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

Decision Decisions

As a parent, you spend a lot of time telling your kids what to do, and perhaps more time than you think you should convincing them that it was their idea. If you’re lucky, you get to watch them make the “right” choices on their own—and to see them turn out well in the end. What you really try to avoid doing, certainly as they enter adulthood, is to make those decisions for them.

With defined contribution plans, over the last three decades or so, mostly we told workers what to do (or at least what people very much like them should do). And, despite a lot of hand-wringing to the contrary, most did. There were, of course, “holdouts”—a stubborn and/or inattentive group that resisted those entreaties, at least up until the point at which we did the right thing “for” them by automatically enrolling them in these programs. One might have thought that their resistance was thoughtful, perhaps principled, and maybe economic—and yet, survey after survey shows that those who were defaulted in stayed there. Were they lazy, afraid to make the wrong decision, unable to make any decision, or merely inattentive? Perhaps all of the above. Regardless, the debate about whether we should “impose” on them our sense of the right thing to do—to make that decision for the “recalcitrant” minority—would seem to be over.

The New Frontier

The new frontier in participant decision-making appears to be retirement income or, more precisely, helping individuals make arrangements for a suitable stream of income post-retirement. There is a general—and perhaps increasingly pervasive—sense that the solution to this challenge is already at hand (or could be with a tweak here and there): the annuity.

That assumption was in evidence last week at a presentation by a panel of behavioral finance academics at an event sponsored by Allianz (1). As part of its response to the Labor Department’s RFI on retirement income, Allianz had worked with the inimitable Schlomo Benartzi to assimilate a wide range of behavioral finance techniques to better understand participants’ reluctance to embrace annuities (at least in large numbers), and to help remedy “the annuity puzzle” (yes, it even has a name, apparently). Certainly from an academic perspective, there is no valid reason why an individual seeking a dependable stream of income in retirement wouldn’t take advantage of a product that purports to do just that. And yet, in the “real” world, individuals continue to defy those expectations.

All of which, to my ears, began to beg the question, Should we be helping participants to do the “right” thing about retirement income, as we did about retirement plan enrollment? Should we be making that decision for them as well?

It is an idea that is already “out there,” and one that seems of interest to the Obama Administration. Certainly there is a concern that many take their multiple defined contribution distributions between “now” and whenever retirement finally occurs in cash and deploy them for purposes other than retirement. This “leakage” from the system almost certainly depletes the accumulative effect of retirement savings for many younger and lower-income workers, leaving them to literally start over at their next place of employment (there is some evidence that larger balances accumulated by older workers are more routinely rolled over into tax-advantaged vehicles such as an IRA).

Which again leads one to ask, what WOULD be the harm in letting a default mechanism make the “right” decision for them, certainly so long as they could opt out? Hasn’t our experience with automatic enrollment shown not only that people are willing to let good decisions be made for them, but that they appreciate it as well?

We once resisted automatic enrollment as a design choice for reasons that seemed just as daunting: We didn’t know the “right” deferral percentage, weren’t sure how it should be invested, worried that it would lose value between the time it was withheld and (potentially) returned, and were bothered by the potential conflicts between state wage law and federal directives. The Pension Protection Act effectively resolved those issues, provided a structure for a valuable safe harbor protection, and yet managed to avoid mandating its approach. As a result, it’s more likely than ever that more savers will have more savings to manage at retirement, perhaps for longer in retirement, than would otherwise be the case.

Now, for most situations at present, the retirement income amounts involved may well be too small, the products available too expensive and/or complicated, the protections for employers and participants alike too vague, the portability and/or access to the funds frustratingly problematic. And, let’s face it: Current annuity designs (2) don’t really come in a convenient “trial size.”

Still, IMHO, we need to focus on creating workable, sound default decisions—because the alternative for many until we do will be making decisions by default.


—Nevin E. Adams, JD

(1)All in all, it was a fascinating presentation, and the report summary that accompanied it is well worth a read (see “Annuities Get a Behavioral Finance Makeover” ). Those reports included notions that workers, and especially older workers, pay too much attention to recent stock market movements, suffer from a “hyper” aversion to risk, and, after their mid-50s supposedly have a particularly tough time making complex financial decisions. All of which purported to explain not only why workers don’t make good investing decisions at retirement, but perhaps even to suggest that they wouldn’t want to (ironically, one study indicated that, given the opportunity to make an active decision to purchase an annuity, a surprisingly robust 49% did).

(2)For the record, I’ve no particular affinity for the annuity concept per se vis-à-vis an alternative that provides the reliable stream of income at retirement for a reasonable price, and no reason to think that an adviser-led participant solution couldn’t compete very effectively with an annuity, much as an adviser-led investment program can do as well (and perhaps better) as a qualified default investment alternative. Of course, every participant doesn’t have access to an adviser, and many don’t have accounts large enough to warrant those attentions—and we need solutions for those participants as well.

Live Long and Prosper?

I’ve been a huge “Star Trek” fan all the way back to when I had to watch the original episodes on a tiny black-and-white, 13-inch television set with rabbit ear antennas (and, yes, adorned with aluminium foil). Unlike most of my friends at the time, my favorite character was Mr. Spock, whose understated strength, brilliant mind, and quiet commitment to logic had an appeal to a young kid who fancied himself to have all those attributes (thankfully, my ears weren’t pointed).

Perhaps as a result, early on, I mastered the “infamous” Vulcan salute that many people struggle to perform unassisted (it consists of raising your hand and spreading your fingers apart between the middle and ring finger), and the Vulcan greeting/blessing that accompanied the gesture—“Live long and prosper”—always struck me as being as elegant as it was simple.

