happen. Part of that, of course, lies in the inability to portray something so uniquely individualistic, and part of it, surely because the audience itself has no real idea what a secure retirement looks like, much less what it will be like to live through the alternative. But part of it also is our collective unwillingness to share that truth, or to do so only in the smaller sized text, the fine print of “disclaimers”.

I’m sure the pharmaceutical companies would just as soon not bother with their little disclaimers – ditto those consent forms that accompany the most modest medical procedure. Let’s face it, if any of us EVER thought those “possible” results were likely (including the folks shoving the forms in our face), we’d surely walk away.

Disclaimers, of course, are generally defensive mechanisms; written by lawyers, for lawyers – by the people who have spent time figuring out how all the things that can possibly go wrong to protect themselves against the impact on those who haven’t – or can’t. The drug company tells you that dire consequences are a possibility precisely because they don’t want you to later claim (in a court of law) that you weren’t told they were. They are NOT, however, generally designed to so fully and completely apprise you of the negatives that you hesitate. The “fine print”, in other words, is not designed in such a way as to gain your full attention.

Are your disclaimers any different? Are they truly designed to get people’s attention…or are they simply designed to cover your….assets?

- Nevin E. Adams, JD

The Ant And The Grasshopper

One of the more well-known Aesop’s Fables is the story of “The Ant and the Grasshopper.” In the story, the ant works hard all summer long, storing up food for the winter that it surely knows is coming. The grasshopper, though he too knows that winter is coming, decides instead to fritter the summer months away—going so far as to make fun of the ant for working so diligently.

Of course, winter does finally arrive, and the grasshopper finds himself stuck in the cold, and hungry. He quickly remembers his “friend” the ant—and hops over to his anthill and proceeds to ask for a handout.

There have been certain animated retellings of this fable over time—in most of those, the grasshopper comes to see the error of his ways and appeals to the ant for a morsel of food in a contrite manner. And, in those “happier” versions of the fable, the ant has enough to share—and does—and everyone seems to live happily ever after. But in the original version of the story, the grasshopper approaches the ant not with a sense of contrition, but with one of entitlement. And in at least one older version of the story, the ant slams the door in the grasshopper’s face.

Respect “Ed”

I’ve not been a huge proponent of automatic plan solutions. Not that they don’t have their place, and not that they don’t have the ability to have a positive impact on plan participation rates. Certainly, some would-be participants just don’t get around to completing or turning in the enrollment forms, and surely others are intimidated by the process. But my thinking over time has been that those who could afford to save were—and that adults should be accorded the respect of allowing them to make their own financial decisions, even when those decisions weren’t the ones I would make, or the ones I think they should.

More recently, I had been concerned that many workers simply couldn’t afford the discretionary savings. But over the past couple of years, the miniscule drop-out rate from automatic enrollment programs has persuaded me that many of those who think they can’t afford it find a way (that, or they haven’t yet figured out that they can opt out). Economics is clearly a factor for some—but studies seem to suggest that isn’t the issue for most.

That’s left me wondering—again—why so many eschew voluntary savings programs, and that’s why, though I am philosophically opposed to mandatory programs (the fact that employees can opt out doesn’t mean that they actually feel that they can, or know how to), these days, I am willing to take a more aggressive stance That was inspired in some part by the whole subprime debacle. Clearly, there were a lot of people who made questionable (to put it mildly) financial decisions—decisions that, depending on who’s making the call in Washington, could come to be underwritten (directly or indirectly) by people who had the good sense not to overextend themselves.

It does not require a hyperactive imagination to see a point down the road where many Americans lack the financial resources to fund their retirement years, including workers who once had an opportunity to participate in their workplace retirement plan—“grasshopper” workers who simply may have made a choice to invest in things other than their retirement security at a time when most of the “ants” who had the chance gladly took advantage.

Of course, “automatic” enrollment is not mandatory participation, and the Pension Protection Act’s provisions (and the required annual notices) may make it easier for those who are automatically enrolled to opt out than it has been up till now. I’ll also concede that, as articulated motivations go, “making it harder for people to shirk their responsibility to save for retirement” comes off as rather, well, harsh.

Nonetheless, we’re all running out of time to do the right thing—and I’m not sure the rest of us can afford to let the grasshoppers continue to have their day in the sun.

- Nevin E. Adams, JD

Don’t Just Do Something, Stand There!

If you’ve been asked in the past two weeks what to do about the market (and who hasn’t), I’m sure your response has been something along the lines of…“Nothing.”

There are, of course, more eloquent ways to express that sentiment. And, let’s face it, when it seems that everyone is asking that question – it’s generally well past the time when it is prudent to try and do something. Still, it seems that throughout my professional career, every time the market plunges (even when it stays down for an extended period), the pundits all seem to say the same thing; “the fundamentals are sound,” “we’re going through a period of short-term volatility”, sometimes even that that period of “short-term volatility” was anticipated (apparently even an innocuous footnote about the possibility of such things “counts”).

Naturally, we’d all like to believe is that we don’t need to do anything in these times of - “uncertainty” - because, well ahead of the current tumult, things have already been done to protect us on the downside. However much we would like to believe that, there’s something to be said for a timely, comforting voice of reassurance. Better yet if that reassurance comes from someone knowledgeable in such matters – and better still when that reassurance comes from someone familiar with the particulars of our investment portfolio. That’s why, to some extent, I find the platitudes from various economists somewhat disingenuous; not only are they blissfully ignorant of my own personal asset allocation, what they always seem to be saying, IMHO, is “don’t take your money away from us.”

Still, plan sponsor fiduciaries are generally appreciative of those messages. They bear responsibility for the prudence of such investments, after all – and the reassurances of experts that prudence has been manifested in their decisions (or their non-decisions) is understandably welcome. Most are only too happy to pass along those reassurances to the those on whose behalf their decisions (or non-decisions) have been made.

Those retirement plan participants are often reminded that their 401(k)s are long-term investments, that they continue to benefit from the on-going benefits of dollar-cost averaging, and perhaps increasingly that their investment in a diversified asset allocation “solution” means that they needn’t concern themselves with those kind of interim swings. And, for the most part, at least in my experience, on a day-to-day basis most are oblivious to a fault about the status of those investments. They may have a passing awareness that the markets are down, and some consciousness that their retirement plan investments could be impacted.

There is, however, a new generation of participant-investor emerging. One that has, consciously or, increasingly, unconsciously, relinquished control of that portfolio to experts – individual advisers, perhaps in the form of managed accounts, or less personalized solutions, such as target-date funds. What remains to be seen is how some of these “proxies” will fare in troubled markets – and perhaps just as importantly, how they will be perceived as doing.

Tough times can engender resentment and, in extreme cases, litigation. But they can also foster an appreciation for past expert counsel, and that current reassurance that the storm has been anticipated – and tough times can bring opportunity.

So, are the portfolios you’re responsible for standing pat – or just standing still?

- Nevin E. Adams, JD

Spend Thrifts?

With lightning speed, the House managed to cobble together an economic stimulus package last week, the Senate will take it up this week, and President Bush seems anxious to sign it. Even more amazing in the current political environment (and in an election year, no less), there appears to have been true compromise on both sides of the aisle in pulling it all together.

But for those of us who focus not only on the importance of saving for retirement, but on trying to remedy the inefficient (and non-existent) savings behaviors of working Americans, there were huge ironies in the logic behind this particular stimulus, IMHO.

I fully appreciate the economic spiral that sometimes sets in – people get worried about their personal finances, quit spending on non-essentials, which leads to less revenues for businesses, whose employees get worried about THEIR personal finances, and who subsequently quit spending on non-essentials, which leads to…well, you get the point. I’ll also confess that my blood pressure rises dangerously every time I fill up my tank (there’s something wrong when a non-SUV costs more than $50 to fill the tank). Clearly, lawmakers figured that they needed to do something before everyone who was already “mad as hell” decided to “do” something (like elect new lawmakers).

