The Plot to Kill the 401(k)…Thickens

 Critics of the 401(k) have moved way beyond mere bad-mouthing—and are now openly advocating actions that would undermine support for, and participation in, those programs.

It started with criticism of the 401(k) itself—how it was “never intended” to be a primary source of retirement income—as though that precluded the possibility. There were the insinuations that later became outright claims that—despite evidence to the contrary—401(k) plan benefits were “upside down” and that tax benefits accrued only to the rich. Then reports—based on small samplings of data—that employer matching contributions didn’t really impact/influence contribution levels—and that the match was…“unfair”—or “exploiting naïve myopic workers.”

More recently, there was the pining for the defined benefit plan design, even though it never really provided the level of benefits promised for most—and even though the vast majority of workers in the private sector never even had that as an option—and even though no serious analysis with a full appreciation of the costs (and risks) of businesses taking on those obligations sees that as a reality. 

Yes, for years now the 401(k) has suffered the Shakesperean “slings and arrows of outrageous fortune.” Sometimes the motivations of those throwing stones have been obvious—sometimes not.  Some are surely just academics desperate/eager to be published, others have a strong preference for/commitment to a federal government “solution,” rather than the private sector. Some—surely some—are honestly just motivated to examine and improve on that voluntary system—but limited by access to comprehensive data. 

Of course, one might instead more cynically wonder if there’s a deliberate reliance on distorting measures like averages and means extrapolated from accounts ranging from those at the beginning of their savings career with those nearing retirement—in that, the retirement industry itself has been complicit in its search for clicks and headlines, regardless of the messages those distortions perpetuate. Throughout, there have been criticisms about the lack of coverage and/or participation—but little acknowledgement that the system has long been considered as supplemental to that “big government” solution—Social Security (which, let’s face it, has challenges of its own).

Having laid that groundwork, in recent weeks, those voices have become increasingly bold in their condemnations. There’s no longer any pretense about their plans for the 401(k). Quite frankly, they plan to starve it to death—to redirect those tax deferrals to other projects, and not as deferrals, but as outright taxpayer-funded “grants.” Not so long ago, the notion of taking away the preferences that do, in fact, encourage participation—but more importantly foster sponsorship of these programs—would have been anathema to political prospects. Apparently, those days are now behind us.    

Little wonder that in the latest Retirement Confidence Survey by the Employee Benefit Research Institute (EBRI) and Greenwald Associates, the second-highest concern of survey respondents was that the U.S. government would make “significant changes to the America retirement system.” 

So, what can we do about all this? Here are some suggestions:

Call out those in Congress who want to strip away support for the 401(k). Here I am talking specifically about the sponsors of the latest attempt to undermine the private retirement system—the sponsors of the innocuously labeled “Retirement Savings for Americans Act” (RSAA). More specifically, I’m talking about Sens. John Hickenlooper (D-Colo.) and Thom Tillis (R-N.C.), as well as Reps. Terri Sewell (D-Ala. 7th) and Lloyd Smucker (R-Penn. 11th). Up until now, the sponsors have demurred on how this bill would be paid for—until Sen. Hickenlooper recently acknowledged that he would be willing to reduce the 401(k) incentives and limits to pay for the proposed plan, which would include a 5% federal match. That’s right—a 5% federal match. Those heading to the NAPA DC Fly-In Forum, take note!

Quit sharing and promoting “research” based on distorted or questionable data—and the organizations that produce them. Yes, I know you’re just trying to highlight the need for action, and perhaps to provoke a business opportunity. And yes, I know you don’t always have time to wade through the assumptions and math, not to mention biases in sampling size—or those that are simply surveys of individuals that don’t know any “better.” But if you feel compelled to share it, at least take the time to acknowledge that you haven’t had the chance to validate the results.  And come to https://www.napa-net.com where we try to keep you up to date on such things.

Support the organizations that are supporting and advocating for positive change and enhancements in these programs. If you’re reading this, you’re likely already a supporter of one of those (the National Association of Plan Advisors)—and good for you. You can (and should) also support those efforts by participating in committees, conferences, and education programs. And by sharing the information you find here. You can even start with this one!

Quit apologizing for the 401(k). That’s right. Even the 401(k)’s most vocal champions seem to be inclined to acknowledge “we still have work to do.” I’m not suggesting we ignore realities—but this “voluntary” retirement savings program has in a remarkably short period of time become THE way Americans save, and they have VOLUNTARILY set aside TRILLIONS of dollars for the future. To my eyes, this is a jaw-dropping incredible, amazing success. 

