A Tale of a (Wobbly) Seat at the Table

 

I recently met some friends for lunch – but the only seats available were those high-back stools you basically have to climb up to in order to sit. But that wasn’t the worst of it.

As it turned out, my seat…wobbled. Which is to say that it basically rocked even as I sat there. Now, I’m all about rocking chairs in the proper setting, but when you’re trying to eat a meal (or enjoy a cold beverage), it’s annoying – particularly if you are one of those lean on the table types – and especially when your seat is high off the ground.   

And as I was sitting there desperately attempting to maintain my balance (it didn’t help that my companions found my predicament humorous), it called to my mind that retirement security has long been said to be based on the concept of a three-legged stool.

While the reference is somewhat dated, Social Security benefits were said to be one leg of a three-legged stool consisting of Social Security, private pensions and personal savings/investment.[i] There were, of course, some fallacies in the comparison, not the least of which was that those three legs[ii] (like that of my wobbly stool) weren’t equal, but they were all seen as essential to the overall stability of the end result. Time may have passed, and the components may have shifted, but crafting a credible, sustainable retirement income plan continues to require multiple prongs of support – and yet today, even those traditional legs are in need of some attention. 

Secure the Foundation

As with my initial attempts to correct the stool’s wobble, first and foremost, Social Security (and Medicare) needs to be shored up. 

To fully appreciate just how essential this program is, and how integral to a complete solution, just try finding a retirement income needs projection that doesn’t have as a foundational baseline Social Security benefits. Or consider that an emerging strategy to compensate for retirement savings shortfalls is to use those savings to postpone Social Security claiming in order to maximize those benefits. Indeed, considering how many Americans rely on Social Security as their sole – or at least a primary – source of retirement income, you’d think addressing the looming shortfall would be a matter of high priority for policy makers.

With all its funding shortcomings and demographic challenges, the “solution” is straightforward[iii] (raise FICA withholding rates and/or the income levels to which those rates are applied, or means-test and or reduce benefits). That said, the cost – political and economic – and will to do more than talk about the need to do more – remains sadly lacking.

It is, quite simply, “job #1” – and a foundation upon which everything else depends. Needless to say, perhaps – the sooner the better.

Open More ‘Doors’

The simplest solution to my wobbly stool was to find – another stool. Arguably, that just transfers the problem to another future diner, but... as it turned out, there were none available. Indeed, despite the protestations of a distinct, though all-too-readily published minority, the current private retirement system works well – but only for those who have access to it. While there’s little (other than human nature) preventing folks from simply going online and opening an individual retirement account – few do. In fact, data consistently shows that even modest ($30,000-$50,000 salary) income workers are twelve times more likely to save for retirement if they have access to a plan through work than those who don’t. But many – and these days that’s primarily those employed at smaller businesses – still don’t.  Our retirement vision of the future simply has to include universal availability. In the private sector only about half of full-time workers have that opportunity, and that’s a problem.

Now, small businesses are kept pretty busy just trying to stay IN business, but they have the same need to attract and retain talent as the Fortune 50, and a retirement plan benefit can certainly play a role. The recently passed SECURE 2.0 Act of 2022 provides massive incentives to do so (tax credits that, for those with 50 employees or less, basically make the plan free for the first three years), and, for those put-off by the potential complexity of providing those benefits, a “Starter K” that’s significantly streamlined compared with the traditional 401(k). Yes, there’s a provision that will require new plans of most businesses formed after Dec. 29, 2022, to offer automatic enrollment – but that will certainly help those workers save, and save more effectively. 

Let’s face it – even when you build it, they don’t always come. My guess is that all this will be effective to some degree – but that it won’t completely close the so-called “coverage gap.” But, as the dramatic new incentives in SECURE 2.0 have only just come online, we should probably give them a little time to sink in and take hold.

Improve the ‘Offramp’

At one point in my annoyance with my stool (yes, I had unsuccessfully attempted to remedy the situation with a wadded up paper napkin, but couldn’t quite get the balance correct) – and I gave serious thought to simply walking out and trying a different establishment (one that had better seating). But the food had been ordered, and I was the only one (apparently) struggling with the imbalance, so I decided to tough it out (though I have to say that dining whilst trying to maintain one’s balance doesn’t make for good digestion).

It is ironic that plans ostensibly designed to (ultimately) provide income in retirement, do such a poor job of providing…income in retirement. Now you can argue that the focus of these plans is to help workers accumulate savings FOR retirement, and that after that, they’re on their own – but there’s plenty of evidence to support the need for helping workers save and invest properly. And trust me, that’s a lot simpler than trying to figure out how to structure withdrawals in retirement. It may not be a legal obligation, but there’s a case to be made for employers who want to help assure that these workers save.    

All one has to do is look at the tremendous success of target-date funds – not only in the rate of adoption by plans and participants, but in how much better diversified 401(k) accounts are today versus a generation ago when everybody was making individual investment decisions. Already popular, that pace of take-up was spurred by the guidelines contained in the Pension Protection Act of 2006, and subsequent guidance from the Department of Labor. The question that needs to be answered then is, how/can we do something similar for helping get those retirement savers invested in a retirement income solution – but perhaps more critically, how can we get plan sponsors comfortable enough with the concept to adopt it the way they have target-date funds.      

The original SECURE Act took several key steps – helping address concerns about portability – how a retirement income account could be transferred during a recordkeeping conversion, or during an employee termination, as well as putting some additional clarity around a safe harbor to provide comfort to plan fiduciaries. At the same time, some intriguing new approaches emerged, as well as some refurbished solution – but then COVID-19 struck, and plan sponsors had much more to deal with than adding a retirement income feature to their plan, as they worried about the Great Resignation, navigating the sensitivities around working from home, and volatile markets.

The bottom line is that we don’t yet know how much these solutions – and the new legislative structures – will move the needle here. What we do know is that we need solutions that are cost-effective, relatively simple to explain, and readily available – and I know the retirement plan of the future will include those.

Accident ‘Tell’

While some still maintain that things like the 401(k) were an “accident,” in the space of a few decades it has become America’s retirement savings plan – in a way that the traditional defined benefit pension plan never really did in the private sector. That said, the past several years have seen dramatic improvements in access, efficacy, and participation in these programs – and it’s not been an accident.  The retirement system’s traditional three-legged stool has certainly undergone some needed rebalancing over time – and let’s face it, there may once have been three-legs to that stool, but they were NEVER equal.

There are many factors that influence these directions – legislation certainly plays a role, as does regulation – but ultimately it comes down to having goals, realizing that employers and the workers they employ are dealing with a wide variety of needs and circumstances, and trying to find a balance between them. To that end, the guidance and technical assistance of retirement plan advisors and third-party administrators are, and will continue to be, essential voices.     

Before our meal was finished, a table nearby opened up, and I was able to swap my wobbly stool for a more secure seat. Similarly, while a full resolution might not come to be as soon, or as well as we might hope/think – it seems to me that there are changes afoot and in place that have, and are continuing to move us in the right direction(s). Those will come to fruition all the sooner with the support and encouragement of trusted advisors, TPAs, recordkeepers, and the retirement industry generally.

Because if there’s anything more annoying than trying to sit on a wobbly three-legged stool, it’s not having any place to sit at all.

- Nevin E. Adams, JD 

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[i] These days, it’s arguable that private pensions and personal savings have been combined into retirement plan savings accounts, such as 401(k) and 403(b). Others have opined that there’s really a FOUR-legged stool, with that other leg being home equity.

[ii] According to Social Security, “the earliest use of this metaphor which we have been able to document was by Reinhard A. Hohaus, who was an actuary for the Metropolitan Life Insurance Company. Mr. Hohaus, who was an important private-sector authority on Social Security, used the image in a speech in 1949 at a forum on Social Security sponsored by the Ohio Chamber of Commerce. Hohaus, however, had a slightly different "stool" in mind than came to be understood in later years. His three-legged stool consisted of: private insurance; group insurance; and Social Security.”

[iii] I was no fan of this in 1983 when all of this was done either – but…

 

Could Employer Contributions Actually Lead to Leakage?

I recently stumbled across an academic study that claimed to find a correlation between higher employer contribution rates and leakage.

I will confess to a certain skepticism at that finding. There are, after all, a well-established series of things that contribute to leakage, broadly defined as distribution of retirement savings prior to retirement – but employer matching contributions – and certainly more generous matching contributions – have never been on that list.