Mixed Messages

So, what’s inconsistent with this message? For starters, the government wants people to spend these “rebate” checks – and spend them NOW. Indeed, there was concern about it being given to people above certain income levels (families making more than $174,000/year will get no rebate) because – they would be inclined to save or invest it, rather than spend it. Contrast this with the message of most enrollment meetings – how one should forgo that cup of Starbucks or that movie rental for an investment in long-term financial security. A little now adds up to a lot later on, right?

Secondly, there was a desire on the part of some lawmakers to extend this “rebate” to every working American – including those who don’t actually pay income taxes. What that means, of course, is that for them (and it’s a remarkably high percentage of Americans) this isn’t a “rebate” of income tax (they already have all that is withheld returned to them when they file) – it’s essentially a return of their FICA (Social Security) withholdings. Not actually, of course. That’s merely the rationalization for why they should get one of these checks (though what else could we be rebating?). Little wonder we tell folks that they need to prepare for the eventuality that Social Security won’t “be there” – at least not in its current form - when they retire.

“How” Now

Finally, what isn’t being said out loud – but has to be a concern for those banking on this stimulus package to live up to its name – is how people spend it. Specifically, they would prefer that people not use the rebate to pay down debt.

We all know the impact that debt can have not only on people’s ability to save for retirement, but on their current financial situation. We also know that taking a loan against one’s 401(k) plan balance, while frequently characterized as “borrowing money from yourself” is really just another case of “borrowing from Peter to pay Paul”. Still, our industry has been largely persuaded that workers won’t contribute to 401(k) plans if they don’t have some way to tap into those funds in an emergency.

There’s some reason for that underlying concern about rebate spending on debt – recent history, in fact. The government did something similar in 2001 (basically as an “advance” on the 2001 tax cuts). Government data indicated that only about 20% of the rebate check money was spent by consumers – and 60%, was used to repay debt. Of course, in 2001 just $38 billion was distributed in rebate checks (0.4% of GDP), versus $100 billion this go round (0.7% of current GDP). Paying off debt is not a bad thing, by the way, though it’s not likely to provide the intended economic jolt.

It remains to be seen if the stimulus package will work – and it’s by no means certain that the situation will feel as dire (or that it won’t) by the time the checks actually arrive (June is the current estimate). I also realize that there is a difference between trying to stimulate the economy and focusing on long-term financial security.

Still, I can’t help but think that the government’s response is promoting the kinds of behavior we would typically scold participants for; spending, rather than saving – and spending retirement savings, to boot.


- Nevin E. Adams, JD

Beta "Test"

After months of research, informal talks with vendors, and not a few inquiries to a few “trusted advisers,” just before Christmas, we finally made our decision.

We bought a Blu-Ray DVD.

Now, that may not mean much to many of you. However, even the most casual renter of DVDs these days is frequently subjected to a commercial for that “next level” of viewing experience. The problem, of course, is that there are two levels: HD and Blu-Ray. The former has been around longer and, at this writing, that means that there are more movies in that format. The latter, if one is to believe the research, is “better” technology (you can put five times as much content/material on a Blu-Ray as on regular DVD versus just two times as much on an HD)—but your movie selection in that format (today) is smaller (none of this matters unless you also have a high-definition TV capable of displaying all this grandeur, by the way).

The other problem, of course, is HD and Blu-Ray are not compatible. You can’t play HD on Blu-Ray or vice versa (you can play regular DVDs on both HD and Blu-Ray players—fortunately, for those of us who have invested a small fortune in the current DVD format). Now, I’m not altogether sure that my aging eyes can discern the difference in quality between the two formats (there IS a noticeable difference between high-definition and regular), and I don’t now care, and never have cared, a bit about those DVD “extras.”

But you see, I used to own—and loved—a Betamax. If you’ve been around long enough to remember cassette music tapes, you may remember that there used to be two videotape formats—Betamax and VHS. Betamax tapes were physically smaller than VHS, but held as much recording time and with superior quality. But being “better” obviously wasn’t enough. Sony was the only firm that made “Betas”—while everybody else made recorders in the VHS format. When my beloved Beta finally died—and with it my ability to enjoy my collection of recorded movies—well, let’s just say it was an expensive lesson in the travails of being an “early adopter.”

Personalized advice has been around ever since participants have been asked to make their own investment decisions. Granted, some of that advice came from Joe in the lunchroom, but it’s been there, nonetheless. There’s little question that personalized advice is “better” than less-focused solutions like target-date funds (when provided by a trained professional, that is). Even the most casual observer will generally acknowledge the short-sightedness of an approach that dictates that every single person who is thinking about retiring within five years of the year 2040 should have an identical asset allocation.

And yet, those prepackaged asset-allocation solutions are clearly taking the retirement industry by storm. The vast majority of 5,000+ respondents to PLANSPONSOR’s annual DC Survey already have those choices on their menu, and those asset allocation options are drawing a growing percentage of assets—and that’s before the final qualified default investment alternative (QDIA) regulations take hold. Participants seem to “get” them, plan sponsors like them, and providers can’t bring their version(s) to market soon enough. Moreover, the vast majority of advisers have embraced them as well—viewing them, rightly IMHO, as a valuable tool in the arsenal to help workers start saving and investing prudently. The assumption, of course, is that when those balances get big enough to warrant a more customized solution, the participant investor will be equally ready to embrace it, rather than simply remaining comfortable with the “easy” approach that doesn’t require thought or involvement—and has worked out well for the past 20 years. Perhaps even at the recommendation of a financial adviser.

When that time comes, participants may well agree that they now need a more personalized solution. But advisers that take that eventuality for granted would be well advised, IMHO, to remember that “better” doesn’t always “win.”

- Nevin E. Adams, JD

Trading Places

Back in 2003, when then-New York Attorney General Eliot Spitzer launched his investigation into mutual fund trading practices, two distinct areas were highlighted: late trading, which was illegal on its face (particularly so when facilitated by the fund companies themselves), and market-timing, which, as we were reminded in a parenthetical comment in nearly every story regarding the scandal, was not (though nearly every fund prospectus claimed to discourage such patterned trading and promised to take steps to deter it).

That distinction was frequently glossed over in the coverage that followed—and the settlements that ensued. When all was said and done, a large number of chastened fund complexes had forked over a large amount of money (much of it to the coffers of the Empire State) and agreed to adopt new controls and procedures designed to ensure that the wrongdoing they never admitted to doing never happened again. So much commotion was raised, in fact, that the Securities and Exchange Commission was roused from its slumbers—just in time to adopt a “solution” to the problems resulting from the not-illegal-but-nonetheless-apparently-troubling practice of market-timing. Of course, the solution—initially set forth by a trade group that represents the mutual fund industry—was already available to those fund companies. But now, thanks to the codification in SEC Rule 22c-2, even the most casual mutual fund investor—including those who do so only via their 401(k) plan—has been forced to be aware of redemption fees—and we’re not just talking about cases of quick in-and-out, round-trip trades, either.

Setting aside what, IMHO, is still an absurd result, it’s all old news by now. Been there, done that, bought the T-shirt….

Here We Go Again

That’s why it’s been interesting to watch the debate over market-timing once again raise its ugly head—this time among the participants of the federal government’s own Thrift Savings Plan, or TSP. Apparently, there are a couple of thousand participants (out of a universe of 3.8 million in the TSP) who are trading “frequently”—and the TSP is taking steps to rein them in.

The Washington Post has reported that 2,018 participants who sold holdings in an international fund on October 24 had transferred in just a few days earlier (10/19). And, of that group, 323 participants were trading $250,000 or more. Moreover, during the previous 60 days, those 323 traders had made 5,804 exchanges in the international fund worth $1.9 billion, according to TSP officials (one participant has traded more than $1 million back and forth a number of times). These participants aren’t trading in mutual funds, of course, so the SEC’s 22c-2 strictures don’t apply.