While we all hope to prosper and live long, a recent Issue Brief released by the Center for Retirement Research at Boston College reminds us of the financial challenges that are often attendant with living long, but that tend to be glossed over in retirement planning. That particular study claimed that those who are in good health heading into retirement had better brace themselves for higher, not lower, health-care costs in retirement—since the researchers determined that the expected present value of lifetime health-care costs for a couple turning 65 in 2009 in which one or both spouses suffer from a chronic disease (defined in that research as diabetes, cancer, lung disease, heart disease, or stroke) is $220,000, while the comparable tally for a healthy couple was projected to be—$260,000 (see “Being Healthy Could Cost You More in Retirement”). Now, as usual in such matters, there is a certain amount of interpolation and extrapolation at work. Still, without wandering into the statistical “weeds,” a primary reason for that somewhat counterintuitive finding is that people in good health can expect to live significantly longer than their less-healthy counterparts—and thus, according to the report, are at risk of incurring health-care costs over more years(1).

Now, the point of the report wasn’t to encourage an unhealthy lifestyle; rather, it seemed designed simply to underscore the need to set aside money (2)—and a significant amount of money at that—for health-care expenses in retirement, regardless of how healthy you are (or expect to be).

Healthy or not, all other things being equal, the longer we live, the longer we must rely on our retirement savings. Not surprisingly, confronted with the potential of outliving one’s retirement savings, participants frequently fall back on an assumption that they will simply work longer. Now, that’s a good solution, at least in theory; saving, rather than spending, for additional years can do wonders to shore up one’s financial security—as long as you can count on being able to actually remain employed, that is. Unfortunately, even those physically able and willing to do so don’t always have that option.

That’s a reality that participants don’t always appreciate—and, IMHO, one that is all too often shrugged off in the retirement planning process.

The better option, if one hopes to both live long AND prosper, is to prepare as though you won’t have the time or the luxury to do so; to take action here and now, rather than banking on the opportunity to “make good” later on.

Anything else would be—illogical.

—Nevin E. Adams, JD

1 The report also acknowledges that, over those longer lives, those relatively healthy individuals may, nonetheless, eventually contract one of those chronic diseases.
2 More precisely funding. The report notes that “Households that delay purchasing insurance until their health declines run the risk of facing higher premiums, or for long-term care insurance, being denied coverage altogether.”

Grecian 'Formula'

While the markets were in an apparent freefall last week, I could hear former Treasury Secretary Hank Paulsen on the TV in the next room telling (lecturing?) the Financial Crisis Inquiry Commission that the problems that led to the 2008 meltdown could, and should, have been dealt with sooner, and that we could, and should, have moved faster—and with more to stave off the crisis. The criticism then—as it was last week in Europe—was that this was a time to act, not to think; that if we didn’t act—act now, act decisively, and without question—well, the results would be catastrophic.

It is a theme that runs through Paulsen’s recent book, “On the Brink,” as he drags the reader from one impending crisis to another during those fateful weeks of 2008. In Paulsen’s retelling, those who back his “need for speed” are thoughtful and prescient; those who don’t, well, their motivations are generally painted as either blinded to the seriousness of the situation or hopelessly ideological. From the former Goldman Sachs CEO’s perspective, we weren’t bailing out Wall Street, we were saving the very financial system itself (though he was willing to let the politicians claim that they were saving jobs). And perhaps we were, so we set aside our doubts and concerns, gave the experts what they said they needed—and plenty of it—and hoped they knew what they were doing.

Now, in fairness, the financial system did stabilize and the markets did—eventually—return to some semblance of normality. Until ….

Now I, perhaps like many of you, am not yet quite sure what to make of the crisis bubbling in Greece, much less the response of the EU and the International Monetary Fund (IMF), and what that might mean to us. But the chorus—we must act, act now, act decisively, and without question, or else—well, it’s a little too familiar to those of us who thought we had already been there, done that. But, once again, we’re told that if we don’t, things will get worse, much worse—and we’re (again) afraid that’s not an exaggeration.

Déjà View

But make no mistake: There are some clear and disturbing parallels between this “rescue” and the ones that have gone before. Once again you have a sudden infusion of apparent wealth on paper that fueled a borrowing binge that fueled a spending spree that fueled more borrowing, until things reached a point where the system was no longer willing to loan money (despite lucrative fees)—at which point, the whole thing should fall apart. But at that point the outstanding debt is so large that that same system that empowered that situation now claims that failure is not an option. It’s not just that bank, or that automobile company, or that country…it’s all the other things that depend on them….

We’ve seen this before—and more than once—from investment banking to the foreclosed house down the street.

Now, if this was your compulsive gambler of a brother-in-law on the wrong side of another “can’t miss” bet that put him (and perhaps your sister) in trouble with his bookie’s “collection agency,” you’d doubtless bail him out, and insist that he check into rehab (at least the first time). Indeed, that’s what the Greek “austerity plan” is all about: raising the retirement age to 63 (from 61), freezing pay and cancelling year-end bonuses for public-sector workers (no simple thing that, when something north of a third of the population works for the government), hiking the nation’s VAT to 23% from 21%, and cutting retirement pensions by 14% (by some accounts, those pensions currently provide an 80% replacement ratio, adjusted for wage inflation).

This, of course, is also what set off those riots in Greece last week—and the concerns about what that portends for the implementation of this new bailout, and its ability to stem the tide, took a bit of “austerity” out of all of our retirement security last week.

Once again politicians have been led (many willingly and happily) down the primrose path by so-called financial experts—told that there was, after all, a free lunch; lured into a sense of complacency and then, abruptly, told something else. It is a formula that has, again, taken us to what is being painted as a pivotal point, a crisis beyond which a chasm lies. We worry—that they are right, that it won’t be the last, that we’re not doing enough, or that we’re doing too much - again.

And then, somewhere in the dim reaches of consciousness perhaps, we realize that the folks telling us what we absolutely have to do now—without thinking, without questioning, without hesitation—look suspiciously like the folks who got us into this mess in the first place.

—Nevin E. Adams, JD

IMHO: Why Bother?

