Scale "Model"

I’ve long had an issue with weight scales, for the perhaps obvious reason that, these days, they frequently deliver a message I’d just as soon not receive. See, even when I’m feeling pretty good about the way I look and feel, those scales generally remind me that is at a weight that I know is not “appropriate” for my height.

Over the years, I have rationalized that gap in any number of ways; that those scales are frequently inaccurate, that the definitions of “appropriate” are skewed, even that I’m wearing clothes (or shoes) at the moment that are throwing things off (hey, I’ve got pretty big feet). But since I know, deep down, that those are, after all, mere rationalizations for avoiding the truth, these days I pretty much just treat stepping on scales as I would stepping on a rusty nail—which is to say, I avoid them at all costs…at least until I manage to get back on a regular exercise regimen.

My sense has long been that that is how participants approach the issue of figuring out how much they need to save for retirement. It’s not that they don’t know they should know that number, and not always that they just don’t have time to deal with it. Mostly, they have a sense that the number will be larger than they would like it to be, and that, coupled with a sense that the savings they have accumulated will be smaller than it is “supposed” to be—well, let’s just say they don’t want to be reminded that their retirement plan health isn’t good.

There was some of that in the “National 401(k) Evaluation” published by Financial Engines (see Report Highlights Savings Gaps, Ways To Close Them). The report was, in fact, replete with signs that most participants in the sampling are not in very good shape when it comes to retirement, with roughly three-fourths not on track to replace 70% of their pre-retirement income at age 65. When you consider that about a third have badly allocated portfolios (the report somewhat euphemistically terms these “inefficient”), and that nearly 40% are not contributing enough to receive the full match—well, let’s just say that there are some obvious reasons for the gap.

IMHO, it’s more than a bit ironic that studies routinely show that participants who take the time to make that retirement assessment feel better—and are more confident—about their retirement preparations than those who don’t. Of course, it could be that the only ones taking the time to check things out are those who are already reasonably confident that they’ll get a good result; unfortunately, I don’t recall ever seeing a connection between pre-assessment confidence and post-assessment (nor, for that matter, do these confidence assessments typically correlate confidence with savings that justify that sentiment).

Still, I like to think that those who take the time to do the assessment find out that things are perhaps not as hopeless as they had thought—and that, following the assessment, they walk away with a specific action plan for either staying on track, or closing the gap between needs and reality.

Inside the Financial Engines report there are a couple of examples that illustrate the point. One is a 45-year-old participant making $50,000/year who currently has a $50,000 account balance and who is deferring 4% in a portfolio that is overly risky—a combination that the report says will leave him 27% below his idea goal (if the market performs “typically”). But the report notes that if this participant reallocates at an “appropriate” risk level, they can narrow the gap to 23%; if they do that AND save 2% more per year, they can cut the gap to 14%; and if they do both AND delay retirement two years—well, they’re on track. Or, this participant could simply save 8% more a year to achieve the same gap-closing result.

Now, like with my bathroom scale, you can quibble with the assumptions, but the important thing, IMHO, isn’t taking the time to figure out you have a gap—most of us probably have that sense before we ever sit down with our retirement plan statement. Rather, it’s the plan that comes out of that process—the plan that helps us get back where we need to be—that not only helps us feel better, but gives us a reason for that feeling. And, like that bathroom scale model, the longer you put that off, the longer that “recovery” will take – and the harder it will be.

—Nevin E. Adams, JD

"Status" Quo?

Last week, during our PLANADVISER National Conference, I asked a panel of four plan sponsors if their current adviser was a fiduciary—and if that status mattered to them.

It’s not the first time I’ve asked that question; in fact, I have asked it of these plan sponsor panels at each of our four such conferences to date (although the plan sponsors were, of course, different). I ask it for one simple reason: While I sense a certain unanimity of opinion on the matter in retirement plan adviser circles, plan sponsors frequently have a more nuanced view.

Sure enough, this year a plan sponsor panelist not only said that his adviser wasn’t a fiduciary, but that he wasn’t at all sure why that mattered. In fact, he wondered aloud why an adviser would want to go to jail with him if something went awry.

Now, you could tell that many of the advisers in the room were surprised, perhaps stunned, by that statement. And yet, IMHO, that plan sponsor demonstrated what I felt was a pretty insightful appreciation for the litigation shield—or lack thereof—afforded him in hiring a fiduciary. For my money, far too many plan sponsors think that when they hire a plan adviser who is a fiduciary (or a provider who touts itself as a “co-fiduciary”), they have, in fact, supplanted their own fiduciary obligations to the program. But here was a plan sponsor who understood that if something “went wrong,” even if his adviser were a fiduciary, he was still on the hook.

That said, this plan sponsor’s answer was the kind of response that should surely give pause to an industry that spends so much time and energy “angsting” over the fiduciary issue.

The truth is, hiring a fiduciary is no magic talisman against litigation for the plan sponsor—and those who think (or who are mislead into thinking) so are ill-advised, to put it kindly. So why should fiduciary status matter?

Consider for a minute, when you bought your last car, who was that salesman looking out for—even as he ostensibly went to lobby his manager on your behalf? What about that clerk that was so helpful as you considered that PC or big-screen TV purchase? How about that commission-based realtor? Did they really have your best interests in mind?

Advisers that have adopted fiduciary status routinely talk about how their fee-for-service approach insulates them from bias in making fund recommendations; note that it allows them to bring THEIR very best judgment to the fore. What is, however, IMHO, too often glossed over is that it’s not just their best judgment, even an unbiased judgment, that is the essential benefit to hiring an ERISA fiduciary. Rather, it’s that judgment applied, and applied solely, in the best interests of the plan and its participants.

And that matters most—or, IMHO, should matter most—to those who are themselves charged with making decisions that adhere to those standards

—Nevin E. Adams, JD

“Forever” More?

Last week, the Treasury Department and Department of Labor held two days of joint hearings on the subject of retirement income (see Lifetime Income Hearing Witnesses Demand Fiduciary Shield).

There was discussion about the need for product design enhancement (though much of the focus seemed to be on better explaining what was already available); better (i.e. cheaper) pricing for the kinds of institutional purchases these plans might provide (though I’m hard-pressed to see how you get any kind of aggregation benefit in terms of product just because the buyers all work for the same employer); and the challenges of portability, both when a plan changes providers and a participant changes employers.

There was also talk about misunderstandings about annuities that no amount of communication or education seems able to dispel (my guess is the hearings won’t alter that dynamic, either), and there was concern about differences in gender-specific annuity tables (and, let’s be honest, gender-specific savings habits and longevity experiences). And, of course, there was a LOT of talk about things that would encourage employers to embrace these options as an integral element of their plan design. To my ears, those recommendations tended to fall into two basic themes: some kind of QDIA-like default safe harbor, and/or some kind of fiduciary safe harbor for annuity selection by the plan fiduciary.

IMHO, you can’t not address those concerns. While there are any number of operational impediments to incorporating a retirement-income option, I still find that the big challenge remains plan sponsors’ concern about being on the hook for a bad annuity provider choice—not today, or a year from now, or even 10 years from now, but forever. And while, as with investment advice, the Labor Department has tried to offer guidance in the interests of encouraging higher adoption rates, so far as I can tell, it hasn’t budged the needle at all.

I don’t fault the Labor Department for this; after all, there is a fine line between offering the level of protection that will actually change fiduciary behavior and just giving the store away. Clearly, the plan sponsor/fiduciary’s decision will have a significant impact not only on the choices available to, but the choices taken by, participants—and somebody knowledgeable needs to be accountable. That same rationale, though it’s often glossed over, is why the plan sponsor retains its customary level of prudent-expert responsibility for the choice of an investment advice provider, even if some protection is afforded them on the particulars of that advice; and why they are still on the hook for the prudent selection of a qualified default investment alternative (QDIA), even though they gain a great deal of protection from potential participant lawsuits so long as they comply with the safe harbor requirements.

That said, IMHO, there’s a world of difference between making a point-in-time choice of an advice or investment provider—a decision that can be monitored, reasonably readily benchmarked, and changed—and that involved in selecting a retirement-income option where the untangling can be considerably more “involved.”