Moreover, an analysis by fedsmith.com (a Web site devoted to federal workers) claims that those who bought in on 10/19 did so at $25.13/unit, and those who sold on 10/24 did so at $25.32/unit, making 19 cents per unit in just a few days. A feat that looks pretty good until you consider that, at 10/31, that particular TSP fund closed at $26.31.

But the TSP’s issue isn’t with the money these folks are making on those transfers. Rather, they are concerned about the cost impact of that activity on the folks who don’t trade; higher broker fees and transaction costs—especially in the international fund, where it's more difficult for the TSP's investment manager (BGI) to match buy and sell orders. They have—rightfully as fiduciaries, IMHO—expressed concern that a (relatively) few participants are driving up the costs for the vast majority who, like their counterparts in the private sector, never trade. Those trading costs stand out in the TSP, which enjoyed a total expense ratio of 3 basis points (that’s not a typo) in 2006. The trading costs for their international fund that year? Eight basis points (again, no typo). Now, those expense ratios may be a “problem” that your average 401(k) would love to have, but we’re talking about a $235 BILLION dollar fund. So, in crafting a recommendation to deal with this situation, the TSP’s chief investment officer looked to—mutual fund practices in the 401(k) industry and the SEC’s mandate under Rule 22c-2. Ultimately, unable to come up with a transaction fee that would be big enough to cover the trading costs, the TSP has decided to impose limits on the number of trades per month. Those limits—two per month—should be enough to satisfy anybody who isn’t trading funds for a living. Moreover, the TSP has imposed NO restriction on transfers from any of the funds to the G fund, the TSP’s most conservative option, to address the concerns of participants who might want to move their balances out of the way of some economic tsunami. More importantly, IMHO, it sends a message both to those participant-traders and to “everybody else.”

I also was struck by the TSP’s comparison of their solution with that adopted by the mutual fund industry. Though we frequently bemoan the bane of participant inertia, our industry has long been concerned about participants that would fritter away their day—and their balances—trading their retirement savings. That was the mantra against daily valuation in the first place, why we fretted over day traders in the middle of the tech-bubble, and, now, why a relatively few market-timers (setting aside for a minute that the incidents taken to task by regulators involved the complicity and/or active acquiescence by the fund companies; let’s face it, we all know the odds are against participant timers) have managed to burden an entire industry with an additional layer of costs, another complicated message, and random restrictions.

I can understand why the fund managers are in favor of these impediments. I’m (still) not altogether sure why the rest of us have been so willing to go along.

- Nevin E. Adams, JD


Footnote:

In the interim, a group calling itself TSPSHAREHOLDERS.ORG has launched a web site and a petition campaign to block the new transfer policies – and they have just under 3,000 signatures on that petition (one can’t help but wonder if it’s the SAME 3,000 that have been doing the frequent trading). They have some issues with the calculation of trading costs – and they claim that the big trading surge last October resulted in a “tracking error” (basically a difference between the price at which transfers were credited and the real cost of the transaction) – and they claim that the tracking error accounted for 56 basis points in the favor of those who stayed in the fund (see http://tspshareholder.org/newsletters/Vol2_No2.html).

Now, what’s missing in that analysis, of course, is the reality that that tracking error COULD have cut the other way – and those left sitting in that investment fund could just as easily have been stuck with a loss. But then, that’s how free markets work. Some people win and others don’t (what’s also more than a bit ironic, IMHO, is that up until the past couple of years TSP participants could only transfer once a quarter).

Birthday "Presence"

Just after Christmas my family flew to Chicago for a surprise – my mother-in-law’s 85th birthday. It was a huge success – she wasn’t expecting us – in fact, wasn’t expecting to have all three of her children and their families in town on that day.

Over the course of our time there, I heard her tell several people “I never thought I’d make it this long.” Now, my mother-in-law doesn’t look (or act) 85. Still, even by today’s lengthening longevity standards, 85 is a long time – and, even as we planned our surprise trip “home”, we couldn’t help but wonder how many more birthdays we’d have together.

None of us know how many birthdays we’ll have – and how many of those will happen during retirement. Indeed, contemplation of our personal mortality is something that most, IMHO, reserve for special, isolated occasions (some not even then, of course). And yet, one of the most important aspects of planning for a financially secure retirement is making some attempt to predict just how long that retirement is going to be.

There are simple ways to deal with this complex and sensitive issue, not least of which the cogitations of actuarial science imbedded in those ubiquitous retirement projection calculators. After all, it seem so much more emotionally palatable to know that the “average” 52-year-old is likely to live to “X” than it is to actually think about the years that personally remain on this mortal coil.

Other Variables

If there are limits to our ability (or willingness) to focus on retirement’s “duration”, we nonetheless have the ability to influence other key variables in the equation of a financially secure retirement. We can, as a growing number of workers suggest they will, postpone retirement’s commencement by working longer. Not just age, but health, influences our ability to do so – a pertinent concern at a time of year when New Year’s “resolutions” are in vogue. Today’s workplace is certainly more conducive to such concepts than it was for our parents – and yet, I’m always struck by data on just how many of today’s retirees “attained” that status involuntarily, and earlier than they had planned.

A more obvious choice –one at the core of today’s retirement savings campaigns – is to save more, and perhaps to save more earlier. Unlike employment choices that may ultimately lie outside our control – or the uncertain and sometimes tenuous nature of human mortality – we all make choices every day about how to spend – or not to spend – the resources at our disposal. Admittedly those are frequently difficult choices – how much more have you had to spend to fill your automobile tank this week than you did even a year ago – and yet a tough choice now could mean the difference in an impossible trade-off twenty years down the road.

Like my mother-in-law, we may not ever think we’ll “make it” as far as we actually do. But if we’re lucky enough to get there – surprised or not - we surely don’t want to arrive empty-handed.

- Nevin E. Adams, JD

“Legends” of the Fall?

I went to see “I Am Legend” over the weekend. It’s the third cinematic version of the post-apocalyptic story that Richard Matheson wrote in 1954. This weekend’s reviews will (rightfully) be mostly about Will Smith—but Vincent Price was the first to take on the role in 1964 (in “The Last Man on Earth”), as did Charlton Heston in 1971’s “The Omega Man.” Each film, of course, is different—and I’m not just talking about the generous application of CGI. So different, in fact, that while I had read the book and seen the prior two film interpretations (Matheson influenced the 1964 version, but had nothing to do with “Omega Man”), I was distracted by things not happening the way they were “supposed” to happen in the story.

The “story” of this nation’s retirement has been similarly well-chronicled. For the very most part, the stories of late have been of the apocalyptic variety—and with some justification, IMHO. Last week, the Government Accountability Office (GAO) published the latest version, titled “Low Defined Contribution Plan Savings May Pose Challenges to Retirement Security, Especially for Many Low-Income Workers.”

Gee, ya think?

I don’t mean to disparage the work of the GAO in this regard. They’re not the first—and they certainly won’t be the last—to attempt to project the consequences of our nation’s current preparations for retirement. Most, including the GAO projections, paint a dire picture indeed. In fact—and this was the headline for most of the coverage of the report—GAO projected that, for workers born in 1990, nearly 37% would reach retirement with no savings at all!

Now, I have a daughter who was born in 1990 (she actually went to see “I Am Legend” with me), and while she surely is an exceptional child, I have a hard time imagining that 37% of the kids her age will come to retirement with no savings at all. Not that I see it as an impossibility. Let’s face it, we live in an era where about half of working Americans don’t even have the opportunity afforded by a workplace retirement savings program, and where, on average, a quarter of those who do, don’t take advantage of it.

Still, one could at least argue that today’s workers are still “counting” on Social Security, that some have (and too many presume they will have) the underpinnings of a defined benefit pension, that many espouse the notion of working past the confines of a traditional retirement age as a choice, rather than a necessity. If they’ve been slow to respond to the call, perhaps they’ve been “encouraged,” perhaps even deluded, by our unwillingness to be straight with them about the need and their growing responsibility.

