A Change of "Hearths"

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

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

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

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

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

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

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

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

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

How your investment menu might change.

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

And you might also want to:

Document your review/decision(s)

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

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

- Nevin E. Adams, JD

‘Might’ Makes… Wrong?

 Sometimes the motivations of those attacking the 401(k) are pretty obvious.

The most recent was an article by a Maurie Backman at the Motley Fool titled, “Why a 401(k) isn’t the wonderful savings tool you think it is.” I tried to ignore it when it first (to my eyes) appeared on Forbes (which seems to have a pretty low threshold for contributions these days), and I was no more inclined to read it when it showed up a couple of days later on Fox News. But then folks started sharing it on both LinkedIn and Twitter—some ostensibly to hold it up for ridicule,[i] others as an affirmation—and, with some reluctance, I finally clicked on the article. 

Oddly, considering the title (and, in fairness, editors have been known to tweak headlines such that they bear little resemblance to the article they are attached to), the article spent almost as much space outlining the virtues of the 401(k)—specifically that they are “easier to sign up for” than an IRA, and that they have (much) higher annual contribution limits, even for catch-up contributions.

So, what’s their beef(s)? Backman makes three points:

1. That investment choices in a 401(k) can be limited (specifically that you generally can’t buy individual stocks).
2. That fees in a 401(k) can be high (the issue here seems to be the inclusion of actively managed funds alongside index offerings—and an assertion that “401(k)s plan come with administrative fees that generally are not negotiable. The administrative fees you'll pay with an IRA are typically much lower”—an assertion that doesn’t align with my experience, but is offered without data).
3. That a Roth option isn’t guaranteed (this factual assertion despite the fact that the most recent data from the Plan Sponsor Council of America that more than two-thirds of 401(k)s do currently provide the option).

To sum up: According to the article that claims the 401(k) isn’t a wonderful savings tool, the suboptimal aspects of a 401(k) are: (1) the options might not include individual stocks; (2) the fees can be high; and (3) you aren’t guaranteed to have the ability to save for retirement on a Roth basis—even though, by the author’s own admission, 401(k)s have much higher contribution limits and are easier to access, and thus are much more likely to be used (recall that data indicates individuals are 12-15 times more likely to save in a 401(k) than in an IRA on their own). Oh—and there’s only a passing reference to the employer match, which arguably also isn’t “guaranteed,” but is certainly more likely to be found in a 401(k) than in a stand-alone IRA.  

Perhaps it should come as no surprise that an article penned by the Motley Fool—a platform that purports to help individuals make stock picks—thinks that you’d be better off utilizing a retirement savings plan[ii] that would more readily accommodate their services. 

Yes, sometimes the motivations of those attacking the 401(k) are pretty obvious. The motivations of those choosing to publish such silliness? Not so much.

- Nevin E. Adams, JD

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[i] Memo to those who did—clicking on the article is the whole point; sharing it only exacerbates the problem.  

[ii] To add to the irony, the article sums up its advice thusly: “What you should do in that case is contribute just enough money to your 401(k) to snag your full employer match, if one is offered, but then put the rest of your savings into an IRA. Doing so could help you invest more appropriately, avoid high fees, and enjoy the perks of a Roth saving option.” 

What's 'Eating" 401(k) Haters?

 Another week, another Bloomberg op-ed bashing 401(k)s—but this time the target is fees—and advisors.

The most recent “shot” is found in an article[i] titled “401(k) Fees Are Eating Your Retirement Savings.” The author, one Ethan Schwartz,[ii] without citation (beyond “various estimates”), tosses out claims as to the “average” fees in 401(k)s (and we know the value of “average” in such matters), states that those fees are “much higher” for then claims to know of “annual expenses well under 0.1%, and often near zero, offered by widely available stock and bond index funds and ETFs in many flavors and stripes outside of 401(k)s”—and then does the math to show how much it all adds to individually, and then he extrapolates it to the whole universe of 401(k) savers to assert that “more than $20 billion annually” is being “taken” from the nest eggs of retirement savers.