It’s more than a little ironic that the very thing that makes it possible for those providers to offer those kinds of lifetime income guarantees also makes for a certain sense of irrevocability in the decision. Now, I realize that it doesn’t have to be irrevocable, certainly not in a forever sense (though there are generally financial penalties attendant with that decision). But that, I think, remains the real problem with annuity selection, not just for plan fiduciaries, but for plan participants as well. You not only have to weigh a lot of considerations that people generally aren’t comfortable weighing, you wind up making a call that seems like it not only has to be right for now, but “right” forever.

It is, quite simply, a decision that still seems perfectly suited to guarantee that no decision will be made for as long as it can possibly be postponed.

Ultimately, in fact, what we may need to help plan sponsors make these options more available is not a better way to help participants get into annuities—but a better way to help them get out.

—Nevin E. Adams, JD

Listening Post

With our PLANADVISER National Conference just one week away, I found myself turning back to my notes from the PLANSPONSOR National Conference in June.

Some of these came from presentations, others originated from the audience, and still others arose in the dozens of side conversations at breaks and such in between the official conference sessions. Some, honestly, are something of a synergy among the three. See if they don’t get YOU thinking…


You may not be responsible for the outcomes of your retirement plan designs, but someone should be.

How you spend your weekend is a microcosm of retirement.

“Free money” isn’t.

Retirement income is a lot less of a problem when you have saved a pile of money.

You can lead a horse to water, after all—but you can’t make him think.

No one expects taxes to be lower in retirement any more.

Auto-enrollment is still viewed as a very paternalistic type of event.

When it comes to fee comparisons, eventually there will be better sources of information, but right now it’s still a bit mystical.

Providing revenue-sharing information to participants is like giving car keys and whiskey to teenage boys.

If you don’t know how much you’re paying, you can’t know if it’s reasonable.

You want your provider to be profitable, not go out of business.

Retirement income is a challenge to solve, not a product to build.

If you’re having trouble connecting with an employee group, find—or create—a missionary within that group.

When selecting plan investments, keep in mind the 80-10-10 rule: 80% of participants are not investment savvy, 10% are, and the other 10% think they know enough—and usually chase returns.

While it’s a good idea to have fiduciary insurance in place to cover a loss, you should have a well-documented fiduciary process in place to avoid claims in the first place.

Now is a good time to renegotiate fees.

When advisers are examined, their plan clients usually are also.

Never ignore a letter from the IRS.

Left to their own devices, participants still don’t do anything.

Tax payers effectively subsidize the benefits of 401(k)s. Of course, they also subsidize the ability of many Americans to no longer pay federal income taxes.

A corollary: The tax benefits of 401(k)s are tiered toward those who actually pay taxes.

The best way to stay out of court is to avoid situations where participants lose money. The second best way is to have a well-documented prudent process.

Annuitization of defined contribution balances only makes sense if those balances are big enough to annuitize.

Some participants do opt out of automatic enrollment.

“Free money” is still a powerful incentive for participants.

The biggest mistake a plan fiduciary can make is not seeking the help of experts.

You can be in favor of fee disclosure and transparency and still think that legislation telling you how to do it is misguided.

The single most effective way for individuals to ensure that they have sufficient income in retirement is to accumulate more wealth; the amount of their savings before retirement defines their options in retirement.


I’m often asked how we come up with our conference and magazine topics, how we manage to keep our pulse not only on what’s coming down the road, but what people are focused on in the here and now.

The simple answer is—we listen. And when we listen, we all learn.

—Nevin E. Adams, JD

“Miss” Perceptions?

Next week we will launch our eighth annual search for the nation’s best retirement plan advisers.

Each year, we receive a number of inquiries from advisers about the awards, many that fall into a category I tend to think of as “exploratory”—feelers as to what we are looking for.

Well, at its core, what we hope to acknowledge—and, thus, what we are looking for—hasn’t changed at all from when we first launched the award in 2005: advisers who make a difference by enhancing the nation’s retirement security, through their support of plan sponsor and plan participant information, support, and education. And, since its inception, we’ve focused on advisers who do so through quantifiable measures: increased participation, higher deferral rates, better plan and participant asset allocation, and delivering expanded service and/or better expense management.

Now, we’ve always tried to be very transparent about the award, and the process that underlies the selection. That said, I know that some have questions—and perhaps misperceptions—about the award and how it is administered. So, based on conversations I have had with some of you over time, not to mention the general inquiries that emerge around an award that garners this much attention, here are five things you should know about PLANSPONSOR’s Retirement Plan Adviser of the Year award:

(1) It’s NOT a personality contest. Sure, advisers who are nominated by 30 of their closest friends and wholesalers stand out (though only after you’ve passed the quantitative round). But even then you get no extra points for having support in the “community.”

(2) You will have to provide actual data about the impact your firm is making on things that really matter. We look at participation rates, deferral increases, participant asset allocations, and even fee negotiations. And we will talk to your plan sponsor clients (and expect them to confirm your data). If you don’t have, or aren’t monitoring, those kinds of data, you probably aren’t ready for this award.

(3) Award semi-finalists and finalists are chosen based on a blind review of qualification data. Our process selects semi-finalists and finalists based solely on data and screened reference checks. Only after the finalists have been selected are their names known to the judges.

(4) Our judges sign nondisclosure agreements. Yes, we have judges for this award—judges who not only know the space, but know how to evaluate the data. Two of the five judges for each award are advisers; prior winners of the award, in fact. We have always thought their perspective was important as a “real world” check on the award criteria. That said, we understand that some advisers might be reluctant about sharing data about their practice1 with potential competitors—and our judges agree, in writing, to respect the confidentiality of that information.

(5) Those who don’t participate don’t win. It may be an honor “just to be nominated,” but those who don’t respond completely and accurately to the aforementioned requests for information don’t make it past the nomination round.

May the best adviser(s) win—and, based on our prior winners,they generally do.

—Nevin E. Adams, JD

Editor’s Note: Those who have additional questions should feel free to e-mail me at nevin.adams@assetinternational.com, or Alison Cooke-Mintzer at acooke@assetinternational.com

More background information on the award is available HERE
Additional information is available here


1 We’re not talking about client lists here; average rates of deferral and savings across your client base, your average client size, that kind of thing.

Double Dipping?

Last week, Fidelity published some data from their quarterly analysis of participant activity.

For the very most part, the data (see Fidelity Finds Q2 Uptick in 401(k) Withdrawals) revealed what we have come to expect from such reviews: Participants continue to stay the course, deferral rates are largely unchanged (average was 8%), and more increased their rate of deferral (5.3%) than decreased it (2.9%) in the most recent quarter. Additionally, the balance recovery continues apace, with the average account balance up 15% (though for this good news, you have to reach for a year-over-year comparison, because Q2 figures to be a pretty rough one for participant accounts—down 7.6% in Fidelity’s database).

However, this report drew more than the customary amount of coverage for its finding that rates of hardship withdrawals and loans were higher—and by some measures, significantly higher—than they were a year ago.1

My initial reaction was that this latter finding was something of an outlier; after all, in recent weeks we have seen other, similar reports from other providers that indicate that withdrawal volumes were down, certainly compared with the dark early days of 2009. But then, this was more recent data, and with the report of weekly jobless claims back up to half a million, well, let’s just say that it didn’t require much imagination to see a link between more people out of work and an uptick in “premature” distributions.

But later, as I considered the data, the findings didn’t seem so out of line. While the Fidelity survey found that 11% of participants took out a loan this quarter (9% did a quarter earlier), neither the average initial loan amount ($8,650) nor the loan term (3.5 years) seemed out of line. The report did, however, contain at least two alarming statistics. First, 22% of participants recordkept by Fidelity now have an outstanding loan, and while that isn’t much beyond the one in five that did a year ago, it nonetheless represented a decade-long record for Fidelity’s database. Indeed, this was the item that most media outlets qravitated toward (based on the calls I got).

In fact, IMHO, a more troubling trend lies in the fact that nearly half (45%) of participants who took hardship withdrawals one year prior also took a hardship withdrawal in the 12-month period ending in the second quarter of this year.

While participant loans are (too) frequently touted as borrowing from yourself, they put the participant in the position of having to replace—on an after-tax basis—the contributions you’ve withdrawn and a rate of “return” in the form of interest on the loan. Still, at least you’re on a schedule to replace the money you’ve withdrawn.