The study – innocuously titled “Cashing Out Retirement Savings at Job Separation” – spends most of its 20-odd pages talking about leakage, its impacts on retirement security, and some possible solutions.  That said, one needs read no further than the abstract of this paper to find its surprising conclusion regarding one such underlying cause; its authors “estimate that a 50% increase in employer/employee match rate increases leakage probability by 6.3% at job termination.” More specifically, “The higher the proportion of one’s 401(k) balance contributed by the employer, the more likely employees are to cash out, holding constant balance and covariates.”

Proportion ‘Ate?’

That latter part is significant, since we know that participants with lower balances are more likely to have their balances distributed at job separation (so-called “force-outs” being typical at $1,000 or less). In fact, the paper acknowledges that “A higher balance discourages leakage holding all else constant.” Even so, a 6.3% increased probability might be “statistically significant,” but it most assuredly isn’t significant in economic terms. But to see any kind of connection between a more generous employer match and leakage just seemed – unusual. Particularly since – and as the study’s authors acknowledge – “Employers with more generous matches care about their employees’ well-being in retirement, but unintentionally nudge employees to cash out when they change jobs.”

The research cites a relatively robust sample (162,360 employees terminating from 28 retirement plans form 2014-2016 from a recordkeeper “that covers 15% of the U.S. workforce”), from a variety of industries. They acknowledge that the cash-out percentage (41.4% of employees cashing out at job separation) in this sampling is “strikingly high,” although in this group[i] – though interestingly “only 27.4% of terminating employees ever carried a loan, and only 3% of those defaulted.” The latter data point stands out because previous studies have found that outstanding loans defaulted at job separation are a significant cause of leakage. And – while averages are notoriously unreliable datapoints, the terminating participants in this sample had an average account balance of $46,556.[ii]

Reasons Able?

Of course, these researchers were looking for a connection between employer contributions and leakage – and, having found one – held out four possible rationales for that connection. First, they considered a scenario where workers, cognizant of the higher match actively planned to “leak” – basically “over-saving” to obtain the match, cutting into the income they actually needed for current expenses, and then needing the leakage to fill that hole. Secondly, they opined that a higher employer contribution rate during employment might engender a higher level of job security, and a correspondingly higher spending rate by the worker – that, upon termination, might then need to be funded by higher rate of withdrawal/leakage. Thirdly, they thought that workers might retain a sense of mental accounting that compartmentalized the employer match as “free” money, rather than sums set aside specifically for retirement (though the leakage impacted more than that account). Finally – and this is the rationale they landed upon to explain this “account composition” effect – that individuals who contributed a smaller proportion of their 401(k) balance (relative to the match) may be prone to think of their accounts at job separation as a readily spendable pile of cash (less so if one contributed more).

All of this felt to me like they were trying (too hard?) to rationalize behavior that wasn’t “rational.” That said, the researchers nonetheless conclude that “exiting one’s firm and being told that a sum is available can transform a perceptually illiquid source of long-term retirement security into a psychologically liquid pile of cash. Terminating employees spend the money when, arguably even for the minority of employees involuntarily terminated, there are good options of reducing household spending, adding gig forms of employment, or leveraging home equity lines of credit to supplement unemployment benefits until back in the workforce.”

Ultimately, it was impossible to really get inside the numbers and assumptions presented to ascertain how much of this conclusion was data-based versus “extrapolation.” The contributions labeled as matching looked to be more than just standard matching, perhaps including QNECs or safe harbor contributions as well, but there wasn’t enough detail in the paper’s tables to confirm that. As noted above, the withdrawal rates were high, and the “average” account balance presented clearly covered a wide variety of possibilities. And let’s not forget that, even with those considerations, the additional rate of leakage attributed to these generous employer contributions was pretty small.

There is, however, at least one conclusion worth drawing from this – and that’s that if the worker considers these accounts “free” money – and goodness knows, the employer match has long been positioned as such – they might well not realize the price they will pay, both at the point of distribution (taxes and penalties) – and ultimately at retirement – for spending those retirement savings…now.

- Nevin E. Adams, JD  

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[i] Another aspect of this group that struck me as odd – only about two-thirds of this group took a one-time total cashout, whereas another 21% depleted their 401(k)balances in two or more withdrawals within eight months.  One would normally expect traditional leakage patterns to be tied to a single withdrawal, rather than a series.

[ii] With an understandably large standard deviation of more than $97,000 – I say understandably because individuals with that size account balance tend to stay with the plan (an easy default) or rollover to an IRA or other plan). As the authors acknowledge, “A higher balance discourages leakage holding all else constant.”

The Big Retirement Question

I’ve been honored with a lot of praise and congratulations over the past couple of months about my “retirement” (and not a little skepticism about my understanding of the term) — but in quiet moments, there’s been one question that keeps coming up.

That question — and it generally arises once topics like “what are your plans,” “are you going to move,” and “can your wife really stand having you around all the time” have been broached — is, quite simply, “how do you know when it’s time to retire?”

Honestly, it’s a complicated question, and one to which the answer is deeply, even intimately, personal.  For many it’s not their choice, of course. Surveys suggest that for significant minorities the timing is imposed on them by external factors; a job layoff, a physical impediment, or perhaps caretaking responsibilities. While none of those were factors in my decision, at the outset, it’s worth bearing in mind that the “when” is not always in your control.

For most people — including THIS person — the calendar plays a role. Sixty-five is one of those milestone markers to which folks (and plan documents) still “anchor” — I say “still” because full retirement age under Social Security for today’s retirees is no longer 65. You don’t actually have to be retired in order to claim Social Security — but as I eyed that decision point, I had Social Security’s marker in mind. The reality is that there remains a certain age range in which thoughts of retirement can be considered “normal.”

Regardless of age (or Social Security) considerations, a big focus of my retirement timing was about finances. More specifically, first knowing how much our monthly living costs (and that knowledge is a lot more accurate closer to actual retirement than it would have been 30 years ago). That said, it remains something of a moving target, what with surging gas prices, and the reemergence of inflation. We tend to live within the bounds of a known paycheck, one that often (though not always) makes an effort to keep pace with such things. As one contemplates the uncertain “certainties” of a more-or-less “fixed” income — well, when you’re looking out over a financial future that is likely to be twenty years — or more — even the most prescient crystal ball gets a little fuzzy.      

All that starts with a baseline, of course, and thanks to my wife’s spreadsheeting and budgeting skills, it was pretty easy to extrapolate what our baseline expenses would be once work-related expenses (including things like 401(k) contributions) were behind us, including a cushion of sorts for the travel we have in mind, and some “new” considerations for things like healthcare.[i]    

With that financial floor established, we then had “only” to see what regular sources of income[ii] we had to meet those expenses. In that regard, we were fortunate — able to structure regular streams of retirement income that exceeded our baseline expenses while still preserving the larger pools of retirement savings that we had set aside over our working careers for things beyond that baseline out into a distant future. 

At that point we had dealt with what for many is the big obstacle — knowing that we could afford to walk away from that regular paycheck, and that we could maintain our current lifestyle. Now, that wasn’t the first time we had run through those estimates — doing so had already helped us establish savings goals over the years — but the calendar provided a specific focus with regard to timing.

And then COVID hit. 

That turned out to be a mixed blessing. For all the awful, scary things that came with the pandemic, it gave me and my wife of (then) 35 years an extended period of time together in close quarters. Our nest was empty, but for two four-legged children — and it affirmed not only our relationship, but the comfort of knowing that I could be not only content, but happy being at home. Make no mistake, if there’s one big regret that one hears retirees express, it’s that they weren’t ready for the shift to a home focus (not to mention their spouses). COVID provided me with a real-world preview of that experience — and even with the interruptions of incessant Zoom and Teams calls (or perhaps because of them?) — I could tell I was … ready.

So, how do you know when it’s time to retire? Well, for my money (literally), you need to have the interest — the motivation — to seek less of the “what you have to do” so that you have more time for the things you want to do. That needn’t be age-related, of course — but life’s ongoing obligations sometimes require a deferral of the latter in the interests of the former. 

To that point you also need to have the money figured out — because the things you want to do may not put food on your table or a roof over your head. That said, you might find that you can live more simply, or live elsewhere — and enjoy life more with…less. It’s easy to get caught up in the pace of work and life — and to push off for another time the opportunity to “smell the roses” — all the more so if you love and enjoy your work.     