The failure laid at the feet of 401(k)s—if a failure it is—is that people who don’t work, or who don’t work for employers who offer a retirement plan at work, are in worse shape than those who do. Now, I’m not saying that the 401(k) design works for everyone, and it most assuredly won’t work for those who don’t have access to its benefits. That said, 401(k)s are working for far more people and in far more varied circumstances than the fear-mongering headlines give them credit for. It’s one thing, after all, to acquiesce to what has become a journalistic “creed”—that “if it bleeds, it leads”—and something else again to wield the knife. 

Those of us who see the impact it has made, and continues to make, on a daily basis need to be willing to say that. Out loud and proudly.

- Nevin E. Adams, JD

(Not Just) One Small Step…

 “I believe that this nation should commit itself to achieving the goal, before this decade is out, of landing a man on the moon and returning him safely to the earth.”

I’ve often wondered if then-President John F. Kennedy actually thought that goal was obtainable on May 25, 1961. Even as he spoke those words,[i] he acknowledged that it would require “alternate liquid and solid fuel boosters, much larger than any now being developed,” not to mention funding for “other engine development and for unmanned explorations—explorations which are particularly important for one purpose which this nation will never overlook: the survival of the man who first makes this daring flight.”

It was to be a magical time for our nation’s space program. There was a plan, three separate programs (Mercury, Gemini and Apollo) to help us get there, and an aspirational vision—with an end date/deadline! There was also a sense of national urgency (the so-called “Space Race” with the Soviets, which was a lot less scary than the arms race), and, while throughout its life the program was remarkably bereft of injury, the tragedy of the February 1967 fire on Apollo 1 that took the lives of Gus Grissom, Ed White and Roger Chaffee reminded us of the stakes involved.

And then, after years of watching Americans enter space, circle the planet, exit their craft while circling the planet (at unimaginable speeds), and then leave Earth’s orbit to touch the lunar sky, I can still remember the grainy black-and-white images of Neil Armstrong’s “one small step for man” flickering across the screen of my family’s small black-and-white television (replete with its aluminum foil-festooned rabbit ears) on that Sunday evening in 1969. An experience that was, in some form or fashion, replicated around the world that special July evening 55 years ago in a rare planetary unanimity of experience as we got that report of a successful landing at “Tranquility Base.” It was one small step for Armstrong and a giant leap for mankind—but it was truly the culmination of lots of “steps” of different individuals, size and magnitude that made it possible.

It doesn’t take much imagination to draw a correlation between the planning for a landing on the moon and a successful arrival in retirement (OK, so maybe it takes a little imagination). It requires a notion of what constitutes a successful arrival, an idea of the steps that will be required to get there, the tenacity and ingenuity to deal with the inevitable bumps along the way—and the specificity of a date certain to give some structure to those plans.

That said, students of history know that one of the contingency plans for the Apollo 11 mission was a presidential statement if those astronauts had crashed (they missed the planned landing site by about 4 miles, and got pretty low on fuel before landing), or if they hadn’t been able to return to Earth (some engineer actually forgot to put a handle on the OUTSIDE of the lunar module door—and if the astronauts hadn’t noticed that and left the door open while they were on the surface, they might not have been able to get back inside the LEM). Fortunately, those contingencies are now simply interesting historical anecdotes. Still, it’s worth recalling that the ultimate mission was not only to get men TO the moon, but to return them safely home.

This week, as we ponder the accomplishments and planning that helped our nation put men on the moon, it’s also worth remembering that OUR “mission” is not only to get tomorrow’s retirees safely TO retirement, to take those “small steps” along the way—but ultimately to position them and their finances to carry them safely THROUGH retirement … to their “tranquility base.”

 - Nevin E. Adams, JD

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[i] Delivered before a special joint session of Congress.

(Writing) A Retirement Reality Check

 Are you scared of retirement?

Well, if you are, you have some company. And, at least according to one of those click-bait survey headlines, 40% of some 800 individuals surveyed claim to be more afraid of retirement than … death. And more than half—52%—of those younger than 39 claim the same.

Now, as silly as that seems, could those survey respondents simply be more ready to meet their maker than most? Now, as it turns out, they have some pretty concrete concerns about retirement—or more specifically what they are afraid they will lose; things like income and employment-based healthcare benefits. So, they aren’t scared of retirement, per se—but of the things they fear they will lose because of retirement.[i] 

I get it. Anyone who has changed jobs, a home, even a boss—can appreciate a certain level of anxiety around the unknown—even when it’s a result of your choice. And when it’s not?       