Here’s a question to ask your plan sponsor clients: “Why do you offer a 401(k) plan?”

I’m guessing that many, perhaps most, would say simply, perhaps without giving it much thought, “to attract and retain good employees.” That’s what more than half of the plan sponsors canvassed in a recent Wells Fargo survey said (see “Survey Suggests Gaps in Plan Sponsor Goals, Roles”), and it’s one of the top reasons cited by none other than the Department of Labor . I’m guessing a similarly high number would say that they “have” to offer the plan as part of their benefit offerings to be competitive.

In fact, I was surprised that 45% of the respondents to the Wells Fargo survey indicated that a primary goal of the program was to provider workers with the means to arrange for a financially sound retirement. Not that that isn’t in the back of plan sponsor minds; I just don’t think it looms large as a rationale for the time, energy, and expense of establishing and keeping these programs in place.

Still, I think for most employers, these programs remain a “take-it-or-leave-it” proposition. Oh, they want employees to take advantage of them—and participation rate remains a key metric for many programs. But I suspect that most employers think that, if they offer a program that allows workers to save efficiently and effectively (and at a reasonable price), well, I suspect they feel that they have lived up to their end of the bargain.

Of course, we all know that the employer plays a key role in the true success of these programs, and that an active and engaged plan sponsor is worth their weight in gold (literally) in terms of getting workers to participate, and to participate at levels that eventually can help ensure their financial independence.

We all know who they are. Generally speaking, they are the ones who go above and beyond the mere requirements of the law regarding plan information and communication. They are the ones who not only inspire confidence in their plan, but in the ability of their co-workers to take an active role in helping ensure their own financial well-being. They are the ones who adopted automatic enrollment before it was “cool” (or sanctioned via the Pension Protection Act); who probably know exactly how much their plan costs; and, yes, who probably, early on, saw the advantages in bringing the help of a financial adviser to their program. And, yes, odds are they are also the ones who have plans with higher participation and deferral rates, and a more motivated group of participant savers, to boot.

I’m sure many who don’t take those steps are nonetheless attentive to the requirements and obligations of their duty as a plan fiduciary—they simply lack the time, energy, or volition to make that kind of commitment. Some, I’m sure, worry that going beyond the law’s requirements places their firm—and them personally—at risk.

But, in my experience, employers who adopt a “take-it-or-leave-it” approach often find that that is exactly how their workers feel about their retirement plan.

—Nevin E. Adams, JD

Cynic’s “Cull”

I have always taken seriously the notion that news and information should be presented “straight”, and without commentary.

But there are times when it’s hard not to just scratch your head and say “huh?” or laugh out loud at some of the stuff that comes across our news desk.

Here’s a (somewhat cynical) sampling from just the past couple of weeks:

CONFIDENCE MIEN? A nationwide survey by Citi and conducted by Hart Research Associates found that 44% of investors report being confident in their ability to retire in financial security as they had planned (said another way, that’s nearly half who DO feel that confident) . More than a third (36%) said they might need to adjust their plans (so, do two-thirds not see any need to do so?), and (a mere) 16% said they are not confident in their ability to retire in financial security. Must be a lot of rich uncles out there…MORE

“NOTHING” DOING. Throughout one of the most stressful and volatile markets in memory, the vast majority of participants did exactly what they always do – nothing (though admittedly sometimes that’s the best thing to do). MORE

OUTSIDE INFLUENCES? Those with a workplace retirement plan are (also) more likely to be saving OUTSIDE of work (66% versus 57%, according to Transamerica). MORE

AVERAGE SAYS? Morningstar says that the 3.8% average target-maturity fund return in the first quarter was slightly below the 4% return during the fourth quarter of 2009 (what does an average of so many disparate offerings tell you, anyway?). Read MORE

FAMILIAR PHASES? MetLife reports that just over a third of plan sponsors say they are unfamiliar with at least some of the particular mechanics of how stable value works. (So apparently two-thirds are familiar with ALL of the mechanics?). Read MORE

CONTROL GROPE? Controlling benefits costs is now the top benefits objective for employers, edging out employee retention for the first time since 2006, according to MetLife. (Is that because costs are so high, or because these days folks aren’t worried about keeping workers?) MORE

WORK “OUT?” A recent report from Hearts & Wallets suggests a growing number of Americans now think of retirement not as when their portfolio reaches a certain level of assets, but when they are no longer able to find full-time employment (here’s hoping the former doesn’t come up before the latter is able to support that “decision.”). MORE


“FREE” FALL? (Still) leaving money on the table; Hewitt Associates notes that more than quarter of participants did not contribute enough to their 401(k) to receive their full employer match in 2009. MORE

STABLE, VALUED? Who needs diversified; While Hewitt Associates notes that premixed portfolios (including target-date and target-risk funds) now (finally) make up the largest portion of employees’ asset allocations (24.7%). The second-largest allocation was in GIC/stable-value funds (17.1%). MORE

KID "STUFF". More than four in 10 so-called “sandwich generation” parents (41%) continue to provide at least some financial support to their young adult children, according to the 2010 Families & Money Survey by Charles Schwab & Co., Inc. The biggest worries for mid-life parents are not being able to retire (29%), outliving their retirement money (22%) as well as not saving enough (22%). A distant fourth - the worry that their children won’t become financially independent (11%). (Personally, I’d be worried about not being able to retire BECAUSE my kids might not become financially independent). MORE

“UNDER” COVERED. A Centers for Medicare & Medicaid Services (CMS) report on the new health care reform law released Friday estimated that 1.4 million fewer Americans will be enrolled in employer coverage as a result. That’s a net number, by the way. The report goes on to note that about 14 million people may lose employer-provided coverage due to a variety of reasons, including more low-wage workers moving to an expanded Medicaid program and some employers, especially smaller companies and those with low average salaries, being “inclined to terminate” coverage (of course, no one knows exactly how this will play out (I suspect this is a conservative estimate), but IMHO 14 million losing their current employer-based coverage, while (ostensibly other) employers will be picking up (another) 13 million seems like a lot of disruption). MORE

So – what do you think? Did I miss any?