Finally, it’s really important to have the right mindset to be ready to step outside the confines of a W-2 employment structure — that you have people or interests or hobbies that can (continue to) provide meaning, fulfillment, and joy in this next chapter of life.

It’s still early days for me in this new chapter — and I’ll concede that by most outward appearances I haven’t retired at all. Trust me, like any new “job” there’s a learning curve. And I’m working on it.

- Nevin E. Adams, JD

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[i] We didn’t appreciate it initially, but to date Medicare planning has proven to be the most stressful because, while the coverage is surprisingly good, premiums are income-based — and Medicare starts with the last official income number it has — your 1040 AGI…FROM TWO YEARS AGO. Perhaps needless to say (except to Medicare), my post-retirement income is less than it was two years ago — but, fortunately, we were successful in making our case on that point.

[ii] I (finally) consolidated my 401(k)s. I’m happy to say that the depositing of those savings has gotten a LOT more efficient over the years. However, I’m disappointed to say that getting those funds OUT is about as tedious as it has always been (one of the reasons I had put off consolidation) — and EVERYONE, it seems still insists on doing so via a hardcopy check that has to get to you via the U.S. mail (though you CAN pay a ridiculous premium to expedite that delivery) — UNLESS you’re rolling it over to an IRA on their platform. Gee, I wonder why… 

Reminders and Remberances

As we headed to San Diego last week, two things were uppermost in my mind.

The Summit, of course — you don’t spend 10 months of your life focused on pulling together (and executing) the nation’s largest (and for my money, best) retirement plan advisor conference without running through your mind a constant list of things to be done, things that you think were done, but you’re not sure, and, of course — the things you COMPLETELY forgot about until the day before you fly out.

The other thing was my father. See, April 1 was the anniversary of my father’s passing, and while it’s been 17 years, I still remember that day. It was unexpected — on a Saturday morning when such calls are inevitably good or awful news. I had just wrapped up my weekly column when I got that call — from my sister. My father, who had been battling cancer for several years now, had suffered a series of heart attacks. By the end of the day and, sadly, several hundred miles away from our home — he had passed.

He had, by then, had nearly a decade’s worth of retirement — not as long as most hope for, but to that point he had outlived any of the men in his family line — and he was, as they say, prepared to meet his Maker. There’s a great peace with knowing such things amidst the sorrow and heartache, and I was grateful for it, and the comfort it gave my mother.

We know that, as ironic as it sounds, death is a part of life. Thoughtful individuals prepare for the possibility of death — through faith and, with luck, sound financial planning. Most don’t dwell on those realities on a daily basis, and that’s doubtless a good thing. In my Dad’s case, he — thanks to my mother’s example — had done what they needed to do to sustain their then-current, albeit modest, lifestyle in retirement — in no small part a result of the sacrifices they made during their working lives.

In this business, we spend a lot of time worrying about the risks of outliving our retirement savings. Participants increasingly seem to rely on an assumption that they will work longer, or save more later, to make up for their current shortfalls. Seventeen years later my Mom continues to benefit from those earlier decisions. Don’t bother telling me that those of modest incomes can’t or won’t save.  

As we leave San Diego this week — chock full of inspiring keynotes, insightful content, and amazing networking experiences — I’ve been reminded, anew and afresh, of just how important what WE do, and how we do it — as individuals, and as industry professionals, is in terms of helping provide a sustaining post-career lifestyle. And how lucky I am to be part of that effort.

To this day my parents’ example reminds me that those results come from decisions — big ones, and a zillion small daily ones — to set aside for the post-career life we hope to have. It is a decision, a choice.

Here’s hoping more of us make the right one — while we can — so that those we leave behind will have better, easier ones.

- Nevin E. Adams, JD

A ‘Value’ Proposition

A few weeks back, an industry friend commented that, while we had certainly done a great job promoting the NAPA 401(k) Summit, that campaign hadn’t fully captured the essence of what makes “the Summit” different. Let me try here.

There are, admittedly, a lot of conferences out there — and most promote — as we do — the great content, compelling keynotes, robust networking and great accommodations.  Some of them actually deliver on those promises. But since everyone says they do, how do you know the difference?

The most obvious metric is, perhaps growth. Time-pressed advisors don’t waste their time going to conferences that don’t deliver the “goods.” The Summit has now been around for more than 20 years — and it’s challenging to sustain consistent growth over that long a stretch. That said, when I arrived here back in 2014, my first Summit “here,” we had about 1,300 attendees — and about a third were advisors.  And we were pretty darned proud of that ratio.

But this year we’re looking at about 2,400 — and almost exactly half are advisors. You can do the math. 

Now, that’s the what — but it’s also part of the “why.” And for my money, a big part of the “why” is because of the “who.” I’ve long referred to the Summit as the nation’s retirement advisor convention for one simple reason; everybody who is anybody in the retirement plan space will be there — and they don’t just swing by to do a quick “drive by” presentation — they stay.[i] So, whether you’re looking to reconnect with old friends, to connect with new ones, or to meet and/or learn from others — the Summit has you covered on all fronts.

We do approach our content a bit differently than most, I think. While it’s gotten to be pretty common for events to boast of their steering bodies, many, perhaps most — are just figureheads to the actual agenda development. They’re a group to whom the folks doing the “real” work of planning, structuring and implementing the event keep updated, mostly for a sense of validation and the occasional course correct. Oh, and so that the event can “show off” the luminaries that have agreed to lend their name (and face) to promote its bona fides.

Our steering committee is informed not only by their own experience and perspective as some of the industry’s leading advisors, but by the reader polling that provides insights from you. We don’t just ask them what they think we should include (or merely ask for that affirmation of a sponsored agenda platform), we ask them what session(s) they are willing to “own” — and by that we literally mean carrying responsibility not only for panel/speaker selection, but for ensuring that those chosen fulfill their responsibilities — up to and including making sure that the session delivery itself lives up to the high standards of the nation’s retirement plan advisor convention. They literally have skin in the proceedings. And, unlike many events, we choose the topics, and only THEN do we match speakers/perspectives with those topics. The result? Well, despite a solid diversity of topics, attendees often “complain” that they want to attend two or three “competing” sessions all at the same time.     

There are, of course, a myriad of ways to build and structure events — note here that I haven’t said a word about our keynotes, or even NAPA After Dark (that has in just a few short years become the pinnacle of networking events). But, aside from the practical information, valuable insights, vibrant networking — and yes, world-class entertainment — it’s worth remembering that among all the (other) things that set the NAPA 401(k) Summit apart — unlike every other advisor conference out there — your NAPA 401(k) Summit registration helps support the activities of NAPA — your advocacy, information and education organization — not the bottom line of some corporate media organization or some private equity firm. NAPA not only informs and educates — it literally is your voice with regulatory agencies and legislative bodies both here in the nation’s capital — and across the nation. 

And more importantly, your attendance at the NAPA 401(k) Summit remains a unique investment in your future — and the future of your profession.

See you in San Diego!

 - Nevin E. Adams, JD

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[i] And there’s no better testimonial to the value of the Summit and the commitment to be part of it than the numerous courageous (and sometimes harrowing) efforts undertaken by many to get to Summit — see “Planes, Trains, and …U-Hauls?”

"Stuck" in the Muddle?

This weekend most of America will undergo a rather painful change.

I’m talking about the legally mandated move to Daylight Saving Time (for most of us). That’s right, at 2 a.m. on March 12, clocks around the nation will “spring ahead” to 3 a.m., reversing course from last fall when the move was to “fall back” to standard time. It’s a “movement” laid at the feet of none other than Benjamin Franklin who, in what’s been characterized as a “satirical” letter to the editor of The Journal of Paris in 1784 pitched “the economy of using sunshine instead of candles.”

Mr. Franklin may have been satirical, but the economic rationale for this artificial time contrivance lingers on. It was certainly a factor in 1916 when Germany saw adjusting the time as helpful to its war effort.  Great Britain embraced the same logic the following year, and by March 1918[i] the (now at war) United States was on board — well, sort of. It only lasted till the end of that war, was picked up again (briefly) during WWII (when it was called “War Time”), though afterwards it was optional (that must have been fun)[ii] — and then pretty much faded from sight until the mid-1960s.      