Now, properly administered, it’s not easy to obtain a hardship withdrawal. You actually have to be experiencing a financial hardship, for one thing, and you often not only have to prove that, but also that you have exhausted other sources. Worse, that hardship withdrawal is reduced not only by the need to pay taxes on the pre-tax monies you’ve now tapped, you have to fork over another 10% as a penalty to Uncle Sam (unless, of course, you’re older than 59 ½). What that means, of course, is that what you think you are seeing isn’t exactly what you are going to “get.”2 In fact, it could easily be just half what the requesting participant might be expecting.

The reality is that people are surely hurting, and if the money they have set aside in their 401(k) helps them through this period, puts food on the table, or keeps the family in their home, that’s, IMHO, a good thing. After all, there’s not much point in taking out a loan when you don’t have a source of income to repay it.

But what concerns me about the trends in the Fidelity report, aside from the implications that so many are struggling financially, is that, in my experience, hardship withdrawals, unlike loans, are not only gone for a while, they are savings that are often “gone” forever.

—Nevin E. Adams, JD

1Loans initiated over the past 12 months grew to 11% of total active participants from about 9% one year prior. The portion of participants with loans outstanding also increased two full percentage points in the second quarter to 22%. The average initial loan amount as of the end of the second quarter was $8,650, with an average loan duration of three and half years, according to Fidelity.

According to Fidelity’s data, 62,000 of the participants recordkept by the firm initiated a hardship withdrawal in the second quarter, compared with 45,000 participants who did so the quarter before. As of the end of Q2, 2.2% of Fidelity’s active participants took a hardship withdrawal, compared with 2.0% a year earlier.

2 Those taxes aren’t always obvious at the point of distribution, unfortunately, but due at the individual’s next tax filing.

'Mandatory' Sentences

We have long lamented the reality that only about half of this nation’s workers have access to some kind of workplace-based retirement vehicle, and with good reason.

Well, we now have bills introduced in the Congress, both House and Senate, that will, eventually, require that every American business that hires 10 or more workers offer them the ability to save for retirement (see Auto-IRA Bill Introduced With Employer Mandates, Auto IRA Bill Introduced in the House).

Now, my first reaction was “it’s about time.” After all, we can talk about inadequate savings rates, inefficient asset-allocation decisions, and egregious revenue-sharing arrangements—but workers with access to the opportunity to save are surely better-served than those without. And any number of studies have shown that those without access to those programs save less—when they save at all—than those who have the opportunity to participate.

But honestly, the more I read through the bill1 summary (and that’s MUCH easier than the legislative language), the more I was struck by the potential complications. Workers, of course, can opt out—but under the legislation, employers are stuck with having to set the programs up.

Not that those workers will necessarily be saving much, nor is it likely to be “enough.” The default deferral rate will be 3%, with no escalation (though the worker can bump up the rate), nor is an employer match permitted. Workers have the choice of saving on a pre- or post-tax (Roth) basis, though the default is post-tax.

A default investment structure is outlined—basically, a principal preservation fund for balances under $5,000, with a lifecycle fund for larger balances—but the employer will still have to choose a provider, and could still wind up with fiduciary liability for that choice, unless the employer picks a provider on the approved list (from an online database that the government will establish). The bill summary suggests that an employer will fill in some basic information about its workforce, be provided with a list of suitable providers, click on one, and be connected2.

Moreover, there are eligibility standards to be monitored (those employed for at least three months and who have attained age 18 as of the beginning of the year), payroll deposit deadlines to be met (and an excise tax if they are not), a requirement to provide employees with some kind of standardized form explaining the program and investment decisions (though this could be part of the W-4), and a $100 excise tax per employee who is not properly covered by the program.

Oh—and to offset the costs of implementing and running this program, the employer will get a tax credit of…$250.

Will it Matter?

So, will this legislation live up to its promise? Will it provide 42 million more Americans with an “easy, effective way to take responsibility for their fiscal futures and plan for a secure retirement”? The truth is, I’m not sure.

We can only hope that regulators are as attentive to the fees assessed on these accounts, and on the investment structures created—accounts that are sure to be miniscule on an individual basis, but which will almost certainly in their entirety be an enormous pile of temptation.3 As for its impact on participant savings—well, it is perhaps a step in the right direction, certainly in terms of getting those who have jobs to begin putting some of that income aside for retirement. Surely the additional incremental cost and burden to the employer won’t by itself be enough to dissuade a hiring decision—though in tandem with other mandates and the promise of higher taxes, to boot, it might well.

There is, of course, always the possibility that a realization that a retirement plan mandate is coming will spur those who have been holding off on setting up a 401(k) to do so now—though, IMHO, it’s every bit as likely, and perhaps more likely, that they will simply set aside those plans and wait for the “government’s” version (which, even with all its requirements and costs, is surely less onerous).

To their credit, those pushing the bills are trying to plug a retirement savings hole that has too long been ignored. There is every indication that they have been thoughtful in their analysis, and have sought to minimize both the cost and the effort imposed on businesses.

That said, there is a cost—in time, effort, and focus—attendant with setting these programs in place (and it feels like more than $250 worth to me). While, in better times, this might be a laudable initiative4, it strikes me as oddly inappropriate at a time when concerns about additional government mandates appear to be restraining hiring and business growth.

Timing, it is said, is everything. Unfortunately, I think this mandatory IRA bill may well be a good idea at a bad time—and that, IMHO, could make it a bad idea.

—Nevin E. Adams, JD

(1) For simplicity, this column focuses on the bill introduced in the Senate, which was the first to be introduced, though the two appear similar, if not identical.

(2) From the Bingaman bill summary: “The website will be designed to assist employers in choosing a provider. The employer will enter a small amount of information about itself and its employees in a starting screen. Then, employers will be directed to a page listing providers willing to serve as trustee for employees’ Automatic IRA accounts. Once the employer makes a choice, it will be directly connected to the provider.”

(3) The Bingaman bill summary explains the phased implementation approach not as an accommodation to employers, but so that retirement service providers can “prepare for a significant expansion in the number of IRA accounts (through product innovation and marketing) and regulators to address enforcement and other regulatory issues.”

(4) The bill wouldn’t kick in for everyone right away: In the first year after enactment, the provision will apply only to firms with 100 or more employees (counting employees who earned more than $5,000 in the prior year); in the second year, 50 or more; in the third, 25 or more; and in the fourth, 10 or more. So, perhaps by the time it is effective, the “timing” will be better. However, employers may well focus on the future implications when they make current hiring decisions.

IMHO: "Wrong" Headed?—Part 2

Last week’s column presented half of a list that I titled “10 things you’re probably STILL doing wrong as a plan fiduciary.” As I mentioned then, this is a compilation based on my experience, the experiences of a group of experts who conducted a panel by the same title at the PLANSPONSOR National Conference in June, and a list of “Common Plan Mistakes” from none other than the Internal Revenue Service itself.

Here’s the rest of the list:

6. Not providing required notices to participants (e.g., safe harbor notices or QDIA notices).

The law provides plan fiduciaries with certain protections conditioned on the timely provision of notices deemed sufficient to alert participants to their rights and the obligations of the plan fiduciaries. This holds true with so-called “safe harbor” plan designs as well as the selection of qualified default investment alternatives (QDIAs), or the implementation of automatic enrollment, where the participant could opt out of deferrals, select a different deferral amount, or select another investment option.

While the implications of failing to provide a timely notice vary depending on the purpose of the notice, generally speaking, a failure to provide the notice invalidates the protections afforded the fiduciary.

7. Failing to obtain spousal consent.

The IRS notes that a common plan mistake submitted for correction under the Voluntary Correction Program (VCP) is the distribution to a participant of a benefit in a form other than the required QJSA (e.g., a single lump sum) without securing proper consent from the spouse. This often happens when the sponsor’s human resources accounting system incorrectly classifies a participant as not married (or when the participant was not married at one point and subsequently got married—or remarried). The failure to provide proper spousal consent is an operational qualification mistake that would cause the plan to lose its tax-qualified status.