The Boomers remain a relatively optimistic lot when it comes to retirement, despite a litany of surveys and projections (including those like the GAO report) that suggest many are merely whistling past the proverbial financial graveyard. Time will tell if the urgings of those Cassandra’s are an accurate prediction too long ignored; a fundamental misapplication of averages, standard deviations, and longevity tables—or some of both.

The next generation—for this is the Boomers’ brood, after all—may fare no better, it is true. But they’ll surely do it with less justification—and despite access to a growing array of tools and resources—than their parents.

- Nevin E. Adams, JD

The End in Mind

Having spent three days immersed in PLANSPONSOR’s second annual DB Summit, I was struck by just how relatively “easy” participant-directed plans—be they 401(k), 403(b), or 457- are.

Now, I hope you picked up on the use of the word “relatively.” I wouldn’t suggest for a minute that participant-directed programs don’t have their challenges. If the concept of saving is simple enough, the science of investing, compounding, and tax-deferral presents daunting intellectual obstacles for many. Even expert practitioners struggle with notions of “reasonable” fees, appropriate glide paths for target-date funds, and the applicability of QDIA regulations in the “real world.”

Over the years, our industry has worked to make participant-directed programs more accessible to participants. More recently, we have accommodated those who don’t want that access (for whatever reason)—or those who prefer to hire experts (or both)—with an assortment of automatic plan design features.

Meanwhile, IMHO, defined benefit designs have gotten more complex. Ironically, alongside the very Pension Protection Act provisions that have yielded such clarity to future defined contribution designs, we have managed, in a number of key areas, to take already convoluted calculations, turn them on their head, and introduce several new variables (several of which are, just weeks ahead of their implementation, still undefined)—all on results that must now sit up high and prominently on corporate accounting statements.

If their design is complicated, there is nonetheless a remarkable clarity of purpose to defined benefit pension plans, IMHO, and one need look no further than their name. The purpose of those traditional pension plans is imbedded in their very name—“defined benefit.” By design, plan sponsors need to project the ultimate benefit to be paid—and then figure out a way to pay for that. They need to consider how long people will live and what their pay will be in the distant future, project potential investment returns, consider the interest rate environment, and how much money has already been put aside for that purpose. Defined contribution plans, on the other hand, define only the amount(s) being contributed, not that ultimate benefit. And yet, by near-unanimous acclamation, the “results” of these programs—the benefits they provide—will define the financial security of our retirement.

Much of the impetus for the enactment of the PPA—and in no small part, many of the potentially draconian funding and reporting requirements contained therein—was the product of concerns that the benefits promised were not being adequately funded, and that, ultimately, those commitments would be “dumped” on the federal government (in the form of the nation’s private pension insurer, the Pension Benefit Guaranty Corporation (PBGC). Those PPA-imposed strictures, in turn, have led a growing number of employers (though by no means as many as the headlines would lead one to believe) to rethink those commitments.

One can only wonder what might happen if we were to impose on individual workers and their defined contribution plans what we have already imposed on those defined benefit programs…a funding requirement sufficient to provide a promised benefit, rather than simply restricting how much money can be contributed to these programs.

What if we began—with the end in mind?

- Nevin E. Adams, JD

Window of "Opportunity"

The past year has brought with it an extraordinary amount of change to our industry. And yet, I have yet to meet an adviser—in any setting—who isn’t brimming (some are even bubbling) with enthusiasm for the opportunities they see for their business in all this change.

That’s a very different perspective than I hear from their plan sponsor clients. Not that plan sponsors aren’t appreciative of positive change. It’s just that, as a general rule, my experience has been that plan sponsors are significantly more likely to associate change with work, rather than opportunity—and with some justification.

Consider the recent finalization of regulations on the qualified default investment alternatives (QDIAs). Plan sponsors finally have some reasonably clear definition of what constitutes an appropriate default investment choice (at least according to the Department of Labor), one that provides a fair amount of flexibility for the sizeable number of plans that previously relied on a stable value option as a default to effect a reasonable transition—and those that adopt the new QDIA approach will, in turn, receive protection from participant lawsuits that is identical to the ERISA 404c that so many have found so elusive (whether they know it or not). And they get that protection without all the work attendant with acquiring that elusive ERISA 404c shield. All this for, in many cases, doing nothing more than embracing as a plan default investment option the asset-allocation solutions that so many have already adopted over the past couple of years. A huge opportunity, right? Easy, right?

Second Thoughts?

Well, sort of. What they also have to do is put out a notice that lets participants that are to be defaulted into that QDIA know that they are being defaulted, and that they have the option not to be defaulted. Oh—and for purposes of previously defaulted monies they have to let those participants know as well…assuming, of course, that their current recordkeeper could tell the difference between someone who was defaulted and someone who simply managed to direct their monies to the default option (and I understand that many/most can’t). Oh, and to take advantage of the protections at the earliest possible date—12/24/07 (yes, that’s right, Christmas Eve)—they would have to have had that notice out to participants 30 days ahead of the effective date (Thanksgiving Week). Assuming, of course, that their recordkeeper was in a position to facilitate that communication—and we’ll ignore, for a second, the possibility/likelihood that their recordkeeper will assess a fee for their support of this effort. Oh, and what if the plan’s current default option doesn’t seem to meet the QDIA criteria (say a conservative risk-based fund that doesn’t take into account the plan’s age demographics)?

Of course, there’s no need for plan sponsors (or advisers) to jumble up an already hectic holiday season with an “everybody on deck” scramble to obtain those new QDIA protections on day one, and there’s an argument to be made that those who do may well regret their haste (at leisure, as they say). Furthermore, additional questions are already emerging as we all begin to work through actually implementing these regulations/requirements—and more are sure to follow.

Creating a Real Opportunity

The best advisers are working right now to understand those implications, and to assess the capabilities of providers in supporting the notice requirements. They’re evaluating the QDIA-applicability of current plan defaults (and doubtless gearing up to recommend new ones, where necessary)—and they’re providing a valuable sounding board for their plan sponsor clients in helping them evaluate a reasonable timeframe for taking advantage of these new protections without pressing them to take hasty actions that might turn out to be imprudent in result or application.

They’re realizing that there’s opportunity, sure. But they’re also realizing that there’s potentially a lot of work for their plan sponsor clients, between where they are – and where they want to be.

- Nevin E. Adams, JD

Motivationally Speaking

Two years ago, I wrote about the “next level” in defined contribution designs: a growing interest on the part of plan sponsors in focusing on service elements like participation rates, deferral amounts, and appropriate asset allocation—a precursor, if you will, for the designs that would eventually come to a fuller fruition in the Pension Protection Act. Since then, there have been any number of industry surveys that tout the boom in automatic plan designs—as does ours.

And yet, despite the pickup in automatic enrollment programs—23.1% of those 5,500 employers responding to PLANSPONSOR’s 2007 Defined Contribution Survey now have these programs in place compared with 17.1% a year ago—it has yet to manifest itself noticeably in participation rates. The average participation rate reported was 72.7%, and while that is higher than the 70.1% in the 2006 survey, it remains short of the 74.9% reported in 2005—before such programs were the hot trend(1).

One explanation for the modest uptick in participation rates lies in the fact that less than a quarter of responding employers have embraced automatic enrollment, of course—and that number varies depending on the market segment. Only 13.3% in the micro-segment have adopted automatic enrollment, compared with 35.9% among the largest programs and 34% in the mid-size segment. A second and just as plausible explanation lies in the fact that nearly two-thirds (62.1%) of respondents said that they had adopted automatic enrollment for new employees only, rather than extending it to all eligible employees. Indeed, more than three-quarters of large employers did so on a prospective eligibility basis, compared with 45.8% of micro-plans, though that may be a function of when the feature was adopted. Opt-out rates—7.7% on average, and 3.0% at median—are consistent with the findings in the 2006 survey.