Better still, he cites the example of a “close friend” who asked for his help—only to find that “the plan offers a menu of high-priced (and underperforming) actively managed vehicles. Its only index-tracking choices are expensive “collective investment trusts costing about 0.5% more than index mutual funds and ETFs.” Oh, and he also cites as “even more outrageous” the reality that those trusts allow for securities lending (which doesn’t cost the plan money, and in fact probably offsets fees with income).

As unlikely as his generalizations seem to match the 401(k)s I know, it’s impossible to pick apart his portrayal of facts because—the individual situation notwithstanding—they are gross generalities. Not that that dissuades him from offering a “solution”—to “simply eliminate 401(k) intermediaries,” and to “let American workers save for retirement using their choice of designated, IRA-like accounts offering the same, cheap index-tracking funds and ETFs available outside of retirement plans.”

Unlike the other proposals cheered of late, he’s willing to leave the “other incentives that encourage Americans to save through their 401(k)s” intact, “including preferential tax status, employer matching contributions and enrolling employees by default.” He touts as “added bonus,” that “employers would no longer have to spend time and money establishing and monitoring their own, costly 401(k) plans. And employees of small businesses would no longer face a cost disadvantage vis-à-vis the plans offered by large firms, as they do today.”

Now, he anticipates “howls of opposition from the investment management industry,” and—along with a perspective of the industry that seems woefully out of date, he cites the work of none other than Yale Law School professor Ian Ayres and University of Virginia law professor Quinn Curtis. You may remember these guys—and the “love letters” from Yale. Their academic pedigree notwithstanding, these are the guys who used outdated (and limited) Form 5500 data and questionable expense assumptions to make wild accusations about 401(k) fees and the plans that offered them. Accusations that, it bears reminding, were subsequently disavowed by Yale University’s Law School. 

In fact, actual fund data continues to show declining fees among 401(k) plans. It’s not that you can’t find outliers—perhaps even this writer’s colleagues’—but that’s clearly the exception, rather than the rule. In fact, the Investment Company Institute reports in “The Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 2019” that 401(k) plan participants investing in equity mutual funds incurred an average expense ratio of 0.39% in 2019, compared with 0.42% in 2018 and 0.77% in 2000. 

Like so many others who opine from ivory towers far removed from the front lines of workplace retirement plans, this author blithely assumes that workers don’t need the education, encouragement and financial support of employers and advisors. He ignores (or perhaps is simply unaware) of the data that shows how workers of even relatively modest means are 12 times more likely to save in their workplace retirement plan than on their own.[iii]  

Today they’re also well-served by a growing number of automatic enrollment designs to help them get started, a steady increase in the default savings rate, and acceleration in that rate over time, not to mention the expanded availability and utilization of qualified default investment alternatives—enhanced designs that are not only continually finding their way “down market,” but that it seems fair to say are largely due to the involvement and engagement of those savings “eating” intermediaries he characterizes as “largely superfluous.”

What exactly is (still) “eating” 401(k) haters?

Why, instead of looking for ways to undermine a system that works, or pushing for incentives to extend those benefits to everyone—do they seem bound and determined to put those retirement savings on a “crash” diet?

- Nevin E. Adams, JD

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[i] Bloomberg News editorials have been on something of a tear of late; you’ll also want to check out An Article that Doesn’t Make Much Sense and Chiseling Away at the 401(k)… 

[ii] According to Bloomberg, Schwartz has worked as an investment manager and financial services executive for 21 years. He was a special assistant to the deputy secretary of the Treasury in the Clinton administration.

[iii] Vanguard, How America Saves 2018 (DC plan participation), EBRI estimate based on 2014 IRS SOI tabulation (IRA-only participation).

A Valuable ‘Commodity’

I’ve been on the road a lot over the past several weeks – and I’ve noted a remarkably diverse range of prices in gasoline across various locales.

I think it’s fair to label gasoline a “commodity[i]” – what the dictionary describes as “a reasonably interchangeable good or material, bought and sold freely as an article of commerce.”

Oh, sure – you may have a preference for one brand or another, you may not care for the political allegiances of their ownership… but when push comes to shove, it usually comes down to price – because, after all, when it comes to gasoline, it’s pretty much the same stuff.

For years, recordkeeping services – complex and difficult as they can be to provide accurately and consistently (not to mention profitably) – have been characterized (some might say disparaged) as a “commodity,” while fee compression (and the aforementioned complexities) continue to fuel consolidation in that industry.