This decision is often laid at the feet of agriculture (more specifically farmers, who generally speaking abhor it), but that business tends to be driven by the actual patterns of the sun, rather than the artificial constraints of a clock (as anyone who has pets that expect to be fed at certain times whatever the clock may show can attest). The reality is that the science on cost savings related to these shifts remains contradictory at best. In fact, there’s a better case to be made for the negative effects these shifts have on our body’s natural circadian rhythms, with studies suggesting it has led to increased traffic accidents and even heart attacks. 

What About Retirement?

Regardless of its origins, DST remains something of an artificial constraint, founded on one set of (arguably) archaic assumptions of (certainly now) questionable validity. It’s not entirely unique in that respect. Consider, for example, the idea of a starting contribution rate of 3% for automatic enrollment plans. Now, since the enactment of the Pension Protection Act of 2006, we’ve at least had a legislative “anchor” for an assumption that is, and has long been, almost uniformly seen as insufficient (not just to achieve retirement security, but in many cases to maximize the employer match). 

But for decades before that (harkening back to a time when some marketing genius labeled it “negative election”), 3% became a de facto default rate. Sure, there was some logic (rationalization?) that it was small enough to discourage participant opt-out (and, looking at the opt-out rates for state-run IRAs with a higher default, there’s perhaps some merit to that concern) — but mostly it anchored on long-standing practice — that was, in turn, anchored on an obscure reference in an example in an IRS bulletin.[iii] One that, as it turns out, was carried over into the automatic-enrollment requirement for new plans as part of the SECURE 2.0 Act of 2022.   

That said, and despite those traditional, limiting strictures, it’s encouraging to see plan sponsors take the initiative (likely with the encouragement and direction of plan advisors) to go beyond that minimum — so much so that 3% is no longer the most common default deferral rate among 401(k) plans, according to the Plan Sponsor Council of America’s 65th Annual Survey of Profit Sharing and 401(k) Plans. 

We seem to be stuck with DST and its implications for yet another season, despite what appear to be annual legislative attempts to undo it. And so, come Monday morning most of us will spend the rest of that week (and perhaps part of the following) a bit discombobulated. 

As for automatic enrollment defaults, it’s a good time to remember that we aren’t “stuck” with the traditional defaults — and there are plenty of good reasons to do “better.”

Nevin E. Adams, JD 

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[i] Fun fact: In 1920, The Washington Post reported that golf ball sales in 1918 — the first year of daylight saving — increased by 20%.

[ii] Daylight saving time didn't become standard in the US until the passage of the Uniform Time Act of 1966, which mandated standard time across the country within established time zones. It stated that clocks would advance one hour at 2 a.m. on the last Sunday in April and turn back one hour at 2 a.m. on the last Sunday in October. States could still exempt themselves from daylight saving time, as long as the entire state did so. In the 1970s, due to the 1973 oil embargo, Congress enacted a trial period of year-round daylight-saving time from January 1974 to April 1975…in order to conserve energy.

[iii]Page 8 — an example regarding "negative election" used 3%... https://www.irs.gov/pub/irs-irbs/irb98-25.pdf

A Swan Song? Hardly.

As you have (hopefully) heard by now, as of tomorrow (March 1), I am entering a new phase of life, one still affectionately referred to as “retirement.” 

Not retirement in the traditional sense, though I do hope to work less hours, forego trips to the office, and spend more time doing the things I want, rather than the things I must. In recent months much has been made of how difficult it is for younger workers to grasp the reality of retirement—but the reality is that retirement “myopia” is not limited to younger workers. Indeed, the reality is that I am not 100% certain what that will be like, though I have described my vision of mine as being akin to Saturday mornings—no alarm, no commute, no meetings, and a much-reduced volume of email to read/respond.  Here’s hoping.

I’ve done the math (lots of times), so the finances are fine. COVID gave me and my wife plenty of time together, so I’m not worried that I’ll drive her nuts by being around all the time—quite the contrary, even after nearly 37 years of marriage. We’ve got family to visit, a short, but growing bucket list of places we want to see—and a book I want to write. I’ll still have the opportunity to write for NAPA (at least until the plaintiffs’ bar moves on to other things and/or we actually manage to close the coverage gap!), to be involved in the NAPA 401(k) Summit, and to continue my podcast series with Fred Reish.  Indeed, for those of you on the “outside” it may not look like I have retired at all.

That said, a big part of being able to “retire” (at least in good conscience) is to know that you’re leaving things in good hands, and I am blessed to be able to do so. Not just to hand the “keys” (so to speak) to John Sullivan, who is already a known force for good in this industry, but the capable hands that have long comprised the editorial team here—Ted Godbout & John Iekel—as well as Tony Descipio who manages our ad placements, Brandon Avent, who preps and publishes our newsletters every day, and perhaps most importantly here, Ethan Durant who, despite the ridiculously short timeframes he’s given to work with, manages to help our important content look so very good. Oh, and just wait till you meet Joey Santos-Jones, our new Director of Editorial Content—the newest member of the editorial team!  

So this post is not really a “swan song,” at least not in the traditional sense. Swan songs tend to be thought of as sad things—after all, it’s the music playing as background for a dying swan that gives us that reference point. But the reality is that “retirement” in all its many forms, is what “we” do—and what I have been committed to my entire working career—it’s what “this” has all been about—to (help) provide the opportunity for working Americans to be able to step aside from the labor of a lifetime and to be able to relax and “smell the roses.” It has long been my aspiration to help make that a reality for as many as I could—and though my ministrations over the past couple of decades may have been indirect, I draw great pride and pleasure from hearing from so many of you the positive impact that my work—our work—here has done. 

I’m thankful for the opportunity I have been given throughout my career, and especially here—to have a chance to not just explain, but to shape retirement policy with your support, and that of the incredible team here at the American Retirement Association. I treasure what I have learned and continue to learn, as well as the people it has been my great joy to work with and learn from over the years—including each and every one of you. 

More importantly, I look forward with great anticipation to this next phase of my career…as we all continue… working for America’s retirement.

- Nevin E. Adams, JD

Second Thoughts About the ‘Third Rail?’

In recent days—notably at the State of the Union address—Social Security is back in the headlines.

Granted, its invocation seems largely intended as a political dividing rod, but it seems today that the vast majority (and despite the veiled insinuations, perhaps the entirety) of Congress and the President are committed to that system’s preservation, or at least rebutting its diminution. It appears that touching Social Security remains the “third rail” of American politics. That said, it’s going to take more than bold podium pontifications to fulfill that commitment.

It’s been called a Ponzi scheme by its critics—and, while not technically correct, there is a familiar element at work—the notion that money being deposited to the system now is basically going to be paid out to other beneficiaries. Indeed, in most Ponzi structures the scheme “runner” generally pays off longer-term participants with money invested by newer investors. Sooner or later, there are not enough new investors to fulfill those expectations and the whole thing blows up—though, depending on the sales skills of the Ponzi purveyor (and the expectations of the investors), it can run for years. Certainly one of the funding issues with Social Security is a result of having fewer new contributors relative to the payout to older participants,[i] if not by number, then by contribution amount(s).    

However, technically speaking, Social Security is not an investment program. Despite those individual withholding statements provided occasionally by the Social Security Administration, nobody has a Social Security “account” into which all those years of FICA withholdings (not to mention the employer contributions) are deposited. People who see those Social Security checks in retirement as a return of the money they put in (with interest) are misguided (at best), though politicians have long found it in their interest for workers to see a link between the two.

Whatever that system’s historic success, and the dependence of the nation’s retirees on its benefits, most surveys find a deep skepticism among the populace as to its long-term financial viability. However, that’s not a new sentiment. Along the way adjustments have been made over time to address those potential shortfalls—the retirement age has been lifted, the taxes withheld from current pay to fund that system have been increased, the benefits eventually paid from that system have been subjected to taxation (effectively reducing benefits)—and these days, most honest politicians will admit that those same kinds of changes will be required again to avert a future crisis.

Whatever you want to call it, to my eyes, Social Security is basically a societal retirement income insurance policy. Those FICA withholdings are premiums and, depending on our life circumstances, we may or may not collect on it. One thing is for sure, however: Whether it’s for life insurance, car insurance, or Social Security, when we make those payments, we expect that we will receive the benefit(s) for which we contracted. Older workers are, naturally, counting on receiving those benefits—because they have been told they can expect them by a reliable source, because they have spent a lifetime dutifully making those payments, and because they have seen their elders do the same.