However, what I found most striking in the survey results was that more than half of employers that had adopted the design say they did so because their organization “wanted to be more proactive in helping employees save”—dominating all other factors. Just 13% said they “needed more participation” to help pass discrimination tests (then again, only about one in five respondents said they had failed a discrimination test in 2006, and that was down considerably from the 2005 results), and half that number said that traditional enrollment/education efforts were not successful. And while it certainly has provided some inspiration, if not motivation, only about one in 10 said that the Pension Protection Act has made the feature “more attractive.” That finding may, of course, be attributable to several factors: that many of these employers had adopted automatic enrollment prior to the passage of PPA, that some have adopted the feature outside the provisions of the PPA’s auto-enroll safe harbor (the match requirements and retroactive solicitation are problematic for some, particularly for smaller programs), or it may simply be that the safe harbor provisions aren’t effective until next year.

Support for the former two reasons is evidenced by the survey’s finding that only 11.5% have implemented contribution acceleration (though that is twice the 2006 pace)—a feature that automatically increases employee deferrals by a certain percentage each year, and that is incorporated in the requirements for the PPA’s automatic enrollment safe harbor. Significantly, while nearly a quarter of the largest employers have adopted the feature, less than 15% in the mid-market have, as have only about one in 10 in the small market—and half that many in the micro-market. For those that have adopted the feature, a 1% annual increase is the clear “norm.”

Consider also that more than half this year’s respondents said that an automatic enrollment safe harbor would not affect their decision on the provision—and a sizeable number said that such a safe harbor was “not necessary.” Still, across all market segments, plan sponsors said that only two-thirds of active participants are deferring enough to take full advantage of the maximum employer match.

All in all, then, it appears that it is neither the PPA’s “carrots” nor the “stick” of burdensome nondiscrimination tests that will lead plan sponsors to adopt automatic plan designs—just the simple realization that some employees need help to become participants, and that, even then, participants frequently need help to do the right things.

- Nevin E. Adams, JD


(1)The survey database can include different—and certainly includes more—plan sponsors each year. Consequently, year-over-year comparisons, while instructive, may yield varying results.

Thank Full

Thanksgiving has been called a “uniquely American” holiday, and while that is perhaps something of an overstatement, it is unquestionably a special holiday, and one on which it seems a reflection on all we have to be thankful for is fitting.

Here’s my list for 2007:

First, I’m thankful for the voluntary nature of the defined contribution solutions in the Pension Protection Act—that plan sponsors were given guidelines and protections for adhering to specific safe harbor approaches, but were not forced to adopt those or prohibited from pursuing their own approaches to things like automatic enrollment (albeit without the regulatory protections). I’m thankful for the Department of Labor’s ongoing willingness—and enthusiasm—for soliciting and incorporating feedback on their regulations from those of us who have to work with them every day.

I’m thankful that, despite the mass coverage of defined benefit plan freezes—and the new restrictions imposed on these programs by the PPA and the accounting profession—so many employers remain committed to the concept. I’m thankful—as are, no doubt, the workers that count on those programs—that so many employers have been willing (and, I suppose in some cases, forced) to make the contributions to at least narrow, if not eliminate, their funding gaps.

I’m thankful for an extra year to gear up for 409A, the thoughtful and deliberative approach by the Department of Labor on the final qualified default investment alternatives (QDIA), and the availability (if somewhat later than one might have hoped) of a sample notice for automatic enrollment plans. I’m glad that 403(b) plan participants can look forward to some of the structural efficiencies and fiduciary oversight that have long been part of the 401(k) market—and thankful that plan sponsors were given some extra time to prepare for that fairly significant change.

I’m thankful that so many entities are concerned about how much we are paying for our 401(k)s—and only a little bit worried that so much of that well-placed concern will serve to make things worse.

Much as there is to be thankful for, there are some things still to look forward to. For instance, I’ll be thankful when:

• Those in Washington appear to worry as much about encouraging employers to set up workplace retirement plans as they do about scrutinizing and punishing those who have;
• Plan sponsors simply decide to eliminate company stock as a participant investment option—if only to deny the plaintiffs’ bar so many easy targets.

Still, all in all, I’m thankful to be able to play a small part in helping provide for the retirement security of others—and grateful that so many gifted professionals have committed themselves to being part of the solution to these issues.

Most of all, I’m thankful for the unconditional love and patience of my family, the camaraderie of dear friends and colleagues over the years, the opportunity to write and share these thoughts—and for the ongoing support and appreciation of readers like you.

The On Your Own-ership Society

Last week, as I was surfing the Web, I stumbled across an article titled “Time for Employers to Cut Cord to 401(k) Plans.” These days, I wouldn’t be surprised to see that kind of premise from a pro-business periodical (see “Why Knots”)—but the premise here was quite different. The article’s author—Bloomberg’s John Wasik—wasn’t suggesting that employers should get out of the 401(k) plan business because it made good business sense for them, but rather that “employees can benefit from having 401(k)-style plans cleft from their employers because the programs would cease to be a black box of excessive middlemen and management expenses.”

The article points to the recent round of hearings on the issue in Congress, “several government reports,” and a recent survey by AARP as proof that employers are not fully disclosing and reducing fees in these retirement programs. And thus, Wasik argues, “[G]iving you more control over your 401(k) will also give you the chance to find the best providers of the most diversified funds.” Wasik maintains that, by allowing individuals to do their own shopping for the best deals, a “competitive national market” would emerge. “Middlemen would get the boot and employees could improve their total returns,” he says.

Now, I’m a free-market libertarian from way back—and I’m leery of current trends that, IMHO, seem to disengage participants from the business of paying attention to these investment accounts. But as I told Wasik in a follow-up e-mail, “No offense, John—but are you nuts?”

I’ll concede that there are almost certainly situations out there where participants are being ill-served by the fees they are paying for their retirement plans, though I personally happen to think those situations are not as pervasive—or as egregious—as some would have us believe (it wouldn’t hurt to have more disclosure to be sure of that, however). I will also concede that many (most?) participants don’t know what they are paying for their retirement programs—though I think that most could get to a good approximation of that number with a modest amount of help.

However, it seems to me that getting the employer “out” of the 401(k) would have several immediate—and hugely detrimental—impacts to participants. First and foremost, our purported ability to find a better deal on our own notwithstanding (setting aside for a moment the reality that some significant number of participants don’t even want to take the time to fill out an enrollment form; see “For the People, By the People” ), how am I going to be able to find a better deal with my individual 401(k) balance than my employer can with the aggregated balances of me and all my co-workers? Even if some highly compensated workers managed to negotiate a special arrangement, do we really think that that the average participant could—or would?

Second, once employers become mere conduits for payroll deductions, workplace education on such matters as the importance of saving and investment will become a thing of the past—after all, participants will now get that from the provider they found on their own. Enrollment meetings? No need for that, since your 401(k) is a do-it-yourself option. And, IMHO, once we’re “on our own,” it won’t be long before that employer match will fade away (in Wasik’s defense, he doesn’t see the loss of the match as a consequence of his proposal—but I do). The model for all the above, IMHO, can be found in much of the current non-ERISA 403(b) space: the match, the lack of employer involvement, the low participation rate(s), the fees….

But the thing we would lose most with an employer-lite 401(k), IMHO, is the oversight of a trusted fiduciary. Granted, many employers don’t fully understand that role or the responsibility—too many don’t have the expertise, and far too many are willing to place those decisions in the hands of providers and advisers undeserving of that trust.

But many more are working hard every day to see that these programs are well-administered, reasonable in price and service, funded and supported in the workplace—and in the process, making a difference in helping ensure a more satisfying retirement for us all.

IMHO, it’s a contribution we can’t afford to be without.