8. Paying expenses from the plan that are not eligible to be paid from plan assets.

Plan sponsors are frequently interested in what expenses can be paid from plan assets. The first step in that determination involves making sure that the plan document allows the payment of any expenses from plan assets.

Assuming that the plan allows it, the Department of Labor has divided plan expenses into two types: so-called “settlor expenses,” which must be borne by the employer; and administrative expenses, which—if they are reasonable—may be paid from plan assets. In general, settlor expenses include the cost of any services provided to establish, terminate, or design the plan. These are the types of services that generally are seen as benefiting the employer, rather than the plan beneficiaries.

Administrative expenses include fees and costs associated with things like amending the plan to keep it in compliance with tax laws, conducting nondiscrimination testing, performing participant recordkeeping services, or providing plan information to participants.

9. Not knowing (or making an effort to ascertain) if your plan fees are reasonable.

As a plan fiduciary, you have several key responsibilities, one of which is to make sure that the fees paid by, and the services rendered to, the plan be reasonable. Fulfilling that responsibility would seem to require that you know the services that are being rendered, and that you know the fees paid for those services.

Determining that the combination is reasonable may seem as much art as science, but if you do not have the answers to those two key variables, it is hard to imagine how you can satisfy your obligation as a fiduciary.

10. Not seeking the help of experts when you lack the expertise to make fiduciary decisions impacting the plan.

ERISA imposes a duty of prudence on plan fiduciaries that is often referred to as one of the highest duties known to law—and for good reason. Those fiduciaries must act “with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.” The “familiar with such matters” is the sticking point for those who might otherwise be inclined to simply adopt a “do unto others as you would have others do unto you” approach. Similarly, those who might be naturally predisposed toward a kind of Hippocratic “first, do no harm” stance are afforded no such discretion under ERISA’s strictures.

Simply stated, if you lack the, skill, prudence, and diligence of an expert in such matters—you are expected to get help.

—Nevin E. Adams, JD

Last year’s list of “10 Things You’re (Probably) Doing Wrong” is HERE

The list of Common Plan Mistakes from the IRS is available HERE

As for correcting those mistakes, see the IRS’ 401(k) Fix-It Guide

You can find more information on fulfilling your fiduciary responsibilities at the Employee Benefits Security Administration’s (EBSA) Web site

'Wrong' Headed?

In this as, perhaps, many professional endeavors, it seems that the more you know, the more you know you don’t know. Moreover, the standards imposed on plan fiduciaries by the Employee Retirement Income Security Act (ERISA) are not only demanding, they may be the highest found in law—and with personal liability imposed, to boot.

About a year ago, I compiled a list of “10 things you're (probably) doing wrong as a plan fiduciary.” By all accounts, it was well-read, much forwarded, and useful in terms of helping plan sponsors and retirement plan advisers highlight areas of possible improvement with your plan sponsor clients.

The list that follows – think of it as “10 things you’re probably STILL doing wrong as a plan fiduciary” - is a compilation based on my experience, the experiences of a group of experts who conducted a panel by the same title at the PLANSPONSOR National Conference in June, and a list of “Common Plan Mistakes” from none other than the Internal Revenue Service itself. Once again, I hope you find this list informative—and that you draw insight and comfort from its contents.

1. Not following the terms of your plan document regarding the administration of loan provisions (maximum amounts, repayment schedules, etc.) or hardship withdrawals.

Plan documents routinely provide that hardship distributions can only be obtained for certain very specific reasons, and that participants first avail themselves of all other sources of financing before applying for hardship distributions (these conditions often are incorporated directly from the requirements of the law). Similarly, loans are permissible from these programs only when they comply with certain standards regarding the amount, purpose, and repayment terms.

Failure to ensure that these legal requirements are met can, of course, most obviously result in a distribution not authorized under the terms of the plan document—and, since these types of distributions are frequently quickly spent by participants (and thus not readily recoverable), it can be complicated and time-consuming to set the situation right.

2. Failure to follow plan document eligibility and vesting provisions

An employee’s rights to retirement benefits are determined by the correct application of service and/or age requirements of the plan regarding eligibility for participation, and also may be influenced by the proper application of the plan’s vesting schedule.

To properly comply with those requirements, you need to maintain accurate service records for all employees. If these records are incorrect, the benefits provided may be incorrect—either in excess of what is permissible or less than what was due to the participant. Note that the failure to properly follow the plan’s provisions can cause the plan to lose its qualified status.

The plan document serves as the foundation for plan operations; it is, quite simply, the operating manual for your program. Sometimes, particularly if you are relying on a document that has been prepared by a third-party service provider, certain “gaps” can emerge between what the document allows and how the plan is actually administered. As a result, it is a good idea to conduct a document/process “audit” every couple of years—don’t assume that “the way we’ve always done things” is supported by the legal document governing your plan.

3. Improperly managing forfeiture accounts

Many defined contribution plans require participants to complete a period of service before becoming fully vested in matching or non-elective employer contributions, and when a participant leaves the play before they are fully vested, their unvested account balance may be forfeited. Some plan administrators place these forfeited amounts into a plan suspense account, allowing them to accumulate over several years. However, the Internal Revenue Code does not allow this practice. Forfeitures must be used or allocated in the plan year incurred.

Revenue Ruling 80-155 states that a defined contribution plan will not be qualified unless all funds are allocated to participants’ accounts in accordance with a definite formula defined in the plan, and the IRS notes that this would preclude a plan from carrying over plan forfeitures to subsequent plan years, as doing so would defy the rule requiring all monies in a defined contribution plan to be allocated annually to plan participants. The plan document’s terms should have provisions detailing how and when a plan will exhaust plan forfeitures.

4. Not starting required minimum distributions (RMD) on time

A minimum payment must be made to the participant by the required beginning date (RBD) and for each following year. Normally, the RBD for a participant who is not a 5% owner is April 1 following the end of the calendar year in which the latter of two events occurs: either the participant reaches age 70½ or the participant retires (for 5% owners, the RBD is April 1 following the end of the calendar year in which they attain age 70½ regardless of their retirement date).

Plan sponsors often discover that required minimum payments either have not been paid timely or at all, especially when a non-5% owner continues working after reaching age 70½. Failure to follow the minimum payment rules as written in the plan document can lead to the loss of the plan’s tax-qualified status. If participants or beneficiaries do not receive their minimum distribution on time, they (not the plan) are subject to a 50% additional tax on the underpayment.

5. Not depositing contributions on a timely basis

The legal requirements for depositing contributions to the plan are perhaps the most widely misunderstood elements of plan administration. A delay in contribution deposits is also one of the most common flags that an employer is in financial trouble—and that the Labor Department is likely to investigate.

Note that the law requires that participant contributions be deposited in the plan as soon as it is reasonably possible to segregate them from the company’s assets, but no later than the 15th business day of the month following the payday. If employers can reasonably make the deposits sooner, they need to do so. Many have read the worst-case situation (the 15th business day of the month following) to be the legal requirement. It is not.

Editor’s Note: the other five things will appear in next week’s column.

The Duty To Ask

Last week I mentioned a revenue-sharing case that could have far-reaching implications.

That case, Tibble v. Edison International, was decided earlier this month (see “Court Buys Retail vs. Institutional Share Fee Claims”) and, IMHO, is a very interesting case for several reasons: First, most of these cases have been tossed before they actually got to trial; second, this one was decided in the plaintiff/participant’s favor (and that’s a rarer occurrence than much of the coverage and “chatter” would indicate). Moreover, here the court was far less deferential to the plan fiduciary decisions than other districts have been1.

But what I found most interesting about this case wasn’t the decision or the court’s rationale, though both will certainly have ramifications beyond this case. Nor, in large part, were the plaintiffs’ arguments any more compelling than in previous actions. In fact, like many of the revenue-sharing/excessive-fee cases filed since 2006, the plaintiffs here made a LOT of accusations—most of which were, as they have been in other cases (and rightfully, IMHO), summarily dismissed2. In this case, that included the selection of sector funds for the plan, having a money market fund on the menu rather than a stable value offering, and structuring the company stock fund as a unitized fund, rather than using share accounting.