Honestly, as a former recordkeeper, I’ve never understood how anyone who had any real appreciation for a business as varied, complex, and demanding as that of keeping up – and keeping up accurately – with individual participant accounts over the course of a working career – would be willing to refer to those services as “interchangeable.” Or why any firm that provides those complex services in these challenging times would be willing to let others do so. Certainly any participant, plan sponsor, or advisor who has seen the integrity of that data put at risk by clumsy and inattentive hands can attest to the impact that a failure to do so. Indeed, I’m shocked by the leaders in our industry who label it as such – leaders that I think might well feel differently if they had spent even a small amount of time in those shoes.


Without question, recordkeeping is not only a challenging business, it is expensive to stay current with technology, to keep processes and programs current not only with changes both in the laws and regulations, but the nuances of individual plan designs. And as if that weren’t enough, cybersecurity has recently emerged as a significant threat – little wonder in view of the enormous amount of sensitive financial data to which these “commodity” producers are entrusted.

Where recordkeeping does seem to have been “transformed” into a commodity business is in the pricing of those services. Like the gasoline drawn from a pump, economists would tell you that, since commodity products are “interchangeable,” they compete (only) on price – and to do so (profitably) requires that that you have to achieve economies of scale – and the continued downward pressure on fees for those services continues to force firms to exit or flee to the embrace of larger players.

Further fueling those trends, the plaintiffs’ bar has latched onto the “commodity” concept, having (apparently) determined that it is “appropriate” to be compensated for these services by a flat per-participant charge ($35 seems to be their notion of “reasonable,” at least for the multi-billion-dollar plans targeted, though the courts don’t seem ready to buy into that presumption just yet).
I know that over the years there has been an ongoing attempt to “functionalize,” to break the complex process of recordkeeping (I tend to think of it as participant accounting) down into component parts like some kind of mass assembly line – and perhaps some quarters have done so successfully. Perhaps then, at least in some venues, that once ornate, vibrant (though often complicated and tedious) process has actually been reduced to one so regimented and segmented, so parsed out between segregated operational touchpoints that it might there truly be considered a “commodity.”

But my personal experience is that those who find themselves working with a service provider or TPA that views those critical services as a “commodity” will, in short order, wish they weren’t.

- Nevin E. Adams, JD

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[i]Now, if you’ve ever had the opportunity to shop for groceries in different parts of the country, you pretty quickly become aware of some incredible price differences in a variety of items, including things as basic as produce or milk. But it’s gasoline that tends to draw my attention, not only because it’s something I buy regularly, but because I don’t even have to walk into a store to compare prices.

15 (More) Retirement Plan Points to Ponder

Working with retirement plans is a complicated, challenging and constantly changing process. That said, there are certain constants — and things that bear repeating and/or reconsidering from time to time.

Since I published my first list of 15 last fall (one of my most popular, as it turns out), I’ve gotten several very good suggestions — and had an epiphany or two.

Here are a few (more) points to ponder:

1. Cheaper isn’t always better, unless it’s the only difference.
2. Sometimes you do get what you pay for — but not always.
3. If you’re not doing anything “wrong,” you probably aren’t doing anything much.
4. You can spend a lot of money in court being right.
5. A fund whose allocation is based solely on date of retirement is sure to miss something, but not as much as a fund whose allocation doesn’t take that into account.
   
6. If you don’t know how much you’re paying, you’re likely paying too much.
7. Don’t assume that those who aren’t saving via your workplace retirement plan know what they are doing — or what they are missing.
8. There’s something about putting decisions down on paper that helps people take them more seriously.
9. Figuring out how much to take out is harder than figuring how much to put in.
10. The werewolves always outnumber the silver bullets.
11. When it comes to workplace retirement plans, there are three kinds of people: those who are ERISA fiduciaries and know it, those who aren’t ERISA fiduciaries and know it, and those who are ERISA fiduciaries and find out via subpoena.
12. If you can’t remember the last time you did a request for proposal, it’s probably overdue.
13. The default deferral rate for a non-automatic enrollment plan… is zero.
14. If you don’t know why “we’ve always done it this way,” it’s time you did.
15. You may not know all the right answers, but it’s worth knowing the right questions.