Despite that level of concern, this is a group in which two-thirds (68%) think that Social Security will be enough to live on—even though 4 in 10 admit they don’t know how much they will get from Social Security. And even though solid majorities expect those benefits to be reduced, and that the minimum age to collect those benefits will increase by the time they retire (which, arguably, is another form of benefit reduction).

I know. None of this makes sense. It’s been said that ignorance is bliss—but clearly that doesn’t apply to retirement awareness. But if there’s anything scarier than the reality of retirement,[ii] it surely must be the fear of trying to figure out what you need for retirement—if you even know how to start.

So, for those worried about where post-retirement income—and health insurance—is going to come from, let me offer up the following as a starting point in a retirement reality “check.”

First stop: Social Security 

If you haven’t set up an account there, you should—today. It’s an easy way to guard against identify theft, get a replacement Social Security card—and get estimates of your and your spouse’s estimated benefits. 

And once you are receiving benefits, it’s a pretty handy way to change your address and set up or change to direct deposit.

In all likelihood, Social Security alone won’t be “enough” (it wasn’t designed to be)—but it’s a regular source of retirement income, and it’s adjusted for inflation. In that sense, it stands to be a solid foundation for a retirement income budget. 

Second stop: Medicare

Trust me, you don’t want to mess this one up. You need to sign up as soon as you’re eligible (age 65 for most), whether or not you plan on claiming then. 

For most, Medicare will be the post-retirement health plan. In my personal experience, the coverage is pretty good—and it’s likely that most will find more options to choose from than in a corporate benefits setting. That said, the premiums are based on income[iii]—and that’s something to keep an eye on as those pre-tax savings (which will be taxed as income) are withdrawn.

There are two “core” parts to Medicare; what are affectionately referred to as Part A (hospital coverage)—which is “free” (in that your historical payroll deductions fund it) and Part B (medical insurance, which covers outpatient care, services from doctors and health care providers, some preventative services)—which, like your current health insurance, has premiums that you have to pay. More on that in a minute.

While certainly of benefit, those coverages won’t replace everything covered by the health insurance most have pre-retirement. Those are likely included in what are called Part C (vision, hearing, dental, and Part D (prescription drug coverage). And, generally speaking, those premiums are deducted from your Social Security benefit.

The bottom line here is that your post-retirement spending plans need to include something for health insurance (more precisely, your Social Security benefit will be reduced by that amount). You can find out more at: https://www.medicare.gov/basics/costs/medicare-costs

What’s Next?

This is, of course, just a starting point—baseline income and health insurance. These then need to be compared to post-retirement income needs/expenses. And then it’s important consider other sources of potential income, things like:

• pension/partial pension from employment (particularly ex-employers, where you may be entitled to a benefit);
• workplace savings plans (like a 401(k) or 403(b) plan), particularly since there are likely multiple plans where you had, and perhaps still have, a balance; and
• IRAs (which may include rollovers from those workplace savings plans). 

All in all, it’s important to have a reality check on retirement—so that you know you’ll be able to still write those checks—in retirement—for real.

 - Nevin E. Adams, JD

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[i] That also includes things like not keeping mentally active, not keeping physically active and/or not having social networks at/from work.

[ii] As has been noted before, those IN retirement seem to be feeling pretty good about things. See Retirement Confidence Bounces Back…Some. 

[iii] See The Biggest Surprise About (My) Retirement. 

The Founding Fathers and Fiduciary Fundamentals

Anyone who has ever found their grand idea shackled to the deliberations of a committee, or who has had to kowtow to the sensibilities of a recalcitrant compliance department, can empathize with the process that produced the Declaration of Independence we commemorate this week.

Not that the machinations of a plan committee can be fairly equated to the deliberations—or impact—of the Second Continental Congress, but there are some parallels. Things like…

Committee members should understand their obligations—and the risks.

Those who gathered in Philadelphia that summer of 1776 came from all walks of life, but it seems fair to say that most had something to lose. True, many were merchants (some wealthy, including President of Congress John Hancock) already chafing under the tax burdens imposed by British rule, and perhaps they could see a day when their actions would (eventually) accrue to their economic benefit. Still, they could hardly have undertaken that declaration of independence without a very real concern that in so doing they might well have signed their death warrants.