Short Falls

Where this court did hold the plan fiduciaries3 liable was their decision to invest in retail shares rather than institutional shares of the same funds. But what I found most striking about the case wasn’t the allegations or the adjudication, but rather that what was, by outward appearances anyway, a thoughtful and sophisticated plan review structure would manage to overlook such a basic opportunity.

Here you have a large ($2-plus billion) plan that not only has an investment committee, but one separate from the benefits administration function. Moreover, that investment committee has access to, and uses the services of, an investment adviser (Hewitt’s investment consulting arm) to review/select/monitor funds. That’s a reasonably sophisticated set-up, and certainly what one might expect for a plan of this size.

Now, the plan decision-makers are aware of revenue-sharing but consistently make decisions that support the notion that they do not take that into account. In fact, the court noted that in 33 of 39 instances during the period in question, the employer made mutual fund replacements that actually decreased the revenue-sharing received by the plan, leaving the court to note, “This overall pattern is not consistent with a motive to increase revenue sharing.” In fact, the court noted that “[t]he Plan fiduciaries did not make fund selections with an eye toward increasing revenue sharing and did not put the interests of SCE above those of the Plan participants.”4

So, what do they fail to do?

Well, apparently they did not even ASK the investment fund providers to waive the minimums for investment in institutional class shares. That’s right, they never asked if those minimums could be waived—so, of course, they weren’t (particularly damning was the testimony of the employer’s expert that such waivers were routinely granted, and for plans of much smaller size). Think of it as “the duty to ask.”

As you read the court’s description of the process, you get a sense that the investment committee was attentive to an investment policy statement (IPS) that was carefully prepared and to which the committee adhered; that they met regularly, and thoughtfully conducted their review with the assistance of a professional investment consultant. The court even described a situation5 where the investment committee considered—and specifically chose—an institutional share class for a fund over a retail offering, because the institutional class met the criteria established by the IPS, whereas the retail class did not.

Yet, for all of this good structure and process, there was one thing that this particular plan sponsor failed to do: They apparently failed to ask if a “better” share class was available.

In the words of the court, “The only way a fiduciary can obtain a waiver of the investment minimum is to call and ask for one. Yet none of the Edison fiduciaries nor anyone acting on their behalf (including HFS) ever requested that the William Blair Fund waive the minimum investment so that the Plan could invest in the institutional share class. Had someone called on behalf of the Plan and requested a waiver of the investment minimum, the William Blair Fund almost certainly would have granted the waiver.”6

Retail “Sale?”

Not that using retail, rather than institutional shares was inherently wrong, even in this situation7. The court acknowledged that in defending the retail-share decision, witnesses for the defendant/employers offered three possible rationales: If the retail share class of a certain mutual fund had significant performance history and a Morningstar rating, but the institutional share class did not; to avoid confusion among participants resulting from frequent changes in the fund; or if there were certain minimum investment requirements, it might preclude the plan from investing in the institutional share classes. Judge Stephen V. Wilson didn’t say whether he would have found those arguments compelling—but then, he didn’t need to bother because, as he noted in the ruling, “None of these explanations is supported by the facts in this case.”

Rather, he noted that “[t]he Investments Staff simply recommended adding the retail share classes of these three funds without any consideration of whether the institutional share classes offered greater benefits to the Plan participants. Thus, the Plan fiduciaries responsible for selecting the mutual funds (the Investment Committees) were not informed about the institutional share classes and did not conduct a thorough investigation.”

Nor was it sufficient that the plan fiduciaries employed the services of an investment adviser. As the court noted: “While securing independent advice from HFS is some evidence of a thorough investigation, it is not a complete defense to a charge of imprudence. At the very least, the Plan fiduciaries must make certain that reliance on the expert’s advice is reasonably justified.”

It is nearly incomprehensible to me—and I would guess to most of you—that in this day and age, a plan fiduciary could be aware of the distinctions of an institutional share class7, and not take advantage of them.

Perhaps, since participants were paying the freight, the fee differential was simply out of sight and thus out of mind. But I’m guessing that the investment committee saw its duty as restricted to the selection and review of the most appropriate investment options under the terms of the IPS, regardless of cost. I wouldn’t be surprised if they saw expense management as the responsibility of the administrative committee—which, doubtless, either assumed that the investment committee’s deliberation included a consideration of fees, or didn’t feel equipped and/or empowered to inquire as to the availability of a less expensive class of shares. Perhaps both felt that their investment adviser was taking those factors into consideration. Ironically, it may well be that this program had so much structure and process that everybody thought somebody else was dealing with the one thing that now seems so obvious, it’s hard to imagine it was overlooked for so long.

Whatever the explanation, it’s clear that nobody was asking the right questions8, and thus, nobody—including the plan participants—was getting the right answer.

—Nevin E. Adams, JD

1 This writer—and the Department of Labor—have had issues with the approach embraced by the courts in more than one of these revenue-sharing suits (see “IMHO: Court “Case”, “IMHO: The ‘Burden’ of Proof”, “IMHO: Second Opinions”, “IMHO: Winning Ways”, “IMHO: The Letter of the Law”).

2 see “IMHO: Fighting Words” at

3 Plaintiffs filed the suit as a class action on August 16, 2007, against Defendants Edison International, Southern California Edison Company, the Southern California Edison Company Benefits Committee, the Edison International Trust Investment Committee, the Secretary of the SCE Benefits Committee, SCE’s Vice President of Human Resources, and the Manager of SCE’s Human Resources Service Center.

4 Nor was the revenue-sharing arrangement hidden. The use of revenue-sharing to offset recordkeeping fees was not only discussed with employee unions, the court noted that the arrangement was disclosed to participants on approximately 17 occasions after the practice began in 1999.

5 In the course of that review, Ertel realized that the institutional share class of the PIMCO Fund had a significant performance history and a Morningstar rating, whereas the retail share class did not. Ertel also realized that the institutional share class charged less 12b-1 fees to the Plan participants. Thus, the Investments Staff recommended, and the Investment Committees adopted the recommendation, that the retail shares of the PIMCO Fund should be transferred into the institutional share class. These facts are very telling: In the one instance in which the Plan fiduciaries actually reviewed the different share classes of one of these three funds, the fiduciaries realized that it would be prudent to invest in the institutional share class rather than the retail share class. Had they done this diligence earlier, the same conclusion would have been apparent with regard to all three funds, and the Plan participants would have saved thousands of dollars in fees.

6 It surely didn’t help matters any that the expert witness hired by the employer-defendants testified that he had obtained waivers for plans as small as $50 million in total assets, and from the same funds as those in question here.

7 Lest some try to rely on this decision as absolute proof that the use of retail class funds is inherently imprudent in 401(k) plans, the court acknowledged in a footnote that “[p]laintiffs are not contending, and the Court has not found, that the mere inclusion of some retail share classes in the Plan constituted a violation of the duty of prudence. The only issue here is whether it was a breach of the duty of prudence to select retail shares rather than institutional shares of the same mutual fund where the only difference between the two share classes was that the retail share class charged a higher fee.”

8 Perhaps including this court. Though there were six funds in question, only three were the focus of the ruling, and for which the plan fiduciaries were held to account for the difference in costs between the retail and institutional shares. The other three were added to the fund menu earlier, apparently outside the applicable statute of limitations, but otherwise seemed to have the same institutional/retail class issues—yet the court rebuffed those claims.

What was the difference? Well, it seems that the plaintiffs didn’t challenge the initial decision to invest (my guess would be because they knew it was outside the statute of limitations), but they did argue that there were subsequent events (change in fund name, manager, etc.) that should have triggered a fresh review, a review in which they argued the whole institutional/retail issue should have arisen, and thus they should be liable as they were in the case of the funds added later. However, this judge was apparently only focusing on the initial decision, and found no reason that the subsequent fund changes should have triggered a full review, and thus—no violation of fiduciary duty. So much for the duty to monitor.

Not-So-Quiet Period

Remember when it used to be quiet in July?

Not so this past week, with the announcement of two major retirement industry acquisitions, a significant update on fee disclosure regulations, and a ruling in a revenue-sharing case that could have far-reaching implications.