- Nevin E. Adams, JD

“Different” Strokes

Having been born in the Midwest, lived a quarter of my life in the South, and now another sixth in the Northeast, I can tell you—people are different. However, having worked for huge firms and considerably smaller ones, I can also tell you that, when people come together in groups, they are not as different as you might think (or hope, as the case may be).

There is a “common wisdom” in our business that suggests that all plan sponsors are, more or less, alike; that large plans are the inevitable early adopters of trends that, sooner or later, trickle down to plans of all sizes. Consequently, those who make their living trying to discern trends and patterns frequently focus on the behaviors in evidence at larger programs—figuring that, in three years or so, those same characteristics will emerge across the spectrum.

There’s some logic to that perspective, IMHO. Plan fiduciaries frequently draw comfort and solace from the experience of others, and smaller programs can hardly be faulted for adopting plan designs and approaches that have been “vetted” by programs with more copious resources. Moreover, providers frequently introduce innovations with price tags that initially discourage smaller-program adoption (at least until later iterations are included as part of the “package”).

That said, I have always found it dangerously simplistic to assume that small plans will, inevitably, follow along eventually in the footsteps of their larger cousins.

"Less" Likely

Consider that smaller programs—let’s use $5 million in assets and less (though some would carve even that in half)—are significantly less likely to have adopted automatic enrollment than those with more than $200 million; in PLANSPONSOR’s DC survey, only about one in five small plans had done so, compared with more than half of larger plans. Now, a goodly number of those smaller plans already had safe harbor designs in place, so had no “need” of automatic enrollment. In fact, one could argue that the safe harbor design is a kind of automatic enrollment. Smaller programs were also much less likely to have a contribution acceleration design in place (just 8.7% compared with about a third of larger programs).

PLANSPONSOR’s Annual DC Survey, which captures the perspectives of some 6,000 plans, found that smaller programs were more likely to make participants wait to vest in employer contributions, and only half as likely to have embraced immediate vesting—differences that admittedly might be predicated on economic considerations.

Only about half of smaller programs had an investment policy statement (IPS) in place, compared with nearly nine of 10 among larger programs. Perhaps not surprisingly, smaller plans reviewed their plan investments much less frequently (49% said annually, the most common response, while more than half of larger plans did so quarterly). They were also less likely to review fees regularly—and much more likely to “never” review them (one in 10).

Consider also that smaller programs were less likely to have adopted a target-date (TDF) solution as a default (28.6% versus roughly two-thirds among larger plans); though, even among smaller programs, target-dates were the predominant default fund choice. They were, however, more likely to be unsure that TDFs were the “best” QDIA option (44%), and more likely to doubt that their recordkeeper was offering the “most appropriate” TDF option.

"More" So

Investment performance was significantly more important to smaller plans, and fee transparency was also noticeably, if modestly, so. Things like financial strength, market image/reputation, and recognizable “brand name” funds stood out in their ranking of preferred provider attributes. However, when it came to things like participant service, reasonable fees, and provider Web site, there was no apparent difference at all.

Smaller programs were more likely to offer advice, and MUCH more likely to offer advice via an adviser outside the plan. Smaller plan sponsors were significantly more focused on the quality of advice to plan participants than larger programs, more worried about the reasonableness of fees, and placed less emphasis on adviser independence but greater emphasis on the ability to negotiate on behalf of the plan than did larger programs.

Of course, the service criteria are expressed in relative, not absolute, terms. That certain aspects were more important to smaller plans does not mean that others were unimportant. However, for those who work with and/or focus on smaller programs, those differences can be significant.

After all, we may all be alike—but that doesn’t mean we’re all the same.

—Nevin E. Adams, JD

Trends "Setting"

Change is a reality of life.

Establishing and maintaining benefit programs that are competitive and distinctive requires an awareness of trends in the marketplace, in the population, in the legislative and regulatory worlds, and in the needs of the workers that your plan sponsor clients hope to attract and retain. While product development and enhancements can certainly play a role, there are also the overarching issues that drive and shape those developments.

Here are 10 of which you should be aware.

Sandwich “Spread”?

Much has been written about the impact of the retirement of the Baby Boomers, the so-called Silver Tsunami. Every day, hundreds—even thousands—in that generational bloc do indeed leave the ranks of the employed, though not always by choice. Still, many are staying—or making plans to stay—longer than they might have chosen in less-stressful times. Indeed, the Boomers increasingly find themselves with a new labeling—the “sandwich” generation—in which they are not only focused on their own financial concerns, but those of their parents and children as well. This may give participants longer to save for retirement (and less time to spend in retirement), providing those still-meager accumulations a much needed cushioning, and it may also ameliorate some of the nascent concerns about talent transitions. But it’s not like that was part of “the plan.”

The “To Versus Through” Debate

Target-date funds have long offered an apparent simplicity of design and implementation that have made them appealing to plan sponsors and plan participants alike, a unique combination that allowed participants to do the “right” thing (letting professionals manage their money and rebalance it on a regular basis) while, for the very most part, doing nothing at all. Ditto plan sponsors, who stood to benefit from the application of the protective umbrella of the Pension Protection Act’s qualified default investment alternative (QDIA) status for an investment option that required no special participant education, involvement, or attention.

Of course, the 2008 market brought to light vast differences in the philosophies underpinning these designs in terms of asset allocation and glide path (in fairness, those were in evidence in 2006/2007 when more-conservative models were ridiculed for their lagging returns). Much of that difference was later explained as a function of whether the glide path was designed to take the investor to their anticipated retirement date—or past it (ostensibly till death).