Not only that, just try finding a retirement income needs projection that doesn’t have as a foundational baseline Social Security benefits. Or consider that an emerging strategy to compensate for retirement savings shortfalls is to use those savings to postpone Social Security claiming in order to maximize those benefits.[ii] Indeed, considering how many Americans rely on Social Security as their sole—or at least a primary—source of retirement income, you’d think addressing the looming shortfall would be a matter of high priority for policy makers. But for the most part—and the current enflamed rhetoric notwithstanding—it unfortunately still seems to be a problem that everyone agrees—someone else needs to fix.

- Nevin E. Adams, JD 

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[i] In 2022, there were an estimated 2.8 covered workers per each Social Security beneficiary. By 2035, the Trustees estimate there will be 2.3 covered workers for each beneficiary.

[ii] Some of the pushback on that argument is a concern that those future benefits will be trimmed—directly or through expanded “means” testing.

'Hidden' Figures

This week was Valentine's Day—and, as usual, there’s been the typical seasonal promotions for flowers, candy, and even pajamas. 

I’ve been pretty good over the years remembering those type events—anniversaries (wedding AND dating), birthdays and, yes—Valentine’s Day. But sometimes the time gap between my remembering the date and actually getting around to doing something to commemorate it has been problematic. With Valentine’s Day that can be particularly painful, if only because so many others are scrambling to do the same thing—and at a time when delivery services (and costs), not to mention growing season(s) can be in short supply, relative to the need.

Several years back, I was running late in my preparations—and spotted an email touting a dozen roses for $24.99 (they’re a LOT more expensive now). Of course, for that price (even then), you could only get them in red (though it was Valentine’s Day, after all), and you actually got a glass vase included in that price (with options to “upgrade,” of course). 

So, I’m feeling pretty good about my bargain-hunting, but then the “other” charges emerged; “standard” delivery was another $12.99, and—at least at that (late) date, it cost (another) $9.99 to guarantee Valentine’s Day delivery, another $14.99 if you want it there in the morning, and there’s a “care & handling charge” of $2.99, regardless of delivery date or time. In fact, by the time you add in taxes those $24.99 roses will run you… well, quite a bit more than $24.99.

Not that you’ll see that all presented in one place—well, until the very last screen, anyway.

Surprise ‘Zing’ 

I wonder sometimes if that isn’t how those who request a hardship withdrawal feel—though, disclosures notwithstanding, it’s not like they can see what it’s actually going to cost at the point they make the request.

Oh, they know the amount they need, and presumably request. But then there’s the 20% withholding that comes off the top, but then, come tax time, they’ll find out if that 20% withholding was “enough.” At the same time, they’ll likely discover the 10% penalty (for those who aren’t yet 59½). Less obvious is the retirement savings “ground” they’ve lost to the customary six-month suspension of contributions (and match). And that’s not considering the 401(k) loan they likely had to take first because, after all, we have to make really, really sure that you absolutely have no other way to get to that money. Those “surprises” are likely to be lessened with the emergency savings and withdrawal provisions of the SECURE 2.0 Act of 2022, of course.[i] 

And then there are the surprises that come WITH retirement. That’s when you “discover” the DISadvantage of pre-tax savings, as Uncle Sam (and his state and city “cousins”) line up for their postponed “cut.” It’s also when Social Security (and Medicare) look to that as fresh income against which benefits (and the cost of benefits) is now means-tested (a.k.a. reduced/taxed).   

Now, if all that seems like a particularly depressing theme for Valentine’s Day, fear not. The impact of the “hidden” costs of retirement—like the hidden costs of that floral arrangement can be muted, if not mitigated, by not waiting until the very last minute to make preparations …

- Nevin E. Adams, JD 

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[i] We’ll save for another day the potential impacts on future retirement savings.

Could Super Bowl LVII Flummox Your 401(k)?

Will your 401(k) be chipped by the Chiefs—or soar with the Eagles?

That’s what adherents of the so-called Super Bowl Indicator[1] would likely conclude, after all. It’s a “theory” that when a team from the old National Football League wins the Super Bowl, the S&P 500 will rise, and when a team from the old American Football League prevails, stock prices will fall.

It’s a “theory” that has been found to be correct nearly 80% of the time—for 41 of the 56 Super Bowls, in fact. Not that it hasn’t had its shortcomings.

One need to look back no further than last year’s victory by the Los Angeles Rams that should have been a portent of good times, only to see the S&P 500 slump more than 19% for its biggest loss since 2008.  And while the previous year’s victory by the NFC’s Tampa Bay Buccaneers bolstered the premise behind the “theory,” the year before that the win by the AFC’s (and original AFL) Kansas City Chiefs over the then-NFC Champion San Francisco 49ers undermined its track record (or did your 401(k) miss that 18.4% rise in the S&P 500?). Or how about the year before that when the AFC’s New England Patriots (who once upon a time were the AFL’s Boston Patriots) bested the NFC champion Los Angeles Rams—but the S&P 500 was up more than 30% that year (2019).

Or, looking the other way, the year before that a win by the NFC champion Philadelphia Eagles (back for this year’s contest) against the AFC Champion Patriots turned out to be a loser, marketwise, with the S&P 500 down more than 6% (though for most of the year it was quite a different story). Ditto the year before, when the epic comeback by those same AFC Champion Patriots against the then-NFC champion Atlanta Falcons failed to forestall a 2017 market surge.

Now, one might think that the real “spoiler” to this market “theory” is the New England Patriots—but the year before that, the AFC’s (and original AFL) Broncos’ 24-10 victory over the Carolina Panthers, who represented the NFC, also proved to be an “exception.”

Market Makings

You might well wonder why, in view of that consistent string of “exceptions” that we’re still talking about this “theory”—but, as it turns out, that’s an unusual (albeit consistent) break in the streak that was sustained in 2015 following Super Bowl XLIX, when the AFC’s New England Patriots (yes, they show up a lot) bested the Seattle Seahawks 28-24 to earn their fourth Super Bowl title.

It also “worked” in 2014, when the Seahawks bumped off the legacy AFL Denver Broncos, and in 2013, when a dramatic fourth-quarter comeback rescued a victory by the Baltimore Ravens—who, though representing the AFC, are technically a legacy NFL team via their Cleveland Browns roots (this is where things start to get confusing, as the Ravens, who were the Browns moved to Baltimore in 1995 (though the NFL still views them as an expansion team) filling the hole left by the then-Baltimore Colts’ 1984 “dead of night” move to Indianapolis.

Admittedly, the fact that the markets fared well in 2013 was hardly a true test of the Super Bowl Theory since, as it turned out, both teams in Super Bowl XLVII—the Ravens and the San Francisco 49ers—were, technically, NFL legacy teams.

However, consider that in 2012 a team from the old NFL (the New York Giants) took on—and took down—one from the old AFL (the New England Patriots—yes, those New England Patriots… again). And, in fact, 2012 was a pretty good year for stocks.

Steel ‘Curtains’?

On the other hand, the year before that, the Pittsburgh Steelers (representing the American Football Conference) took on the National Football Conference’s Green Bay Packers—two teams that had some of the oldest, deepest and, yes, most “storied” NFL roots, with the Steelers formed in 1933 (as the Pittsburgh Pirates) and the Packers founded in 1919. According to the Super Bowl Theory, 2011 should have been a good year for stocks (because, regardless of who won, a legacy NFL team would prevail).

But as some may recall, while the Dow gained ground for the year, the S&P 500 was, well, flat (dare we say “deflated”?).

And then there was the string of Super Bowls where the contests were all between legacy NFL teams (thus, no matter who won, the markets should have risen):

• 2006, when the Steelers bested the Seattle Seahawks;
• 2007, when the Indianapolis Colts (those old Baltimore Colts) beat the Chicago Bears 29-17;
• 2009, when the Pittsburgh Steelers took on the Arizona Cardinals (who had once been the NFL’s St. Louis Cardinals); and
• 2010, when the New Orleans Saints bested the Indianapolis Colts, who, as we’ve already remarked, had roots dating back to the NFL legacy Baltimore Colts.

Sure enough, the markets were higher in each of those years.