On the two industry acquisitions, LPL’s absorption of National Retirement Partners (NRP) will surely be of most interest to the adviser community (see LPL Acquiring National Retirement Partners). LPL, which had only recently launched an IPO (and is thus literally in a “quiet period”), has struggled for some time with its retirement plan focus, while NRP has had its own share of issues in the wake of the recent financial crisis. LPL’s backing should certainly prove to be restorative for NRP’s positioning, and it’s hard to imagine that a newly constituted retirement-focused unit at LPL under Bill Chetney’s leadership won’t provide a clarity of focus for LPL’s efforts in this space.

Plan sponsors may feel a greater immediate impact from Aon’s acquisition of Hewitt (see Hewitt to Merge with Aon), the rationale is that the former’s middle-market product set (especially its insurance lines) will find room to grow in Hewitt’s predominantly large-client base, while Hewitt’s large-plan expertise will be able to find new applications in Aon’s target markets. Those notions inevitably look logical on paper; time will tell if the firms’ cultures and client approaches will assimilate. That said, the new partners are projecting a LOT of cost savings alongside a $5 billion merger—and in a people-intensive business.

As for the final release of the 408(b)(2) fee disclosure regulations, the wait appears to have been worth it (see DoL Issues New Fee Disclosure Rules). I am admittedly not yet all the way through a careful reading of the interim final package, but the removal of a written-contract requirement surely meets the common sense test, while retaining the impact of written disclosures. Similarly, the approach on disclosure—a reliance on full disclosure rather than the, to my eye, more limited conflict-of-interest focus of the prior regulations, should provide plan fiduciaries with more information, even if it does bring with it a potentially greater effort in sifting for those conflicts. Finally—and this is the provision almost certainly likely to draw the most industry focus—the DoL has opted to require that “certain providers of multiple services” disclose separately recordkeeping costs.

This was one of the more controversial provisions in the earlier proposals, and the Labor Department at that time tried to craft a “Solomonic” yet practical solution for those bundled providers who continue to claim that they are simply unable to break those costs out of their integrated delivery models, by basically requiring that unbundled providers disclose those costs, while those who couldn’t (or said they couldn’t) needn’t.

I am encouraged that this new proposal does not make that differentiation. In response to my question on the issue last week, Assistant Secretary of Labor Phyllis Borzi noted that they had heard from a number of sources during the course of the process and comment periods that many plan sponsors still are under the impression that recordkeeping is “free,” and they felt it was necessary to help disavow them of that notion. Back in the day when recordkeeping was routinely priced as a discrete service, it generally was found to constitute about 20% of the total costs for a DC plan; so, IMHO, it’s certainly large enough to warrant a separate disclosure. Ms. Borzi noted that those who may (still) find it difficult to comply with the measure have a year to do so. Personally, I would argue that they should have seen it coming before now.

As for that revenue-sharing case, well, we’ll take a look at it next week—unless, of course, we have another not-so-quiet week.

Thinking "Caps"

While the spate of revenue-sharing suits has—for the moment, anyway—faded into the background, fees remain one of the most hotly debated topics in our industry.

If anything, the intensity has heightened in recent weeks, as we near the Form 5500 filing deadline for December plan-year ends, even as we anxiously await the new 408(b)(2) fee disclosure regulations from the Labor Department—regulations that might well have been at some odds with legislation proposed by Congressman George Miller (D-California) that rode through the House as part of that extenders bill before being dropped by the Senate.

The urgency behind these initiatives is two-fold: to force those who provide services to these plans to more fully and accurately disclose their fees to plan fiduciaries, and to provide participants with some idea of the monies that are being netted from their investment returns (and taken from their accounts). Ultimately, it is about helping people make better, or at least more informed, decisions about their retirement plan investments—and these initiatives are all predicated on the notion that these fees are not adequately disclosed, or sufficiently understood, at present.

That said, a report recently issued by the Transamerica Center for Retirement Studies (from its 11th Annual Retirement Survey) paints a somewhat different picture (see 401(k) Participants not as Knowledgeable as Employers Think).

Asked whether they would like to receive more information from their retirement plan provider about fees and expenses associated with their plan, two thirds of the roughly 600 employers surveyed (and these were not limited to clients of Transamerica) said no, and half of those strongly disagreed with that proposition (smaller firms were somewhat more likely to disagree strongly). Now, that’s a startling statement in view of the characterization of the current state of 401(k) fees by many in Congress and most in the media—not to mention a few in the industry itself.

Asked if those in their firm who were responsible for overseeing the retirement program had a “clear understanding of the fees and expenses associated with the retirement plan,” nearly all—94%—at least somewhat agreed with that proposition. Nearly three-quarters of those at (277) larger firms strongly agreed with that statement, as did nearly half of the smaller firms (271). Could it be that these employers weren’t interested in receiving additional disclosures because they felt they already understood?

Moreover, strong majorities of employers felt that their workers had a similarly clear understanding of the fees associated with their account; one in five strongly agreed with that statement, while roughly half were willing to say they “somewhat agreed” with the proposition. Those results, of course, stood in some contrast with workers, where only about a quarter were willing to say they were aware of fees that may be charged to their account (admittedly, nearly as many weren’t sure, while about half said they were not aware).

These are the kinds of results that tend to work legislators, consultants/advisers—and journalists—into a lather. The “common wisdom” is, of course, that retirement plans are being gouged; that retirement plan sponsors are complacent, if not complicit in the theft; and that plan participants are oblivious to it all.

We may draw some comfort from the reality that most retirement plan fees are drawn from the expense ratios applied to the various funds, ratios that are generally disclosed, if somewhat imperfectly, to plan fiduciaries and participants alike (we may not yet know the apportionment, but the gross amount is certainly ascertainable). And yet, most advisers would likely view the Transamerica Center results with scepticism, if not downright cynicism. I can hear many of you saying to yourself right now, “They may THINK they know what they’re paying, but they really don’t.”

That said, don’t YOUR clients know what they are paying?

It’s hard to know exactly what inferences to draw from the research. Perhaps the plan sponsors are being misled or maybe misinformed; perhaps they do have a workable, if imprecise, idea of the plan costs. Improbable as this might seem, they might even happen to be a uniquely well-informed segment of plan sponsors. We may know what they are thinking, but we do not know what they think they are paying, much less how realistic that assessment.

Regardless, more disclosure is surely coming and—whether they think they know and don’t, or think they do and are correct in that assumption—IMHO, it’s hard to imagine that those disclosures won’t be a positive contribution to the exercise of their fiduciary responsibilities.

Here’s hoping it keeps us all thinking, rather than leaving us all guessing.

- Nevin E. Adams, JD

Prudent Mien?

Anyone who has been paying attention to 401(k) plan litigation these past several years knows that a common trigger—perhaps the most common trigger—for litigation is the presence of company stock in the plan; more specifically, the presence of company stock that has sharply declined in value. Indeed, one has only to look at the two-month period following the struggle to contain the current oil spill in the Gulf of Mexico and the number of litigants and potential litigants circling the BP 401(k) plans to appreciate just how much more aggressive the plaintiffs’ bar has become in pursuing such actions.

That said, those who have been paying attention to how these cases have played out in court are doubtless aware that many, perhaps most, are not coming to trial at all. Rather, they have been dismissed with what, IMHO, is startling regularity, due to a “presumption of prudence.”

Now, one needn’t scour ERISA’s text to discern the boundaries of this legal construct; indeed, that would be a futile effort. Rather, it is a concept gleaned by the courts (and subsequently enshrined in legal precedent) from their understanding of the black letter of the law. It is a concept that found its footing in a 1995 case called Moench v. Robertson. Now, in that case, as in many of the new generation of “stock drop” cases (drawing their name from the fact that the action arises after the value of the stock drops), a plan participant sued a plan committee for breaching its fiduciary duty based on its continued investment in employer stock after the employer's financial condition “deteriorated.” The Moench court (the 3rd Circuit) affirmed the duty of prudence, but looked to ERISA’s diversification requirement and the allowances made for employer stock holdings in an employee stock ownership plan (ESOP), and saw there a rebuttable presumption that an ESOP fiduciary that invested plan assets in employer stock acted consistently with ERISA (bearing in mind that, since Moench dealt with an ESOP, the plan document itself called for investment primarily in employer securities).