The debate is not yet resolved, nor perhaps can (or should) it be. Still, ahead of changes on the regulatory front, fund manufacturers appear to be making a concerted effort to be clearer about those assumptions; and, if that does not make for an easier decision, it nonetheless makes it more obvious that a “decision” must be made.

The Match “Catch”

One of the more troubling trends of the past year was an apparent uptick in the number of employers cutting or suspending their 401(k) match. Coupled with the toll that the financial crisis had already taken on many defined contribution accounts, the retirement security of many participants (who were doubtless happy to have a job, even without a 401(k) match) was certainly under pressure.

Of course, it was never as bad as the headlines suggested. In fact, nearly 80% of the nearly 6,000 respondents to PLANSPONSOR’s annual Defined Contribution Survey said they had no plans to reduce, suspend, or eliminate their match, and, of the few who did say they were considering reducing their match, most were planning to reinstate it this year. Perhaps workers will no longer take such things for granted because, after all, “free” money really isn’t.

‘Share Alikes?

While company-stock-related lawsuits still seem to be the most common, that initial series of revenue-sharing suits is still “out there.” For the very most part, the plaintiffs have not fared well, but two widely publicized cases—one a $16.5 million settlement by Caterpillar, and a second involving Wal-Mart, where last December the 8th U.S. Circuit Court of Appeals found triable issues of fact in the case—are likely to keep plan fiduciaries “jumpy.”

Now, there are plenty of unique aspects to the Caterpillar settlement to differentiate it (see Tractor “Trailer”) the firm’s investment management arm was running the funds in question); and while the allegations against Wal-Mart were not dismissed, they have not yet been adjudicated (see The Benefits of the Doubt). Still, the omnipresent threat of litigation, coupled with new Form 5500 disclosures, are sure to keep things stirred up.

“Tell” Tales

Ah, yes—those new Form 5500 disclosures. Out of sight may have been out of mind, but beginning with the 2009 plan-year filings, the Labor Department has broadly expanded the requirements for reporting compensation earned by plan service providers on Schedule C of the Form 5500 to explicitly require the reporting of both “direct” and “indirect” compensation earned by plan service providers. And it is clear that the DoL views compliance with the Schedule C reporting requirements as part of a fiduciary’s obligation to evaluate the reasonableness of a service provider’s total compensation—at the same time that it stands to gain a better ability to use this data, which is now also to be filed electronically.

Pension Penchants

While many continue to talk about the wisdom of modifying defined contribution designs to more closely resemble the better attributes of their pension predecessors, trillions of dollars (and future benefits) still reside in those traditional defined benefit plans. Caught in the cross-hairs of the financial crisis, more stringent accounting rules, and tighter funding requirements, these programs are responding in a variety of creative ways: some outsourcing more, others less, some taking a more active stance in asset allocation, others opting for a stronger focus on liabilities. But, regardless, most are asking for—and by most accounts, receiving—fresh insights and inputs from the marketplace. That could be an opportunity for enterprising advisers willing to make the commitment.

The End in Mind

For years the retirement plan industry has focused on trying to help participants save as much as they could—all the way acknowledging that the real challenge was likely to be helping them live on that accumulated savings. As it turns out, a new generation of products has emerged that not only will help them do that, but will help them begin making those investments/preparations while they are still in that accumulation “phase.”

Issues in product design (or perceptions about issues in product design) remain, but those gaps are closing (including the gap in perceptions), and the prospects for future market turmoil seem likely to keep these offerings high on plan sponsor radar screens. And let’s not forget that the DoL has been asking for information on “arrangements that provide income after retiring.” (see IMHO: Safety "Knot?")

Conflict Ed?

What constitutes advice—and how those who can offer it can get paid for doing so—has long been a controversial issue. Earlier this year, the DoL took a step back from the position it took in the final regulations on the subject put together—by the DoL—in 2008 before being halted, and then withdrawn last November by the new Administration. The new proposed regulations largely seem to restore the status quo in favor of level-fee advice only. It’s not clear that is the end of things, nor is it (yet) clear that that will expand access to advice by participants. But it is clear that there is a “new” direction on advice (see IMHO: “Access” Points).

Executive “Order”

The 2008 elections brought in more than a new President and big majorities in Congress for his party; it also brought in new leadership at various agencies that have a large impact on retirement plans. That has already brought about shifts in direction on things like participant advice as well as a renewed interest in retirement income, while the financial crisis has reinforced the need for better disclosures on offerings like target-date funds.

Healthcare, Reformed?

By most accounts, much of the “oxygen” in Washington for the past year has been sucked up (out?) by health-care talk and proposals. With a bill now signed, employers can begin to focus on what that means for their programs—and their workers. What that will mean over the next decade is, however, anybody’s guess.

—Nevin E. Adams, JD

"Out" Spoken

About two months ago, the Department of Labor asked the public for some insights on retirement income via a request for information, or RFI.

The RFI sought input on what it termed a “broad range” of topics, including the pros and cons of distributing benefits as a lifestream of income, why lump sums are chosen more often, what kind of information participants need to make informed decisions on retirement income products, their ideas about participant disclosures of retirement income, and developments in the marketplace (1).

The comment period is just about two months old now, and with 30 days left, I thought it might be interesting to see what kinds of comments have come in (the Labor Department posts these comments on their Web site (2)).

The good news—nearly 500 comments!

The not-so-good news—as broad as the DoL’s scope of inquiry was, very few of the comments really seemed to be on point.

Now, in point of fact, I saw very few comments (yet) from providers, industry organizations, or even advisers (did see a couple of familiar names); doubtless those are in process. I’ve little doubt that on an issue this important—and with trillions of dollars at stake—there will be additional comments in both the quantity and quality that this issue surely deserves (3).

It was nonetheless interesting, IMHO, to see so many contributions from “regular” people—401(k) participants (and ex-participants) of every age from across the country. In addition to the voIume of responses, I was similarly taken by their passion and, from what I could discern, a certain singularity of purpose.