It’s not quite that serious for plan fiduciaries. However, as ERISA fiduciaries, they are personally liable, and may be required to restore any losses to the plan or to restore any profits gained through improper use of plan assets. Moreover, fiduciaries have potential liability for the actions of their co-fiduciaries. So, it’s a good idea to know who your co-fiduciaries are—and to keep an eye on what they do and are permitted to do.

Indeed, plan fiduciaries would be well advised to bear in mind something that Ben Franklin is said to have remarked during the deliberations in Philadelphia: “We must, indeed, all hang together or, most assuredly, we shall all hang separately.”

Money can be a sticking point.

Before it declared independence, the Second Continental Congress created the Continental Army, named a Commander-in-Chief (George Washington), and authorized the first printing of American money ($1 million in bills of credit). Indeed, in the months (and years) that followed, the costs of (and means of funding) that army would be a constant source of contention between the Congress and the leaders of the Continental Army, even after the fighting on the battlefields was over.

The costs of running a retirement plan are varied, and these days many are borne—directly or indirectly—by the plan and participants themselves. But if the American Revolution was fought over “taxation without representation,” ERISA charges plan fiduciaries with an unequivocal obligation to ensure that every action taken, every service or service provider enlisted, be done for the exclusive benefit of retirement plan participants and their beneficiaries.

It’s not all about money, of course. But—as the Labor Department has noted, and as the plaintiffs’ bar clearly knows—fees and expenses paid by the plan can have an impact on retirement savings and security. Plan fiduciaries should be no less attentive.

It can be hard to break with the status quo.

By the time the Second Continental Congress convened, the “shot heard round the world” at Lexington and Concord was more than a year old, but many of the representatives there still held out hope for some kind of peaceful reconciliation, even as they authorized an army and put George Washington at its helm. Little wonder that, even in the midst of hostilities, there was a strong inclination on the part of several key individuals to put things back the way they had been, to patch them over, rather than to take on what was then the world’s most accomplished military force.

As human beings we are largely predisposed to leaving things the way they are, rather than making abrupt and dramatic changes. Whether this “inertia” comes from a fear of the unknown, a certain laziness about the extra work that might be required, or a sense that advocating change suggests an admission that there was something “wrong” before, it seems fair to say that plan sponsors are, in the absence of a compelling reason for change, inclined to rationalize staying put.

Little wonder that we often see new fund options added, while old and unsatisfactory funds linger on the plan menu, a general hesitation to undertake an evaluation of long-standing providers in the absence of severe service issues, and reluctance to adopt potentially disruptive (and, admittedly, often expensive) plan features like automatic enrollment or deferral acceleration.

While many of the delegates to the Constitutional Convention were restricted by the entities that appointed them in terms of how they could vote on the issues presented, plan fiduciaries can’t defer that responsibility to others. Rather, their decisions are bound by an obligation that those decisions be made solely in the best interests of plan participants and their beneficiaries—regardless of any other organizational or personal obligations they may have outside their committee role.

It’s important to put it in writing.

While the Declaration of Independence technically had no legal effect, its impact not only on the establishment of the United States, but as a social and political inspiration for many throughout the world since is unquestioned, and perhaps unprecedented. Putting that declaration—and the sentiments behind it—in writing gave it a force and influence far beyond its original purpose.

As for plan fiduciaries, there is an old ERISA adage that says, “prudence is process.” However, an updated version of that adage might be “prudence is process—but only if you can prove it.” To that end, a written record of the activities of plan committee(s) is an essential ingredient in validating not only the results, but also the thought process behind those deliberations. More significantly, those minutes can provide committee members—both past and future—with a sense of the environment at the time decisions were made, the alternatives presented, and the rationale offered for each, as well as what those decisions were.

They also can be an invaluable tool in reassessing those decisions at the appropriate time(s) in the future and making adjustments as warranted—properly documented, of course.

Big change takes time—and effort.

Congress may have declared independence that July, but the reality took considerably more time and effort. 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—but less than a year later Washington’s troops would winter at Valley Forge.  It was not won until the victory in Yorktown, Virginia in 1781, and not official for two years after that. 

We do, of course, 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 continue to do so to this day.

Plan fiduciaries who are doing their duty and fulfilling their obligations aren’t exactly putting their lives on the line—but in their own special way(s), they’re working to help assure American worker retirement freedoms—their financial independence—every day.

- Nevin E. Adams, JD