Now, I will admit to being something of a strict constructionist in my interpretation of the law. I am suspicious of those who manage to, through some jurisprudential alchemy, wrest unexpected (and likely unintended) legal conclusions by reading between the lines of the letter of the law. Further, I am generally distrustful of a process that builds on those kinds of legal “extensions” to base future determinations that are, IMHO, often far afield from the intentions of the law itself. After all, once you have established that 2 + 2 = 5, how hard is it to argue that 2 + 5 = 10?

Ironically—certainly in view of how the resulting Moench presumption has proven to be a powerful force in dismissing many of the stock drop cases at the pleading level—though the 3rd Circuit found a presumption of prudence, it reversed summary judgment for the committee/defendants because the facts alleged (precipitous drop in stock prices, committee members' knowledge of the impending collapse, and their conflicted loyalties as corporate insiders and fiduciaries), if proven, could overcome the presumption. And that finding came in the context of an ESOP, a plan design that, if not exempt from ERISA’s fiduciary strictures, would certainly seem to warrant a certain reasonable amount of fiduciary deference in the decision to hold employer stock.

That said, today the law of the land would seem to lie squarely on the side of plan fiduciaries who continue to hold out employer stock as a plan investment, come hell or high water (literally, in some cases). In effect, this “presumption of prudence” seems to have become a magic talisman against which no claim of malfeasance can be successfully alleged, much less established, simply because the courts have discovered (a cynic might say created) a presumption that holding employer stock is appropriate.

Plan fiduciaries have long been tempted by the allure of placing employer stock in these programs, and plan participants have, in large part, responded favorably1. Frankly, I find the rapaciousness of the plaintiffs bar on such matters to be unseemly at best—some downright unscrupulous—and many of the so-called “investigations” are nothing more than a fig-leaf-cloaked excuse to troll for potential litigants. Disaster can befall the best of firms, and stock prices sometimes tumble for reasons that have nothing to do with the fiduciary management of these plans.

That doesn’t mean that plan fiduciaries can pretend that they do not know things they clearly know as corporate fiduciaries; nor, as a recent amicus brief filed by the Labor Department on the broadening application of the Moench decision states, should the securities laws “immunize fiduciaries who knowingly incorporate false SEC filings into participant communications from liability under ERISA” (see “Solis Argues for Stock Drop Case Law Change”).

In this day and age, a plan fiduciary unable to see the potential for employer-security-related litigation is perhaps unworthy of the role; and, IMHO, a dual-role plan/corporate fiduciary unable to appreciate the potential for a conflicted duty vis-à-vis his or her responsibility to the retirement plan is living in a state of active denial.

As for those not yet targeted by litigation, thus far the courts may have presumed that plan fiduciaries are entitled to a certain deference in such matters—but, IMHO, that’s stretching the letter of the law.

—Nevin E. Adams, JD



1 Nor, as some like to posture, are participants necessarily bludgeoned into investing disproportionately large sums of their retirement savings there. Sure, the match accounts for some, and perhaps displaced loyalty some more, but I have found that participants are simply more familiar—and comfortable—with that option.

'Free' Wills

Over the weekend, I reacquainted myself with that episode of the HBO miniseries “John Adams” titled “Independence.” As a writer and editor, I watched with a special appreciation the part where Benjamin Franklin and John Adams are “tweaking” Thomas Jefferson’s draft—and the pain in the latter’s face as his “precisely chosen” words were modified. All in all, a modest sacrifice, to be sure. But I, for one, could feel his pain.

That said, anyone who has ever found their grand idea shackled to the deliberations of a committee, who has had to kowtow to the sensibilities of a recalcitrant compliance department, or who has simply suffered through the inevitable setbacks all too frequently attendant with human existence must have at least a modest appreciation for the trials that confronted not only that document’s authors, but those then living in these not-yet-united states.

Without question, 1776 is one of those turning points in history, not just for this nation but, in the course of time, for the world as well. And yet, from the perspective of those who, in 1776, put not only their property, but their lives on the line to achieve what we will commemorate this weekend, the prospects of success must surely have seemed unlikely. Indeed, 1776 itself was full of disappointments for many supporting the cause of independence—and near disasters for George Washington’s Continental Army. One can garner a sense for the change in tide by noting that Thomas Paine in January of that year published “Common Sense,” but before the year was out had turned his pen to “The American Crisis,” fretting about “sunshine patriots” in “times that try men’s souls.”

However, before the year was out, Washington’s troops would cross the Delaware under unimaginable conditions and win a stirring victory at Trenton, on their way to a series of impressive but largely unappreciated victories against the British army in New Jersey. Not that the worst was behind them: Less than a year later, Washington’s troops would winter at Valley Forge. Independence may have been declared in 1776, but it was not won until 1781, and not official for two years more.

The point, of course, is that we have much to be thankful for this Independence Day: for those who had the courage to stand up for the principles and ideals on which this nation was founded, for those who were willing then to take up arms to defend those principles and ideals against overwhelming odds, and those who have done so to this day.

If we are to preserve those “unalienable rights,” if we are to continue to enjoy the freedoms of “life, liberty and the pursuit of happiness,” we must remember that the truths so eloquently espoused in 1776 may indeed be self-evident, but dictators and tyrants from time immemorial have sought to vanquish them. It is easy to forget amongst the grilling, fireworks displays, and summer temperatures just how precious those rights are, and how rare still in this world.

This Independence Day, we should remember that, “in the course of human events,” the battles that preserve those ideals for us and future generations are never really “won”; they must be fought for every day.

—Nevin E. Adams, JD

For those interested in learning more about the events noted above, I heartily recommend:

“1776” by David G. McCullough
“Washington’s Crossing” by David Hackett Fischer
“Almost A Miracle: The American Victory in the War of Independence” by John Ferling
“His Excellency: George Washington” by Joseph J. Ellis

For those who prefer a “lighter” read (a la historical fiction), check out:
“To Try Men's Souls: A Novel of George Washington and the Fight for American Freedom” by Newt Gingrich, William R. Forstchen, and Albert S. Hanser

QDIA Essentials

PLANSPONSOR’s National Conference last week featured a series of panels titled “Five Things You Need to Know About…” focused on a series of topics.

One of those was qualified default investment arrangements (1), or QDIAs—and while the “five things” that follow are somewhat different from the list presented by that panel, what follows was certainly inspired by the discussion.

Here’s my list:


(1) You don’t need to have a QDIA to get 404(c) protection.

IMHO, one of the most marvellous things about the Pension Protection Act’s defined contribution provisions was that they weren’t imposed on plan sponsors. They provided clarity, structure, guidance, and, yes, protection on things like automatic enrollment, contribution acceleration, and default fund choices—but didn’t require that you embrace these concepts, unless, of course, you hoped to benefit from the protections associated with adhering to those structures. Sure, IMHO, it’s a lot easier to obtain 404(c) protection under the umbrella of the PPA’s qualified default investment alternative (QDIA) provisions—but plan sponsors who had those protections in place before the PPA can still have them by still continuing to doing the things required to retain them today.

(2) You need to pay attention to participant notices.

Among all the fuss over what a QDIA is, and the applicable structures for automatically enrolling participants in those options, it has been easy to gloss over the requirement to notify those defaulting workers that they are being defaulted, and that they have a right to opt out—both upon enrollment and annually thereafter. Failure to provide the proper notices at the proper times has long been an impediment to fulfilling 404(c)’s conditions—and, if you’re not careful, perhaps enough to thwart QDIA’s shield as well.

(3) A QDIA doesn’t have to be a target-date fund.

Admittedly, target-date funds are the low-hanging fruit of QDIA options. While balanced funds, managed accounts, or even target-risk funds are explicitly acknowledged in the regulations, it is also clear that in order to be “qualified,” the QDIA must be structured in such a way as to take into account the age of the participant and/or the workforce (see “IMHO: It’s About Time” at http://www.plansponsor.com/IMHO___It’s_About_Time.aspx). New adoptions seem to be embracing the target-date approach, but, at least anecdotally, it seems that plan sponsors who previously had a balanced-fund default are finding ways to make it work.

(4) The fiduciary requirements to prudently monitor and select a QDIA are no less than for any other plan investment option—and they are fiduciary requirements.