Based on my Good Friday perusal, the most common sentiment expressed was “keep the government away from my 401(k).” Now, there were flavors of that, of course, but it was a clear, consistent, and vibrant message, nonetheless. Most of these seemed to be from individuals concerned that the DoL’s RFI was little more than a stalking horse for the proposal put forth by Teresa Ghilarducci that suggested that the federal government should give people a chance to convert their 401(k)s into a government-sponsored annuity (see “The Plot to Kill the 401(k)”).

Another sub-group pointed to the fiscal challenges looming over Social Security, and, in no uncertain terms, told those reading their comments that the federal government should put its own house in order before trying to “fix” 401(k)s. Some were simply frustrated with the level of government debt, others the (apparently) growing level of government involvement in their lives (4). Many were simply worried that, having worked hard and saved diligently, the federal government now stood ready to step in and “take” theirs in order to spread it around to others who hadn’t been as prudent (5). (It should also be noted that a distinct minority liked the notion of some kind of government intervention to shield their retirement savings against the turmoil to which their balances had been subjected.)

Now, it would be easy to discount those responses. After all, there was nothing in the Labor Department’s request for information to suggest that the groundwork was being laid for some kind of government takeover; no reason to conclude that seeking insights on why more don’t voluntarily opt for annuities is tantamount to plotting to force people to do so. At best, some might say, these are misplaced ventings against things that have nothing to do with the issue at hand.

However, IMHO, it seems to me to be a sign of something more. I’m struck by the fact that individuals, spurred perhaps by some as-yet-unidentified provocation, took the time to take a public stand in support of their 401(k) and their willingness to take personal responsibility. Nor is it just words alone—that level of commitment has been borne out in any number of surveys that show workers, even in these trying economic times, increasing deferral rates to fill those depleted account balances.

Even so, it’s nice to see a bunch of dedicated participants still willing to put their “mouth” where their money is.

—Nevin E. Adams, JD


(1) A couple of weeks later, I dedicated a column to that effort (see “Safety ‘Knot’” at ), in which I outlined what was, effectively, 30 years’ worth of experience working with retirement plans—and nearly as long listening to plan sponsors and plan participants. In truth, I wasn’t doing so with an eye toward contributing to the DoL’s efforts directly, more or less viewing my role as trying to inspire those of you who work with these structures on the front lines to do so.

(2) You can check out the comments for yourself at http://www.dol.gov/ebsa/regs/cmt-1210-AB33.html

(3) Editor’s Note: It’s not too late to weigh in: Comments must be submitted on or before May 3, 2010. Members of the public can submit their input to the Department of Labor, RIN 1210-AB33, by one of the following methods:

Web: Federal eRulemaking Portal at www.regulations.gov. Follow the instructions for submitting comments.
E-mail: e-ORI@dol.gov. Include RIN 1210-AB33 in the subject line of the message.
Mail: Office of Regulations and Interpretations, Employee Benefits Security Administration, Room N-5655, U.S. Department of Labor, 200 Constitution Avenue, NW, Washington, DC 20210, Attention: Lifetime Income RFI.

(4) One commenter went so far as to sign his comment as a “Citizen Who actually saves, Living below my means Currently being punished for Wall Street's errors.”

(5) See also “IMHO: The Ant and the Grasshopper” at

Court 'Case'

For all the fuss about fees, a recent friend of the court filing by the Department of Labor reminds us that it’s not just what you pay, it’s what you get for what you pay.

The amicus brief had the DoL once again weighing in on another in the series of revenue-sharing suits that have kept the industry stirred up since the first wave was filed in 2006. Once again, the DoL was expressing its sense that there were real, and triable, issues in the case, this one involving Exelon Corporation (see “Solis Asks Court to Overturn Exelon Excessive Fee Case Decision”).

The DoL had previously expressed similar concerns about a similar dismissal in the same judicial district in a case involving Deere & Co. (see “Hecker Fee Case Prompts Exelon Suit Dismissal”)—a dismissal that was affirmed by the appellate court, and that the U.S. Supreme Court has refused to reconsider.

Those concerns weren’t enough to influence the appellate court in the Hecker case, though it did result in a judicial addendum that sought to limit the broader applicability of its reasoning to cases outside the specific facts in the Hecker case (see “7th Circuit Panel Limits Ruling's 404(c) Effects”). That said, the same court rejected the plaintiff’s arguments in Loomis v. Exelon Corp. as being nearly identical to those in Hecker—and dismissed it just as summarily.

Retail Fail?

In its most recent filing, the Labor Department sought to distinguish the two cases, noting that it wasn’t just the mere allegation that a large plan was offering mutual funds with “retail level fees,” but that—since those participants weren’t receiving services beyond those of any retail customer—those fees were, at least arguably, excessive(1). In fact, the DoL’s amicus brief noted that “[b]y continually returning to the point that the panel's opinion was limited to the particular facts as alleged, Hecker clearly and deliberately left the door open for other cases like this one in which the allegations about fees are tied directly to allegations about services.”

The Labor Department also took issue with the court’s admonitions that fiduciaries had no obligation to “scour the market” for the cheapest fees. “[T]he holding that fiduciaries are not duty-bound to ‘scour the market’ to find the lowest possible fees should not be read to mean they are free to pay any fee the market bears, without making a diligent effort to assure that they are getting reasonable services for the fees comparable to what prudently managed plans of similar size and type plans also pay.”