As for 2008? Well, that was the year that the NFC’s New York Giants upended the hopes of the AFL-legacy Patriots (yes, those Patriots) for a perfect season, but it didn’t do any favors for the stock market. In fact, that was the last time that the Super Bowl Theory didn’t “work” (well, until the year before last—oh, and the year before that—and the year before…).

Patriot Gains

Times were better for Patriots fans in 2005, when they bested the NFC’s Philadelphia Eagles 24-21 (yep, those Eagles). Indeed, according to the Super Bowl Theory, the markets should have been down that year—but the S&P 500 rose 2.55%.

Of course, Super Bowl Theory proponents would tell you that the 2002 win by the New England Patriots accurately foretold the continuation of the bear market into a third year (at the time, the first accurate result in five years). But the Patriots’ 2004 Super Bowl win against the Carolina Panthers (the one that probably nobody except Patriots fans and disappointed Panthers advocates remember because it was overshadowed by the infamous “wardrobe malfunction”) failed to anticipate a fall rally that helped push the S&P 500 to a near 9% gain that year, sacking the indicator for another loss (couldn’t resist).

Bronco ‘Busters’

Consider also that, despite victories by the AFL-legacy Denver Broncos in 1998 and 1999, the S&P 500 continued its winning ways, while victories by the NFL-legacy St. Louis (by way of Los Angeles) Rams (that have since returned to the City of Angels) and the Baltimore Ravens (those former “Browns”) did nothing to dispel the bear markets of 2000 and 2001, respectively.

In fact, the Super Bowl Theory “worked” 28 times between 1967 and 1997, then went 0-4 between 1998 and 2001, only to get back on track from 2002 on (though “purists” still dispute how to interpret Tampa Bay’s 2003 victory, since the Buccaneers spent their first NFL season in the AFC before moving to the NFC).

Indeed, the Buccaneers’ move to the NFC was part of a swap with the Seattle Seahawks, who did, in fact, enter the NFL as an NFC team in 1976 but shuttled quickly over to the AFC (where they remained through 2001) before returning to the NFC.[2] And, not having entered the league until 1976, regardless of when they began, can the Seahawks truly be considered a “legacy” NFL squad?

Bear in mind as well, that in 2006, when the Seahawks made their first Super Bowl appearance—and lost—the S&P 500 gained nearly 16%.

As noted above, the Eagles have played in three Super Bowls—but only won once—defeating Tom Brady and the New England Patriots 41-33 in Super Bowl LII in 2017 (they previously lost to the Oakland Raiders in Super Bowl XV and to the Patriots in Super Bowl XXXIX). But those outcomes haven’t really lined up with what the Super Bowl Theory suggests. 

As for the Chiefs, they’ve been there before—four times—but with long stretches in between and mixed results. They were in the very first (though back then it was called the AFL-NFL World Championship Game), losing to the Green Bay Packers, but made it back to Super Bowl IV, where they beat the Minnesota Vikings (the first of the four Super Bowls that team would lose). And then, it was a long 50-year stretch between then and 2020 when they bested the 49ers 31-20—only to come back the next year (2021)—and lose to Tom Brady and the Tampa Bay Buccaneers in Super Bowl LV. Again, a mixed contribution to the SB Theory.

The Eagles are the designated “home” team—and given that the game is taking place in an NFC Stadium, so this doesn’t come as a surprise. That said, they’re going to be wearing their home green jerseys—and the Chiefs will be wearing white—and the team wearing white jerseys in the Super Bowl has won 15 of the last 18 Super Bowls (though the last time Kansas City won they were wearing red).

One more thing to watch for those of you into such things; the winner of the coin toss has lost the Super Bowl eight straight years. In fact, the last team to win the coin toss and win the game—was the Seahawks against the Broncos in Super Bowl XLVIII. Yeah, it’s been a while.

Finally—if you’re feeling like the Super Bowl is later and later, you’re not imagining things. In fact, this year’s contest is the SECOND latest ever. The latest? Last year’s contest between the Rams and the Bengals.

All in all, and particularly in view of the exciting playoff games that have led up to it, it looks like it should be a good game.

And that—whether you are a proponent of the Super Bowl Theory or not—would be one in which regardless of which team wins, we all do!

- Nevin E. Adams, JD

 

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[1] An alternate theory linking the Super Bowl to stock market performance in reverse fashion postulates that Wall Street’s results can be used to predict the outcome of the game. According to this theory, if the Dow rises from the end of November until Super Bowl game day, the team whose full name appears later in the alphabet will win. Some people have too much time on their hands….

[2] Note: Seattle is the only team to have played in both the AFC and NFC Championship Games, having relocated from the AFC to the NFC during league realignment prior to the 2002 season. The Seahawks are the only NFL team to switch conferences twice in the post-merger era. The franchise began play in 1976 in the NFC West division but switched conferences with the Buccaneers after one season and joined the AFC West.

A Change of "Hearths"

There are few things more disruptive to the peace or clarity of a 401(k) plan than a switch in recordkeepers.

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

That’s true, of course, even when the change is instigated by a regular, thoughtful, focused evaluation of the alternatives; and certainly when that change is the product of a desperate quest driven by a truly awful service relationship. But it is perhaps particularly disruptive when the change is thrust on the plan by forces outside of its control or instigation—and for the thousands of plans that have recently or are in the process of a change in recordkeepers due to industry consolidation.

Some changes are less impactful than others on the plan’s daily administration, of course. Changes that trigger a mass departure of key staff can be upsetting, and those that necessitate moving to a new processing platform even more so. Change that requires communication to participants is anathema to most plan sponsors. On the other hand, recordkeeper changes that result in additional resources, better capabilities, a clearer focus, and a stronger commitment to “the business” are not as rare as one might fear.

But—whether for good or ill—a change in recordkeepers—regardless of the motivating forces behind the move—is one of those “choices” that plan fiduciaries are expected under ERISA to evaluate as a prudent expert. And so, regardless of whether the change appears to be good, bad, or inconsequential on its face, plan fiduciaries can be expected to know:

How much your plan pays in fees. And to whom. And for what.

The essence of a recordkeeper/service evaluation is the determination that the services provided—and the fees paid for those services—are reasonable. It starts, of course, with knowing how much is being paid for those services. But you can’t know if those fees are reasonable without knowing the services they support. But this analysis also involves a determination that the services provided are appropriate.  That starts with enumerating the services you received prior to the move—and checking those against the one(s) your new arrangement provides.  

What revenue-sharing is (and where it goes).

At a high level, revenue-sharing is just the redistribution of fees paid to one provider to another. It can be a relatively straightforward matter of compensating a sub-contractor, though in retirement plans it’s generally 12(b)1 marketing/distribution fees collected by a mutual fund company and “shared” with the recordkeeper that is actually doing the “distribution” of the funds. There is a general trend away from such practices—but if they are in place, you need to know how much, to whom, and how they’re paid.

How your investment menu might change.

Changes in recordkeepers don’t always involve shifts in the investment menu offered to participants, though they can and often do. And even if they haven’t—and if you have reviewed them recently—the change in recordkeepers can be a good opportunity to reconsider/affirm your investment options to make sure not only that they are prudent, but that they (still) meet the needs of your workforce, and the objectives of your benefit program.

And you might also want to:

Document your review/decision(s)

Whatever process you are using to evaluate your plan (this doesn’t require a recordkeeper change), the goals and objectives in doing so should be written down, as should the conclusions drawn from the exercise. You might get there with a simple committee review, or perhaps something more formal—like a request for proposal (particularly if you have the time to do so ahead of the move). Indeed, odds are a formal benchmarking process or RFP will produce documentation of those conclusions/considerations as a natural outcome. But if it doesn’t, you should make the effort to make sure it does.

A change in recordkeepers is a good opportunity to reconsider your plan’s design and operations—and one that, as a prudent plan fiduciary—you’re expected to.

- Nevin E. Adams, JD

Markets Timing

As it happens, I’ll commemorate an anniversary of my birth this weekend.

It’s not a particularly significant one—it doesn’t end in a 5 or a 0, won’t trigger any new savings opportunities or impact (catch-up, RMD trigger, forbearance of withdrawal penalties, or Social Security)—but it is a birthday, and therefore a day upon which to reflect (and to wonder anew why we don’t make more fuss about our mothers, who—let’s face it—did the real work on that day).