- Nevin E. Adams, JD

Theory of Relativity

I was having coffee with a buddy of mine a couple of weeks back, and before long the discussion turned to music; specifically the new Bruce Springsteen CD. Suffice it to say that he had just acquired it, and was enjoying it immensely. As it turned out, I had had a chance to listen to the album (yes, I’m old enough to still refer to them as albums) online – and had ordered it. I had not, however, received it in the mail yet.

My friend – who had picked up his copy at a Starbucks – hesitated – then asked me how much I paid. I then told him (about $10) – and, almost as a courtesy (after all, money had already changed hands) asked how much he had paid.

Well, I never did find out – though it was pretty clear he paid more than I did. In fact, I’ve seen the prices that Starbucks charges on the few CDs they stock there, and it may well have been a LOT more.

Now, I’m sure the Bruce Springsteen album that was delivered to my house (that very afternoon, as it turned out) was identical in every pertinent respect with the one my friend picked up along with his morning coffee a couple of days earlier. On the other hand, he had it in his hands immediately without making a special trip. Forty-eight hours earlier that probably seemed like a good bargain – but one that clearly lost some of its luster the closer mine came to delivery. In short, his comfort with the bargain he’d struck was clearly relative to my experience.

Things aren’t usually that clear cut with retirement plans, unfortunately. Every 401(k) plan is just a little bit different, and some quite a bit so. Every employer brings a different level of commitment to the process, as does every adviser – and the workforce that such programs are offered to surely represent a mosaic of difference as diverse as America herself. There is no such thing as a “typical” 401(k), and – much to the discomfiture of some – there is no such thing as a single reasonable amount to pay for the services that would ostensibly be provided to that 401(k).

Yet for all the buzz around the issue of reasonable fees, it ranked sixth on the list of criteria in selecting a provider in PLANSPONSOR’s 2007 Defined Contribution Survey - just behind variety of investment options. Still, in evaluating participant services, “fees for participant services” was the lowest ranked element – and “fairness of fees” and “fee disclosure” were the most problematic elements of plan sponsor service rankings. Today most plan sponsors feel that they are paying reasonable fees – but there are growing concerns that they aren’t. Concerns that are almost certainly fueled by the growing attentions of the Department of Labor, Congress, and the plaintiff’s bar to that very issue.

Sooner or later, like that Springsteen album, people are going to have a chance to realize that they are perhaps paying very different fees for what may well be, in every pertinent respect, identical services. And that’s, IMHO, going to make for some very unsatisfied customers.

It's About Time

It may have lacked the hoopla of a midnight Harry Potter release, but in retirement industry circles, last week’s publication of the Department of Labor’s final regulations on qualified default investment alternatives (QDIAs) was nearly as eagerly anticipated.

And, like the speculation as to which Potter character would survive the latest saga, the early betting had been that stable value would not make the QDIA cut—and, in large part, that turned out to be the case. Instead, stable-value (or more precisely, capital preservation) vehicle proponents had to content themselves with a sanction as a short-term repository for contributions (up to 120 days—long enough to accommodate the 90-day period that defaulted participants have to opt out), and the assurances from the DoL that they were sure that those vehicles would find a home alongside other options in the time-focused asset-allocation products that were accorded QDIA status (ironically, IMHO, in that regard, capital preservation vehicles seemed to fare better than did pure risked-based allocation fund alternatives).

There was, however, at least one significant victory for capital preservation vehicles: the DoL’s final regulation extends the same QDIA status protections to defaulted contributions made to those vehicles prior to December 24, 2007, the effective date of the new regulations. To some, that decision smacked of a “sellout” by the DoL—and it certainly seems a striking inconsistency considering the clear preference accorded diversified, age-based funds in the regulations. As one adviser remarked to me last week, “What was the DoL thinking?”

Frankly, while the decision initially surprised me as well, the longer I consider it, the better I like it.

Considering the inertia associated with the choice of these selections, there is every possibility that plan sponsors permitted the flexibility to leave those existing default options in place will do exactly that—a result that certainly has to be a concern for those who question the prudence of those investments over the long term.

Consider the Alternatives

But consider what the result might have been had the DoL not provided that flexibility. We could well have had to absorb millions, if not billions, of defaulted investment liquidations—movement that could have had severe financial consequences for the market(s), and potentially for the plans that would be presented with huge surrender charges. Spared those charges, it is still possible that that massive shift of money could have occurred – departing their current positions—and entering new ones—at an unpropitious moment.

Even if plan sponsors had decided to simply stay the course on their own (the final regulations cautioned fiduciaries that the exclusive purpose rule precluded the imposition of fees on participant balances just to achieve fiduciary protection), that decision would almost certainly—and sooner rather than later—have drawn the focus of litigators who would cite the DoL’s pronouncements as a proof statement that the investments defaulted in good faith were, in fact, imprudent.

Is this a “victory” for capital preservation proponents? Well, perhaps in the short term, but there’s no mistaking the DoL’s clear intent. The grandfather clause extends only to the balances so invested as of the effective date—not for contributions defaulted after that. Frankly, much as some plan sponsors still prefer the stable-value option (and many do)—and even though the DoL didn’t say that a capital preservation default was inherently imprudent—I think it’s reasonable to expect that these monies will begin to shift toward QDIA-sanctioned alternatives in the months ahead, as they already are. But thanks to the reasoned approach made possible by the final regulations, they will be able to do so in a measured, prudent fashion.

It was a long time coming, but, IMHO, it was worth the wait.

- Nevin E. Adams, JD

Heightened Sensibilities

I was at a conference a couple of weeks ago, when the CEO of a large, national consulting firm stood up and commented on the increased fiduciary burden that the Pension Protection Act had placed on plan sponsors – an obligation to ensure that participants’ savings are sufficient to provide an adequate retirement.

Now, in fairness, I wasn’t paying a LOT of attention to him when he stood up. He wasn’t on the panel, and I was trying to finish taking down some notes from the comments of someone who was. Nonetheless, I think I got the essence of his perspective—that PPA has created a new level of fiduciary responsibility for plan sponsors—correct.

Even if I missed some nuance in that particular instance (and I wasn’t the only one to hear it that way), I’m hearing that sentiment more and more these days—at least from the provider community.

Now, there are a lot of troubling things in the PPA for defined benefit plan sponsors, though not as bad as many feared, and certainly not as bad now that we’ve had some time to let the markets and contributions restore some of the damage from that not-so-perfect storm. But on the defined contribution side, I have always felt that the authors of the PPA had taken a Hippocratic Oath—choosing first to do no harm. The PPA took a number of existing design options—automatic enrollment, contribution acceleration, participant advice, asset-allocation funds—took into account all the areas that plan sponsors had expressed concern with over the years (how much to automatically defer, how to invest those contributions, how to return contributions for workers who wanted to opt out but didn’t, how to offer participant advice…), and provided not only a structure, but some safe harbors as well. Moreover—and IMHO, this is the best part of the PPA on the DC side—they didn’t take away a single design option, just gave us some new ones to work with.

What that means, of course, is that if you like the concept of automatic enrollment, but find that mandatory match a bit expensive—or don’t like the idea of going back and rousing those employees who never signed up years ago with an automatic enrollment notice—nothing stops you from adopting automatic enrollment on your own terms. You won’t get the protections of the safe harbor—but then, how many plans with automatic enrollment have a problem with passing their ADP test? If you still prefer (despite all the industry punditry) a stable value fund for the default—or if you just want to use a managed account that’s been put together by the plan adviser—you can still do that, even though you’ll forgo the generous protections afforded the use of a qualified default investment alternative. It’s as though the good folks in Washington finally realized they were dealing with adults, not crooks—adults who could be trusted to do the right thing(s), given the proper incentives and structure (unfortunately, the DB system wasn’t treated with the same latitude, IMHO).