And the DoL also said that the district court made a mistake by “ruling instead, without inquiry, that the mere existence of fee ratios comparable to those in Hecker (.03 to .96% in this case) meant that the fees must be reasonable and prudently selected....” Indeed, the DoL noted that “[n]othing in ERISA or Hecker establishes that a particular numerical range of fees is either per se prudent or per se imprudent, or authorizes the courts to fashion a simple numerical test, without regard to what the evidence actually shows after the plaintiffs have been given an opportunity to present their case at trial or on summary judgment.” While the court’s reliance on Hecker as a basis for dismissal drew most of the DoL’s focus, it also pointed out that “[i]n an ERISA case alleging excessive fees in terms very similar to the allegations at issue here, the Eighth Circuit, reversing the district court's grant of a motion to dismiss, recently recognized the presumptive inappropriateness of dismissing a prudence claim at the pleadings stage.”(2)

However, at the heart of the DoL’s stance is, as it has been before, that the plaintiffs in the Exelon case had presented a case sufficient to be entitled to their day in court—and that the court’s dismissal of those claims was too preemptory(3), (4), too willing (though not perhaps in so many words) to apply a presumption of prudence to the decisions of the fiduciaries.(5)

What we don’t know yet, of course, is how much extra in types or number of services might be required to justify the payment of retail-level fees by a retirement program (especially a large one)(6), what kind of differential in penalties a court might apply if it found a “reasonable” gap—or if the 7th Circuit will reconsider its threshold for making that case.

However, what we can reasonably infer from the amicus filing is that the Labor Department thinks it should—and that the fiduciary threshold for a plan, certainly a large plan(7), is and, IMHO, should be, more than merely paying retail-level fees for retail-level service.

—Nevin E. Adams, JD


(1) Unlike the Hecker plaintiffs, the Exelon plaintiffs make very clear that they have not received more services for the same amount of money, and therefore the fees are not appropriate for an institutional investor.”

“The participants' amended complaint distinguished it from the one in Hecker by specifically alleging that the challenged fees were too high, not just in the abstract, but in relation to the services received.”

(2) “In Braden v. Wal-Mart, 588 F.3d 585, 595 (8th Cir. 2009), the court held that the plaintiff met the pleading requirements of Twombly and Iqbal, and was not required to plead additional facts explaining precisely how the fiduciaries' conduct was unlawful.” (see “8th Circuit Says Wal-Mart 401(k) Suit Requires Further Discussion”)

(3) “Considering the fact-intensive nature of most ERISA fiduciary-breach claims, and the near monopoly defendants often have over many of the determinative facts, the statutory scheme militates against dismissal at the pleadings stage in the ordinary fiduciary-breach case.”

(4)” It was therefore error for the district court to decide at this stage that under any plausible inference based on the facts as alleged, the defendants could not possibly have acted imprudently when they selected investment options charging retail-level fees and providing retail-level services without, according to the allegations, attempting to obtain the fees (or services) that plans of comparable size are expected to secure in the institutional-fund market.”

(5)” For the reasons stated above, the dismissal was error, not only because it was based on a misreading of Hecker, but because it misapplied the established pleading standards and gave the benefit of the doubt to the wrong party.”

(6) While the DoL’s amicus brief was technically in support of giving the plaintiffs an opportunity to plead their case, it also tipped its hand on what those findings might mean: “It (the plaintiff suit) alleges that the Plan fiduciaries breached their statutory duties by imprudently selecting Plan investment options that were unreasonably expensive for the plan's size and bargaining power and did not provide services commensurate with their high fees.

(7) Such conduct, if true, would constitute a breach of fiduciary duty under ERISA and would make the responsible fiduciaries liable for any resulting losses.”

See also “IMHO: The ‘Burden’ of Proof”

"Afford" Abilities

There are in this--or perhaps any—business certain moments of epiphany that shed light and clarity,

Moments where complexity becomes simplicity, where the shining light of comprehension illuminates what had, until that very moment, been hopelessly “confuddled”.

On the subject of retirement income, my moment of clarity came at the end of a conversation with my then soon-to-be-retiring father who was trying to sort through his options regarding his various savings programs and distribution options. At the end of what I hoped was an educational and enlightening discussion of his options and trade-offs, their upsides and potential downsides, when I was sure that I had been able to unwind and demystify the maze and presented him with a straightforward presentation of alternatives, there was this long pause—and then, he turned to me and, as politely as he could, said, “I just want to know how much money I’ll have to live on every month.”

It’s been many years since that conversation, but, IMHO, the question my Dad wanted answered is the question we all want answered—certainly the closer we get to retirement (younger savers are, of course, more likely to be asking other questions).

In recent weeks, I have been giving a lot of thought to the concept of retirement income. Aside from the relentless march of time, and the still-painful shake-up call from the markets, in recent weeks there have been a series of interesting—and surprisingly different—retirement income offerings coming to market (and some interesting innovations in the ones that have been out there). Legislation has been introduced in the Senate that would put the answer to my Dad’s question right on that 401(k) statement. Moreover, the Labor Department’s recent RFI on the topic has given a new visibility to this critical issue.

But as I wrote about a month ago (see Safety "Knot"), while I think that both plan sponsors and participants want—and are looking for—a product that can answer that question, even the most committed advocate of these programs will tell you that, while there is a LOT of interest, the take-up rate is, well, somewhat less.

There were elements of that on display in last week’s Retirement Confidence Survey (see Retirement Confidence Stabilized, but Preparations Still Lacking). Just 14% of current retirees reported that they “purchased a financial product or selected a retirement plan option that pays them guaranteed income each month for the rest of their life,” and a mere one in 10 (11%) of current workers indicated they were “very likely” to purchase a guaranteed-income product or select a guaranteed-income option from a retirement plan when they retire. In fact, a full one in five said they were “not at likely to do so.”

Even more intriguing: The RCS noted that, while workers/retirees offered a variety of reasons for their reluctance to make this purchase, the most frequently cited reason was that they didn’t feel that they could afford it (26% of workers, 24% of retirees)(1).

Now, considering how little understood these products likely are by most people, IMHO, this seemed an extraordinarily large number to be so astute about the costs.