Traditionally, on my birthday weekend (and the 4^th of July holiday), I have taken a look at my current asset allocations and, when circumstances warranted, rebalanced. There’s no magic to those points in time. It’s not the ONLY time I look (and act)—but it happens to be a time when, whatever is going on in the market, I have a calendar-driven opportunity to take a breath and take a longer view. And, let’s face it, this year has been a bumpy ride in the markets.

The mantra in times of volatile markets is, inevitably, “stay the course”—wise counsel in most situations, particularly since the impulse in such times is often action that one comes to regret in the fullness of time. However, for some, just sitting still and “taking” what the markets choose to inflict on your retirement savings can be excruciating. 

For me, anyway, this year will be a little different. Most significantly, as I near my “retirement” threshold, I’ll actually be shifting into a different pace of accumulation. And, for the first time in my working career, I will be doing it with my retirement savings accumulated into a single place (well, technically two—one for Roth, the other for the traditional pre-tax rollovers). That said, and my birthdate notwithstanding, I still have plenty of investment runway to ride.  

That said, and while my weekend should be a bit less structured than usual, here are some things I have traditionally done—that you, or those you support, may find useful—particularly with the current market uncertainties.      

Get started on rebalancing by changing the investment elections of NEW contributions, rather than transferring existing balances. It will take longer to realign the entire account, but at least you aren't realizing those as-yet-unrealized losses.

Increase current deferral rates. When you think about just how much cheaper those retirement plan investments are now, compared to a year ago, it's hard to pass up that kind of bargain. More so if you aren't yet saving at the maximum level of the match.

Consider automated rebalancing. Most providers now have in place mechanisms that will, on some preset frequency (monthly, quarterly, annually), automatically rebalance individual accounts in accordance with investment elections. It's a good way to keep things in balance without having to worry (or remember) about the best time to do so—calendared events notwithstanding.

Better yet, consider shifting to a target-date fund or managed account. You may well be wondering why I would go to the “trouble” of manually rebalancing my 401(k) when there are professionally managed solutions available like target-date funds and managed accounts. The reality is that only one of my previous 401(k)s had target-date funds available on their menu[i]—and I have taken advantage of that regular rebalancing by professionals to some advantage.

None of this has to wait for a birthday, of course. But doing so on a regular basis can be an effective way to ensure that you get that retirement wish when you blow out the candles!

Nevin E. Adams, JD 

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[i] Another had a managed account option (that I didn’t care for).

Closing the "Opportunity" Gap

There’s no one silver bullet likely to close the nation’s retirement plan coverage gap—but the target is pretty easy to spot.

As it turns out, the nation’s retirement plan access coverage gap is almost exclusively found among small businesses, and it’s not hard to imagine why. The failure rate for small businesses is daunting—and those who’ve managed to avoid that fate are doubtless focused on trying to avoid becoming a statistic. Under those circumstances one can well appreciate that offering benefits, much less RETIREMENT benefits, probably seems like a luxury for another time, if not another business.

A recent issue brief by Anqi Chen and Alicia Munnell of the Center for Retirement Research (CRR) at Boston College examined the issue, and drawing on previous research[i] cited the following three main barriers:

• uncertain revenues that make it hard for a firm to commit to a plan;
• employee preferences for wages and other benefits;[ii] and
• the cost associated with establishing and administering a plan (this latter included an assumption by some/many that employer contributions were required).

Indeed, surveys seeking to better understand this reluctance generally find two major obstacles: cost and complexity of administration. And that was before the recent economic downturn. 

Starter Up!

Enter the SECURE 2.0 Act of 2022 which, among its 90-some-odd retirement plan provisions, contains two that are squarely fixed on resolving those issues. The first of these is the so-called Starter K.  Basically, starting now—employers that have never had a plan can set up a “starter” 401(k) or 403(b) plan. There is no required employer contribution, though employees are automatically enrolled at 3% of pay (they can opt out). While this an actual 401(k)/403(b) plan, it looks more like an IRA, more specifically the type that have been established by a number of states. The limits for employee contributions start at $6,000, indexed to inflation—and there is an additional opportunity for a catch-up contribution of $1,000 for those individuals over 50. However, unlike the traditional 401(k)/403(b), there is no nondiscrimination or top-heavy testing requirements. 

All in all, it’s a straightforward, simple 401(k) design that removes the complexity (and cost) concerns that have held many small businesses back. Conservative estimates prepared for the American Retirement Association suggest that this could provide 19 million working Americans access to a workplace retirement plan that didn’t have that opportunity previously.

Credits ‘Worthy’

But perhaps the biggest incentive found in SECURE 2.0 is the greatly expanded tax credit for new plans.  Under current law, employers with less than 100 employees that adopt a new retirement plan can qualify for an annual tax credit for up to three years equal to the lesser of (1) 50% of the administrative cost of establishing the plan, or (2) $5,000. But, effective for 2023, SECURE Act 2.0 increases that percentage from 50% to 100% for employers with 50 or fewer employees (it remains at 50% for those with 51-100 employees). So, it covers 100% the cost of operating the plan, up to $5,000 (which, I’m told with some confidence is more than the cost of running those size plans). 

More than that, it also establishes a generous new tax credit for contributions made by small employers to a newly established retirement plan (other than a defined benefit plan)—a tax credit that is a set percentage of the amount contributed by the employer for employees up to a per-employee cap of $1,000 (though contributions to those that make $100,000 or more are not taken into account). Better still, that set percentage is 100% for the year the plan is established AND the following year, 75% for the third year, 50% for the fourth year, 25% for the fifth year (0% thereafter). The full amount of the new tax credit would be available to employers with 50 or fewer employees but phases out for employers with 51 to 100 employees. 

MEP ‘Step’

Oh—and for fans of multiple employer plans (MEPs), the start-up credits are available for three years to employers that join an existing MEP, regardless of how long the plan has been in existence (the MEP rule is retroactively effective for taxable years beginning after Dec. 31, 2019).

The reality is that even today more than 30% of all private-sector American workers still lack access to workplace retirement plans and thus lack an equitable opportunity to achieve a comfortable retirement.   Further, nearly 60% of workers in the lowest income classes still lack access to workplace plans. We talk about a “coverage” gap, but it’s really an opportunity gap.     

The challenges confronting small businesses are no less—and arguably even larger now—than they’ve ever been. But, amidst all the economic uncertainty—and with the importance of worker attraction and retention more critical than ever—SECURE 2.0 offers opportunity—not only to strengthen and solidify those workplace bonds—but in the process to help give American workers the opportunity to better prepare for a secure retirement.

- Nevin E. Adams, JD 

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[i] Specifically by the Employee Benefit Research Institute (EBRI), the Pew Charitable Trusts, and the Transamerica Institute.

[ii] Incredibly, the EBRI research, which admittedly went back to 2003, cited as a primary rationale that employees hadn’t REQUESTED the benefit.

Withdrawal Symptoms?

 There’s nothing like a global pandemic to fuel interest in, if not the need for, emergency savings. Indeed, there are a half dozen provisions[i] in the new SECURE 2.0 designed to make it easier for workers to tap into their retirement savings—two aimed specifically at emergency savings.

Though the financial impact of the pandemic (not to mention a series of natural disasters) has arguably been uneven, a report from Vanguard[ii] highlighted the longer-term impacts of the economic slowdown and inflation’s growing bite of the household budget. It's also widely acknowledged that concerns about the inability to fund an unexpected financial emergency is a source of stress for workers, undermining financial wellness.   

All that said, well before COVID-19, there have been concerns about Americans’ lack of emergency savings[iii] and, perhaps more broadly, that they were using their retirement savings accounts as that resource. Behavioral finance-types have counseled that a mental, if not physical, segregation of money by purpose is helpful, and at least one of the new SECURE 2.0 provisions seems designed to make that structure a reality by creating an emergency savings “sidecar” alongside regular retirement savings accounts. 

The first of these is found in Section 115 and, beginning in 2024 it says a participant may generally make a withdrawal of up to $1,000 per year from their retirement account for certain emergencies. The withdrawal may be taxable (unless drawn from Roth) and MAY be repaid within three years, but it will not be subject to the 10% penalty for early withdrawals. Only one withdrawal is permitted per the three-year repayment period—if the first withdrawal has not been repaid.