However, over the past several months, I have detected a subtle shift in the dialogue about PPA. People have, in short order, gone from talking about how many people will adopt automatic enrollment to how everybody should—and I figure in another year, some will say everybody “must.” People talk about how the defined contribution system HAS to change because we’ve lost the protections of the defined benefit system—even though the vast majority of private sector American workers have NEVER enjoyed those protections. And some people—generally speaking, people in the business of selling retirement plans (though they have agents)—are beginning, in words anyway, to “convert” a plan fiduciary’s obligation to deliver a certain level of benefit via a pension plan to an obligation to ensure that the defined contribution plan fulfills that same goal.

Now, since I don’t think you can find that obligation in ERISA—or in the PPA—it gets laid at the feet of plaintiffs’ attorneys who will sue the plan fiduciary for an inadequate result, or is rationalized as “best practices” (another term that I don’t recall stumbling across in ERISA)—or, as some surely walked away from that conference saying, “I recently heard so-and-so say….”

I’d like to believe that those who are promulgating the “enhanced” obligation view are doing so for the purest of motives—that their interest lies only in helping ensure a financially satisfying retirement for all. Still, it seems to me that if they are successful in converting the already daunting fiduciary obligations of a defined contribution program to that of requiring—directly, or by inference—the ensuring of a defined benefit with a DC program, we’ll only do to the former what we are well on our way to doing with the latter.

Why Knots?

We spend a fair amount of time worrying about the relatively small percentage of workers who choose not to participate—at all, fully, or effectively—in their workplace savings plan. Well that we should, because for a myriad of reasons, they are letting a great opportunity pass them by.

However, the real crisis, IMHO, is not about the minority that we hope to stir to action with devices like automatic enrollment, tailored communications, and personal advice. Rather, the real crisis is the majority of American workers who lack even the opportunity to participate in a workplace retirement plan. Certainly, those people are on politicians’ minds, as evidenced by last week’s proposal by Senator Hillary Clinton that purports to provide "universal access to a generous 401(k) for all Americans.” Now, you can argue whether tax credits for the middle- and lower-income workers targeted will be enough to motivate them to take action, and you can certainly take issue with the price tag (and if we know nothing else about politicians of all stripes, it is that those cost projections are always “optimistic”)—but it’s hard to take issue with the need to expand the opportunity to save for retirement to everyone.

And yet, in the interests of laudable goals like “transparency,” “fairness,” and “accountability,” we have nonetheless managed to regulate private-sector retiree health care nearly out of existence, to relegate the support of private-sector defined benefit plans to the sidelines—and we are well on the way to doing the same in the public sector. In fairly short order, our once-vaunted three-legged stool now totters on the financial viability of Social Security and the ability and willingness of individual American workers to make the proper preparations.

It has its imperfections, but it’s clear that the employer-sponsored system works. We may fret about 75% participation rates, but left to their own devices—without the financial support, structure, and education of the employer-sponsored system—individual savings rates are appallingly low. We may well worry about the lack of revenue-sharing transparency and “excessive” fees paid by 401(k) plan participants, but have you taken a look lately at what you would pay for to open a retail IRA that offers a fraction of the services in your 401(k)?

As effective as that employer-sponsored system has been—as essential an element as it surely is in ensuring the retirement security of millions—we continue to undermine the willingness of employers to carry the burden. Somewhere along the way, we seem to have lost sight of the fact that these programs are voluntary, in every sense of the word. They cost money, they take time, they are subjected to an ongoing barrage of change—and, of course, there’s the ever-present threat of litigation.

Yet, we seem to expect employers to continue to support these programs, an expectation that, IMHO, borders on arrogance in view of the burdens imposed. Sure, they attract and, perhaps, allow us to retain good workers—and certainly there are modest tax incentives. But in a time when companies are driven to focus on their “core competencies,” surely we must find some more-meaningful ways to encourage those who have made the commitment to stay the course—and some compelling financial rationale for employers that have resisted the pull to join in.

We all know well why we need the employer-sponsored system. What is less obvious each day—is why a rational employer would be willing to take on the headaches currently imposed by that system.

- Nevin E. Adams, JD

The Devil in the Details

The testimony presented at last week’s hearing by the House Education and Labor Committee on the issue of 401(k) fees (see 401(k) Fee Disclosure Proposal Draws Industry Criticism at Committee Hearing) was remarkably consistent, IMHO, certainly compared with the last time the Committee took up the issue (see Congressional Committee Hears 401(k) Fee Disclosure Testimony). At a minimum, we seem to have moved past the question of whether more fee disclosure is needed to what kind of disclosures are needed, and how we can make them.

At the risk of over-generalizing the perspectives of the individuals (and individuals on behalf of groups) who shared their experience/expertise with the House Committee, it seems to me that everyone supports the following conclusions:

(1) We need a better understanding of 401(k) fees.
(2) We need more disclosure about what 401(k) fees are.
(3) We should let the Department of Labor finish their regulations on fee disclosure before doing anything legislatively.
(4) Legislation mandating a specific fund option is not a good idea (Congressman Miller’s bill, The 401(k) Fair Disclosure for Retirement Security Act of 2007, would mandate that retirement plans offer at least one lower-cost, balanced index fund in their investment lineup—see “Representative Miller Introduces Fee Disclosure Legislation”).

After the testimony had been presented, Congressman Rob Andrews (D-New Jersey) asked witness Lew Minsky, an attorney testifying on behalf of the ERISA Industry Committee, the U.S. Chamber of Commerce, the Profit Sharing/401(k) Council of America, and other organizations, what would be the problem with a specific fee disclosure to participants—a breakdown of recordkeeping, money management, and “other.” To which Mr. Minsky replied, “I’m not sure that anything is inherently wrong with it. It’s the devil in the details….”

The Right Questions

Details matter in such things, of course—not only in legislation, but also in the reality of what 401(k) plans are paying for what they are getting. Unfortunately, it frequently comes down not just to asking the questions, but to asking the right questions. Jon Chambers, an investment consultant and Principal at Schultz, Collins, Lawson, Chambers, Inc., told the committee about a situation where his firm had been engaged in a mapping study for a large 401(k) plan. In the process, they also conducted a fee reasonableness review for the plan sponsor. “The plan sponsor thought the plan fees must be reasonable, because as they reviewed each investment option, each investment option had reasonable fees,” Chambers recounted.

But the reasonableness review found that the total fees generated by the bundled arrangement currently in place were approximately $1 million higher than “necessary” under an unbundled arrangement, according to Chambers. In that case, what hadn’t been communicated (or inquired about) was the availability of a share class more appropriate for the asset size of the plan.

I hear stories like that from advisers all the time, of course. And while I don’t believe that most plan sponsors are being taken advantage of, I am nonetheless concerned that many are. How could they not be, what with the labyrinth that many must go through to simply discover what the different fee types are, much less how much they are, and who that money flows to for what services (and, IMHO, in too many cases, for WHAT services is the better question)?

There are devils in the details of all this, of course—not the least of which is how we help participants who don’t know the difference between a stock and a bond appreciate the nuances of revenue-sharing—but we are long past the point of debating whether more disclosure is needed. And if the hearing last week established nothing beyond that, it was well worth the effort.

- Nevin E. Adams, JD

You can watch last week’s hearing online HERE

“We’re from the Government, and We’re Here To Help”

Despite the variety of advisers, practices, business models, and broker-dealer affiliations at our recent PLANADVISER National Conference, there was a remarkable degree of convergence of purpose in evidence. That was perhaps to have been expected—after all, this was a group of some of the most successful retirement plan advisers in the country. There were, however, a couple of points where perspectives diverged—most intriguingly, IMHO, on the subject of participant advice.

Not on whether or not participant advice is needed, of course—mostly on whether or not they should provide advice as a fiduciary adviser. Both National Retirement Partners (NRP) and LPL have signed on with DALBAR’S Fiduciary Adviser Network (FAN), positioning their advisers to be classified as fiduciary advisers under the Pension Protection Act (see “The Future of the Independent Adviser” at ). Meanwhile, firms like Merrill Lynch, Raymond James, and Principal have taken a different stance; generally either finding the legislative structure around the fiduciary adviser role to be insufficiently clear, or perhaps even unnecessary to helping participants make sound investment decisions (under the Pension Protection Act, the fiduciary adviser role deals only with participant-level device).