Additionally, the report noted that workers’ stated likelihood of obtaining this type of product decreases sharply as age rises, and also decreases as assets increase. Intrigued, I followed up with Matt Greenwald (whose firm produces the report) and EBRI for some additional insights. Turns out that, among those who had accumulated less than $25,000, fully 42% say they would not purchase because they cannot afford it. But that number dropped dramatically (to 26%) among those that had saved $25,000-$99,999--and even more dramatically (to 6%) among those with financial assets of $100,000 or more (this group had other objections; generally, that they had a separate pension or preferred other options. IMHO, they probably just didn’t want to surrender the money (2). Moreover, when you dig inside what those lower income workers likely meant by “afford,” Greenwald and EBRI believe it is a combination of two factors: The first is that many people have accumulated very little and feel they cannot afford to tie up this money; the second, a lack of understanding about the products.

Now, in fairness, those with very small balances don’t really have much to spend--or annuitize, for that matter. And, if you only have $25,000 saved at retirement, well, no amount of annuitization can “save” you from that. Unfortunately, those who think they can’t afford these kinds of solutions may well be the very folks who can’t afford to be without them.

--Nevin E. Adams, JD


1 Other reasons mentioned include already having a pension, investments, or income (13 percent of workers, 15 percent of retirees), not knowing enough about the product (12 percent of workers, 3 percent of retirees), feeling they could do better managing the money themselves (10 percent of workers, 4 percent of retirees), not knowing it was an option (5 percent of workers, 9 percent of retirees), not trusting or believing in them (8 percent of workers, 2 percent of retirees), lack of interest (6 percent of workers, 4 percent of retirees), and not being offered one at work (2 percent of workers, 8 percent of retirees).

2 Those findings actually dovetailed pretty squarely with another report out last week—this one, Cogent Research’s In-Retirement Income 2010 report. That report was based on an online survey among a representative sample of 961 retirees and pre-retirees with a minimum of $100,000 in investable assets--the upper end of the spectrum. Citing the “incredibly high expectations of today’s retirees and pre-retirees,” Cogent Principal and co-founder Christy White noted, “In theory, pre-retirees love the idea of a guaranteed paycheck, but in reality they are unwilling to give up control of their principal for too long—and certainly not forever.”

Income Tacts

I don’t know if you’ve gotten to this point in your year yet, but we’ve started doing taxes in our household.

Now, tax season’s not quite the arduous experience it once was—not since that fateful “encounter” with the AMT a couple of years back, along with a year replete with a variety of “special” events, that finally persuaded me that it was a better use of my time to enlist the services of an expert. Still, there is the process of gathering the requisite information from which that expert can do his thing (aided in no small part by the order in which my better half keeps our financial house), and it provides a good opportunity to get a 30,000 foot perspective on how we spend (and invest) our money.

This year—as in most years—I was astounded at how much of our household income is absorbed by various taxes—federal, state, local/property, and, yes, FICA (which I consider a tax—but that’s a subject for another day). Indeed, while I have an opportunity to see most of these reduce my take-home every pay day, that never has quite the same impact as seeing what it adds up to over a year’s time. After all, it’s one thing to hear people talk about tax rates and tax brackets, credits, deductions, and allowances—or even to see those interim deductions on those payroll stubs. It is another altogether to see, all in one place, how much of one’s household income is “rendered unto Caesar.” This may be a free country, after all, but that doesn’t mean it’s cheap.

For all the angst and drama about fee disclosure, most plan participants are already given a fair amount of information about the costs of their retirement plan accounts. Of course, it’s generally in tiny little numbers in tiny little print—numbers that look like pennies (fractions of pennies, actually) and are expressed not in dollars and cents, but basis points, or bps (1). That doesn’t change the fact that most participants could, if they were so inclined, figure out how much their 401(k) costs. All they would have to do is sit down with their year-end statement and the prospectuses associated with the funds they have invested in, and—setting aside for a second potential “distortions” like interfund transfers (of which there generally aren’t many), the timing of contributions deposited, and the fluctuating value of the fund over the course of the year, and ignoring the impact of things like trading costs within the fund—they could get a respectable, if not completely precise, sense of how much they are paying.

Of course, what they’d also get, if they took the time to do that, is a single figure that would show them what they paid for their 401(k) last year.

Now, like many of those government taxes, those 401(k) fees are a toll that is taken along the way. For years this industry has fretted about the difficulties of producing that single number at a participant level—and, the way those fees are currently structured, that concern is not without merit (2). Some have suggested that producing that figure would produce an unhealthy focus on fees alone, rather than the broader context of a total return; others, that the additional costs of producing that figure would be prohibitive (3), and that participants wouldn’t be able to fully appreciate the array of services they are receiving for those expenditures.

That said, as “easy” as the largely imbedded nature of retirement plan fees makes it to extract them for the investment fund community, it also renders them largely invisible to the investing public.

As a consumer, when it comes to buying things like a car, I may not care (or need to care) how much commission that car salesman gets, how much the manufacturer paid for the tires, or even how much profit the dealership makes. But, at the end of the day, I expect—and have a right to expect—to know how much I am paying for the vehicle I drive off the lot. As a taxpayer, I may not know or fully appreciate just how much of my taxes go to support what services (and I may disagree with some that I do), but, at least once a year, I’ve got an opportunity to know how much I am paying in aggregate (and, generally on a somewhat less frequent basis, I have an opportunity to do something about it).

Unfortunately, as a 401(k) investor, I’m still largely in the dark—and, IMHO, the sooner participants know how much they are paying, the better off we’ll all be.

—Nevin E. Adams, JD

1 In my experience, most “regular” people don’t know what a basis point is (many don’t quite seem to understand what a mutual fund is), and many don’t read the prospectus where such things are explained.

2 One might cynically suggest that perhaps a methodology that would be easier to communicate might be more appropriate.

3 Frankly, IMHO, some of the proposals that have been made to present this information to participants would kill a lot of trees AND shed little in the way of clarity.