The other emergency savings provision (Section 127)—and the one that seems to be garnering most of the media attention is the (confusingly labeled) “Pension Linked Emergency Savings Accounts.” Beginning in 2024, it will ALLOW (not require) employers to create an Emergency Savings Account (ESA) as part of a defined contribution plan (401(k) or 403(b)). Only non-highly compensated employees may contribute to the account, though employers MAY auto-enroll such individuals in an EAS up to 3% of their compensation, and the EAS value cannot exceed $2,500[iv] (indexed for inflation). All employee contributions to this emergency savings account MUST be made on an after-tax basis—and each month participants may take withdrawals from the account (just to further complicate administration, the first four withdrawals for a year cannot be subject to distribution fees). 

Oh—and speaking of complications, those employee contributions must be treated as elective deferrals for purposes of any matching contributions. The matching contributions are treated by a plan no differently than matching contributions made on account of elective deferrals.   

Now this provision likely makes the behavioral science-types happy—it provides a separate mental (and notational) accounting—and one that doesn’t force the individual to choose between saving for retirement or saving for that “rainy day” emergency, at least in terms of foregoing a company match. 

But, aside from the obvious administrative complexities of this option (certainly for the plan sponsor/recordkeeper), it’s by no means clear that this kind of set up won’t create a kind of “Christmas club” account, with individuals withdrawing these contributions for just about any reason every year (just) long enough to get the match—and then the next year they could do it all over again. And again. The Treasury is authorized to issue regulations to prevent abuse, but there’s no telling if or when (or  what) those rules would be.  

It might be good mental “accounting”—but I’m not sure that it will be good for retirement. 

- Nevin E. Adams, JD 

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[i] While I’m focusing on only two of those provisions here, the others are Section 314 (allows for up to $10,000 of withdrawals from plans and IRAs in cases of domestic abuse, effective 2024), Section 326 (exempts from the 10% excise tax withdrawals from plans and IRAs in cases of terminal illness, effective now), Section 331 (allows for withdrawals from plans and IRAs of up to $22,000 in federally declared disasters, effective retroactively to Jan. 26, 2021), and Section 334 (allows for up to $2,500 a year of withdrawals from workplace plans to pay for long-term care, effective three years after enactment (so generally not until 2026)).

[ii] In fact, that report, published last October, and amidst growing concerns about the above factors and volatile investment markets, noted that the share of workers taking cash from their employer retirement plans through new loans, non-hardship withdrawals, and hardship withdrawals were on the rise in 2022.  Called out for special note was the rise in hardship withdrawals, which Vanguard said had reached an all-time high—though that was only 0.5% of workers tracked by Vanguard (5 million participants in 1,700 employer-sponsored retirement plans administered by the firm).

[iii] The most widely repeated likely being the Federal Reserve survey asking Americans if/how they’d handle a $400 emergency (approximately 1 in 9 said they couldn’t, and while that’s a minority, the headlines have tended to highlight the impact)—but see https://www.minneapolisfed.org/article/2021/what-a-400-dollar-emergency-expense-tells-us-about-the-economy.

[iv] Though there’s been some question as to whether $2,500 is “enough” (there’s language in the bill calling for a study to see if it needs to be higher).

5 New Year’s Resolutions for 401(k) Plan Fiduciaries

This is the time of year when resolutions for the cessation of bad behaviors and the beginning of better ones are in vogue. Here are three for plan fiduciaries for 2023.

Develop a plan budget.

Most financially-focused New Year’s Resolutions focus on spending (less) or saving (more)—and the really thoughtful ones do both—all tied around the development of a budget that aligns what we have to spend with what we actually spend. 

Most (many?) plans have a budget when it comes to the expenditures that require corporate funding.  Less clear is how many establish some kind of budget when it comes to what participants have to spend.  Now, granted, what they pay will vary based on any number of …variables—but an essential part of ensuring that the fees paid by the plan (for the services provided to the plan) is knowing how much—and for what. 

At some level that means not only keeping an eye on things like expense ratios, the options with revenue-sharing, and the availability of alternative share classes (or options like CITs)—but it also means having an awareness not only of the plan features, but the usage rates of those plan features.

Because when it comes to retirement plans, there often IS a direct link between spending less and saving more.

Put your fund menu on a diet.

Though it is a point often made with studies (well, one frequently cited study, actually) dealing with jellies and ice cream, a long-standing behavioral finance tenet is that more choice doesn’t lead to better decisions. So, what’s with those (still) burgeoning 401(k) investment menus? The 65^th annual Plan Sponsor Council of America’s Survey of Profit-Sharing and 401(k) Plans found that more than a quarter of plan sponsors offer 26 OR MORE options, while another 18% offered 21-25, and 27% offered 16-20.

Odds are that there are funds on the current menu that either aren’t being used or aren’t being used widely—options that contribute little other than clutter to your investment review and to the decisions of your participants.

Take a look—your retirement plan menu shouldn’t be a kitchen sink “solution.”

Check-up—on your target-date fund(s).

Flows to target-date funds (TDF) have continued to be strong—and little wonder, what with their positioning as the qualified default investment alternative (QDIA) of choice for most 401(k)s. That said, the vast majority of those assets are still under the purview of an incredibly small number of firms—with glidepaths that are not as dissimilar as their marketing materials might suggest. 

A TDF is, of course, a plan investment, and like any plan investment, if it fails to pass muster, a plan fiduciary would certainly want to remedy that situation, including removing the fund if necessary (don’t take my word for it—that’s coming straight from the Labor Department).  

That said, TDFs are frequently, if not always, pitched (and likely bought) as a package. While each fund in the family is reviewed separately, and certainly should be, breaking up the set certainly carries with it a series of complicated consequences, not the least of which are participant communication issues and glide path compatibility. Not that those can’t be overcome—and not that those complications would be deemed sufficient to retain an inappropriate investment on the plan menu—but it doesn’t take much imagination to think about the heartburn that might cause.

The reasons cited behind TDF selection run a predictable gamut; price/fees, performance (past, of course, despite those disclaimers), platform (as in, it happens either to be their recordkeepers, or compatible with their program)—and doubtless some are actually doing so based on an objective evaluation of the TDF’s suitability for their plan and employee demographics. 

Whatever your rationale, it’s likely that things have changed—with the TDF’s designs, the markets, your plan, your workforce, or all of the above. 

Pump up the default rate in your auto-enrollment plan.

While a growing number of employers are auto-enrolling workers in their 401(k) plan, one is inclined to assume that, a decade and a half after the passage of the Pension Protection Act, if a plan hasn’t done so by now, they likely have some very specific reasons.

But for those who have already embraced automatic enrollment, those are plans who have (apparently) overcome the range of objections; concerns about paternalism, administrative issues, cost—some may even have heard that fixing problems with automatic enrollment can be—well, problematic (though things have gotten a little easier on that front).

There has been movement here over the years—indeed the most recent PSCA survey found that two-thirds (65%) of plans with automatic enrollment set the default deferral rate high enough so that participants receive the full possible company matching contribution, up from 57.1% as recently as 2020. In fact, the most common default rate for automatic enrollment plans is now more than 6%. 

Set goals for your plan designs.

The mantra about retirement benefits has always been that they exist to help attract and retain good workers. More recently, a reimagined emphasis on financial wellness has offered some nuance to that—to provide better levels of engagement while they are working, to forestall the “distractions” (and potential malfeasance) that financial stress can engender, and ultimately to help workers retire “on time.” These goals are not inherently incompatible, but at any given point in time they require differences in communication, education, emphasis, and potentially program design.  

There is, by the way, a sense of a shift in such things. While the primary goal of participant education has historically been to increase participation rates, the Plan Sponsor Council of America’s 65^th Annual Survey of Profit-Sharing and 401(k) plans notes that in 2020 that shifted to increasing financial literacy of employees in 2020—a shift that held in the most recent survey with 77.4% of organizations now stating that as their primary educational goal. The secondary goal was increasing appreciation for the plan (likely as a retention method) followed by providing retirement planning to employees. The percent of organizations offering financial wellness programs increased to 27%, including more than half of large employers.

If you haven’t revisited those objectives in a while—or, heaven forbid, have never done so—there’s no time like the present for a reset. After all, as Yogi Berra once commented, “If you don’t know where you’re going, you might wind up someplace else.” 

- Nevin E. Adams, JD