Plan fiduciaries can reap significant benefits from the adoption of a QDIA, and participants even more so—if the option is prudently selected and monitored. Now, personally, I think you could make a case that the selection of an investment fund in lieu of any participant direction whatsoever (much less one that studies consistently indicate will likely never be reallocated) should, if anything, be held to a higher standard than that imposed on the “regular” investment options on the retirement plan menu.

But, at a minimum, in the QDIA regulations, the Labor Department made it abundantly clear that “selection of a particular qualified default investment alternative… is a fiduciary act and, therefore, ERISA obligates fiduciaries to act prudently and solely in the interest of the plan’s participants and beneficiaries.”

Moreover, that, “[a]s with other investment alternatives made available under the plan, fiduciaries must carefully consider investment fees and expenses when choosing a qualified default investment alternative.”

(5) Just because a default fund isn’t a QDIA doesn’t mean it isn’t a prudent default choice.

While target-date vehicles are certainly convenient for plan sponsors and well-received by participants—and explicitly acknowledged as QDIA-eligible—they aren’t the exclusive prudent choice for a default option. Of course, choosing something else—a target-risk fund with no age orientation, a balanced offering, or even a stable value fund—won’t afford you the same protections that a QDIA will. On the other hand, a well-chosen, thoughtfully monitored investment default might not require them.

—Nevin E. Adams, JD

(1) Default investments are investment options chosen by plan fiduciaries in situations where participants fail to provide investment instructions, either through some kind of administrative oversight, or in cases such as automatic enrollment. The Pension Protection Act of 2006 (PPA) provided certain specific conditions under which plan fiduciaries would be afforded special protections when certain specific qualified default investment alternatives were provided for that purpose.

'Going' Concerns

“When the going gets tough, the tough get going,” or so goes the old saying.

It’s a saying with the requisite amount of bravado to stiffen one’s upper lip and shore up one’s resolve as we plough through yet another tough market cycle; a period in which, by all traditional measures, “alternative” investments should be a good place to seek shelter from the storm.

This time may be different, of course. Real estate, one of the most popular (at least in terms of its presence in pension portfolios), served to set off most of the recent market tumult, and is still struggling to make its way back (though one should be careful about the level to which one expects it to return). Private equity, writ large, feels a more precarious move at present, and hedge funds—well, many no longer live up to the name, despite their fee structures.

There are, of course, a growing number of alternatives to stocks and bonds—the traditional standard against which an investment is deemed to be “alternative”—but to boldly go where no one else is going is generally anathema to pension plan fiduciaries.


Of course, there will be (and perhaps already are) institutional investors with a perspective and horizon long enough to wade into this storm surge, those whose skins are “tough” enough to make the kind of prudent investment in strategies and sectors that can (and often has) pay big dividends in the long run.

But caution seems to be the watchword of the day, and many—perhaps most—are not altogether certain that we have weathered the storm. The world’s pension obligations loom large, the returns needed to sustain them less certain, the pockets from which new investments arise already “picked.” In a growing number of places, those already dependent on such promises are rioting in the streets (some days it seems likely that those expected to fund those obligations may join them), but those protests will not fill those depleted coffers, nor will they likely have any good effect in ameliorating the current market unsteadiness.

The going’s still tough—but the tough will, as they are wont to do, keep going.

The question, as yet unanswered, is where—and what—they will be going to.

—Nevin E. Adams, JD

“Left” Field

I participate in a number of LinkedIn groups (and “sponsor” a couple). In one of those groups last week, a member said they were interviewing potential new 401(k) recordkeepers/advisers—and asked a provocative question: What is the one question that you will be sure to ask the next time that you interview potential 401(k) providers?

Of course, we all know that the search for a new provider entails a lot more than a single question. And, as I skimmed my way through the suggestions that had already been proffered, there were a number of important and familiar inquiries; things having to do with the fees charged, fee disclosure, the quality of support staff, willingness to stand in as a plan fiduciary…. These are all important—so important, in fact, it was hard to imagine that they wouldn’t be routinely included in even the most casually composed RFP.

Having read the question—and skimmed the answers—I was about ready to move on. Ironically, the way this question was phrased (or at least how I read how that question was phrased) intrigued me; what WAS that one question I would ask the next time?

Now, having spent a fair amount of my career on the other side of that question (including a period of time when the group that prepared RFPs for a large financial services organization reported to me), I can tell you there are a nearly infinite number of ways to respond “yes” (with a clear conscience) without really meaning "yes, all the time"; ways to gloss over things like high turnover, to offer broad organizational-level expositions designed to assuage nagging concerns about profitability or “commitment to the business”; even ways to assure, without committing, on the subject of whether the provider will "stand in" in the event of a lawsuit, audit, or investigation. None of which should discourage or dissuade one from asking those questions, of course.(1)

That said, when it comes down to that one question, I kept coming back to one that gets asked all the time. One that you probably asked on your last RFP. One to which you may have gotten a response, but, I suspect, not an answer.

The question I would ask is, Can I get the contact information for three clients that have left you in the last 18 months?

Not that you'll get it, though you might—or that the selections won't be "tailored"—but the response (or lack thereof) can, IMHO, be "enlightening."

—Nevin E. Adams, JD


(1) If you want to frustrate a potential provider, just make them respond to an RFP where the questions are worded such that the only acceptable answers are “yes” or “no” (or make them put their “explanations” in a separate document). What many (still) don’t seem to appreciate is that most advisers/consultants take all that fancy verbiage and filter it down to a checkbox on a spreadsheet anyway.

Compliance “Deportment”

Recently, the Internal Revenue Service (IRS) announced that it was sending a questionnaire out to about a thousand 401(k) plan sponsors. The IRS said it developed the questionnaire because of the “critical role 401(k) plans play in our private retirement system” (see “IRS Provides 401(k) Questionnaire Details”).

Make no mistake: It’s going to take some effort to respond to the questionnaire—and respond you must. Described as a “compliance check,” the IRS notes that “failure to complete the Questionnaire will result in further enforcement action.” So, what does the IRS want to know?

Well, there’s a lot of information to be gathered about the plan from plan years going back to 2006: the number of employees, participants, their deferral levels, eligibility standards, service and age requirements, the existence and administration of loans and hardship withdrawals, the results of nondiscrimination tests, the determination of top-heavy status, the level(s) of match, and any changes to those levels.

The more interesting part of the questionnaire, IMHO, is the other questions the IRS asks; things like, Have recent financial conditions led to an uptick in hardships and loans? Does the plan allow for Roth contributions (and how many participants have opted for that feature)? Can participants use a debit card to take a loan? And, for plans that embraced automatic enrollment, did they do so retroactively or prospectively? And I’m curious not only about what plan sponsors have to say about the impact of factors like age, compensation, matching levels, and plan communications on participation levels—but what the IRS might do with that information.

There are, however, some areas that seem a bit like a baited trap: questions about if notices are provided timely, if excess deferral contributions were returned within the legal timeframes, even if the respondent as a SIMPLE plan exceeded the contribution limits.

And, make no mistake, this is a prelude to something deeper. In unveiling the project, the IRS noted that its Employee Plans Examinations previously conducted a baseline study of 79 market segments, and “the findings indicated that 401(k) plans are by far the most non-compliant plan type in the retirement plan universe,” going on to note that “since these plans make up over 60% of the retirement plan universe, it is important to the future of the private retirement system that these plans maintain the highest level of compliance possible.”

What will the IRS do with the information? It says that it will “ultimately result in a report published by the IRS describing the responses and identifying those areas where additional education, guidance, and outreach is needed”—and, perhaps somewhat more ominously, help the IRS focus its enforcement efforts “to address and/or avoid non-compliance related to these plans.”

All in all, I wish the IRS questionnaire wasn’t quite so long, complicated, and—for lack of a better word—intimidating. For plan sponsors, I’m sure it’s going to wind up being one more thing that has to be done when they already don’t have enough hours in the day—and one that could serve to plant a big red flag on their plan, to boot.

Here’s hoping that some good comes out of it—that the IRS does indeed discover some areas in which they can help plan sponsors do a better job of keeping these important programs in compliance—and that, perhaps, it will find that the programs are in better shape than they seem to think they are.

—Nevin E. Adams, JD

More information is at http://www.irs.gov/retirement/article/0,,id=223440,00.html

A version of the online questionnaire is online HERE