Different “Strokes”

As things stand today, it seems to me that both perspectives have merit. Certainly, the PPA’s fiduciary adviser role seems to provide valuable protections for both the plan sponsor and the adviser, offers a structure for review and oversight of the adviser’s services by the plan fiduciary, and affords some additional flexibility in how an adviser may be compensated for those services. Consider that the dominant reason long proffered by plan sponsors for not offering advice is fiduciary concerns and one can quickly grasp the allure of being able to offer assurances on that count.

On the other hand, there are a variety of ways for advisers to offer impactful education, and even full-fledged advice, without running afoul of regulatory prohibitions or having to fulfill the obligations attendant with the assumption of a fiduciary adviser role (which, it should be noted, is quite a separate thing from being an adviser who is a fiduciary), most notably utilizing independent asset-allocation models or embracing a level-fee service approach.

Still, the current “debate” over how to offer advice (or, more accurately, IMHO, how to get paid for offering advice) misses a significant point: It’s not just advisers who think participants need advice, or plan sponsors, or even plan participants themselves. What is most interesting to me is just how eager the Department of Labor seems to be to facilitate that help.

“Far” Reaching?

One of the so-called great “lies” is “We’re from the government, and we’re here to help.” Yet, to this day, I am struck by just how far the government, specifically the DoL, was willing to extend the definition of education—and thus allow participants to get help without causing advisers to run afoul of the advice fee prohibitions in 1996 with Interpretive Bulletin 96-1 (see “How Far Can Education Go Without Crossing the Line?” ). In 2001, they saw yet another opportunity to encourage advice and issued Advisory Opinion 2001-09 , more commonly referred to as the SunAmerica opinion. While requested on behalf of a specific provider, the DoL took advantage of the opportunity to extend their response to include any comparable offering. This allowed the use of independent asset-allocation models without imposing a flat fee requirement, and has now been largely embodied in the computer model exception in the PPA’s fiduciary adviser definition. Just this year, the DoL issued FAB 2007-01, which “clarified” a point for enforcement officers in the field that I’m reasonably sure most plan sponsors weren’t (and perhaps still aren’t) aware of—their liability for the selection and monitoring of the adviser, not the advice (see “IMHO: A Little ‘Free’ Advice”).

But while I think the DoL has long and consistently been supportive of helping us offer advice to participants, there is one thing that they have been just as consistently—and rightly, IMHO—concerned about; advice biased by the compensation of the person making the recommendation. Participants need help, after all—but not in being betrayed by the interests of unscrupulous advisers.

- Nevin E. Adams, JD

Certify Able

A year ago, I wrote a column titled “Alphabet Soup” about the challenges associated with getting—and keeping—professional designations that are meaningful to plan sponsors (see “Alphabet Soup,” PLANADVISER, Fall 2006). However, it’s not as though all certifications or designations are hard to come by—and, unfortunately, there are people out there who are willing to take advantage of people.

Concerns about unscrupulous financial advisers using faux designations to mislead individual investors have resulted in a number of state initiatives to crack down on how these designations are used. And while stories of unscrupulous advisers are not as hard to come by as one might hope, the designation issue has already garnered coverage in the New York Times. The focus of that story was a “Certified Senior Adviser” in the state of Massachusetts who had allegedly taken advantage of clients, notably senior citizens, in promoting inappropriate insurance investments—and who subsequently was sued by regulators in that state.

At this writing, Massachusetts seems to be out in front on the issue—but similar initiatives are percolating in a number of other states. In April, the Secretary of State proposed regulations that became effective June 1, 2007. That new regulation prohibits financial advisers practicing in the state from “using a purported credential or professional designation that indicates or implies that an investment adviser representative has special certification or training in advising or servicing senior investor, unless such credential or professional designation has been accredited by an accreditation organization recognized by the Secretary by rule or order.” The regulation goes on to note that the term ‘senior investor’ shall include a person 65 years of age or older.”

Clearly, the focus of the new regulation is on protecting seniors. Less clearly, but nonetheless based on conversations we’ve had with Massachusetts officials, the regulations aren’t focused on employer-sponsored/workplace plans. Still, there are two issues that have to be of concern for advisers who work with retirement plans with ties to the Bay State. First, there are a growing number of retirement plan participants who are, in fact, older than age 65, and thus “senior investors” under the provisions of the Massachusetts regulation. Second, despite comments on the proposed regulations from a number of retirement plan providers asking that Massachusetts provide a specific exemption for work with retirement plans(1), the final regulations contained no such exemption.

Ultimately, of course, protecting individuals from unscrupulous practices is laudable and well within the mandate of these state officials. Advisers who have worked hard to attain—and retain—professional designations can certainly benefit from the elimination of designation “clutter.” Still, as the various states make their invariably individualized determinations as to how to structure these mandates (and compliance departments struggle to determine how those determinations are to be applied), it seems likely—in the short run at least—that retirement plan advisers, and their plan sponsor clients, will lack some clarity.

- Nevin E. Adams, JD

(1)In comments provided on the proposed regulations, The Life Insurance Association of Massachusetts suggested a new subsection to the law that would read: "This subsection shall not apply to the use of credentials or designations in the context of retirement planning provided or sponsored by an individual's current or former employer."

Rising "Tied"

"In inflation, everything gets more valuable except money."

This week, the eyes of the stock market (and thus the eyes of those of us with 401(k) investments in that stock market) will turn to the meeting of the Federal Open Market Committee—that special subset of the Federal Reserve that determines short-term monetary policy for the nation. The Fed has long—and understandably—been on the alert for signs that inflation might rear its ugly head. Those of us who lived through the 1970s can remember all too well the relentless pressure of wages unable to keep up with prices—and can appreciate the vigilance of the Fed in seeking to keep inflation under control.

In fact, for some time now, the Fed has moved preemptively to head off inflation, or so it claims. But anyone who has actually gone out and bought such basic household necessities as food or gasoline is well aware that the costs of living are climbing rapidly. We may well enjoy a sense of growing wealth as we watch housing prices soar (or did until recently)—but there’s a greater likelihood that you’ve paid dearly for those paper gains in terms of higher property taxes than that you have been able to capitalize on those trends.

Of course the Fed—which is, after all, seeking stability in monetary policy as well as economic growth—deliberately ignores some of the more volatile costs in its evaluation of inflation; notably food and energy.

Still, for those of us who pay to live in the real world, it certainly feels as though inflation—defined by the American Heritage Dictionary as “a persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services”—is alive and well. Little wonder that Social Security recipients wait anxiously each year to find out how much their annual stipend will be adjusted for a “cost-of-living” increase.

However, unlike Social Security, there is no annual cost-of-living “adjustment” for retirement savings—no systematic means by which those accumulated savings are increased to offset the increased costs of things like heating fuel, food, and medicine. Ironically, should the Fed detect the insidious signs of inflation, their response would likely be to increase short-term interest rates—a move that, in all likelihood, would result in a drop in stock prices (and retirement savings accounts).

It’s an issue of more than passing significance for retirement savers, of course. After all, managing to replace a targeted amount of preretirement income is of little consequence if, 10 years on, that amount isn’t sufficient to provide for life’s necessities. To their credit, most retirement savings calculators retain an inflation assumption that can help those future projections reflect potential realities. Those cost-of-living numbers probably understate the increase in things like health care and fuel oil (they may, of course, overstate the rate of increase in other items). Worse, those adjustments frequently serve to project a certain annual rate of pay (and deferral) increase that, for a growing number of American workers, is no more than a quaint anachronism.

Whatever the Fed manages to say about inflation this week, retirement savers should be mindful of the reality that the future frequently costs more than the past—but we only have the present to prepare.

Nevin E. Adams, JD