- Nevin E. Adams, JD

7 Common Retirement Plan Mistakes

The headlines are all about revenue-sharing, conflicts of interest and statutes of limitation — but the things that are likely to get plans and plan sponsors in trouble are a lot more mundane.

Here are seven that are more likely to gum up the works for your average plan sponsor.

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

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

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

Oh, and don’t forget that administrative procedures for dealing with such things have been known to be, or become, inconsistent with plan documents over time.

2. Failure to follow plan document eligibility and vesting provisions.

The plan document also spells out employees’ rights to retirement benefits and the formulas for determining them based on the correct application of service and/or age requirements of the plan regarding eligibility for participation, as well as the proper application of the plan’s vesting schedule.

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

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

3. Not keeping your plan document up to date.

As central to the plan’s operation as the plan document should be, it needs to be updated when the tax laws affecting 401(k) plans change. The IRS generally establishes a firm deadline by which plan amendments reflecting tax law changes must be adopted. If you don’t remember the last time you updated your plan, you’re probably overdue.

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

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

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

5. Not depositing participant contributions on a timely basis.

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

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

Note also that the rules about the timing of matching contributions or other employer contributions are different than those for elective deferrals.

6. Failing to obtain spousal consent.

A common plan mistake submitted for correction under the Voluntary Correction Program (VCP) is the distribution to a participant of a benefit in a form other than the required QJSA (e.g., a single lump sum) without securing proper consent from the spouse. This often happens when the sponsor’s HR accounting system incorrectly classifies a participant as not married (or when the participant was not married at one point and subsequently married or remarried).

The failure to provide proper spousal consent is an operational qualification mistake that would cause the plan to lose its tax-qualified status.

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

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

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

- Nevin E. Adams, JD

IRS Guidance Available
 
As for plans that fall short of any of the above, the IRS has resources available to help you identify these problems before they occur — and an outline of how to go about fixing them if they do occur. And should you find a plan in one of the foregoing predicaments, you might want to check out these resources from the IRS:

• If you haven’t updated your plan document.

• If you have issues with required minimum distributions.

• If you haven’t made contributions on a timely basis.

• If you didn’t get spousal consent.

The Troubble With Tibble

Ours is a complex business. For one thing, it’s fraught with potential peril for inattentive plan fiduciaries, many of whom find themselves tasked with the responsibilities of the role (frequently as part of a much wider range of responsibilities) with little in the way of background, training or explanation to help.

And then you have the defendants in the Tibble v. Edison International case: a large ($2 billion-plus) plan that not only had an investment committee, but also one separate from the benefits administration function. Moreover, that investment committee had access to the services of an investment advisor (Hewitt’s investment consulting arm) to review, select and monitor funds and, according to the findings of the lower courts, a review process that was attentive to the requirements of an investment policy statement (IPS).

What they did not do was ask about the availability of lower-priced institutional shares.

However, that wasn’t the issue before the U.S. Supreme Court this past week. Rather, the Court was asked to decide how to apply ERISA’s statute of limitations to the action of selecting these funds. Three of the retail class funds were added as plan investment options in 1999; three more were added in 2002. The plan sponsor plaintiffs had successfully argued before the 9th Circuit that when the suit was brought in 2007, the funds which were added in 1999 had been on the plan menu for more than six years — beyond ERISA's statute of limitations. At issue was whether the prudence of that older selection could be challenged.

In the presentations before the Supreme Court, both parties agreed that there was a fiduciary duty to review plan investments, and both parties were willing to concede that the initial review and selection of an investment fund should be more extensive than just considering the retention or replacement of a fund that was already on the investment menu. It was the nature and extent of that review that consumed much of the discussion during the hearing.

In the initial ruling in the case, the district court said there had to be a change in circumstances significant enough to make the continued investment in that investment option an imprudent one, and cited legal precedent for its view. The discussion last week noted precedents in the 9th, 4th and 11th Circuits saying that change would have to be tantamount to adding a new fund. In Tibble, there doesn’t appear to have been a change in the funds on the menu per se, but rather, the mere existence of lower-cost institutional shares.

However, the Assistant to the Solicitor General, appearing in support of the plaintiffs’ position as a friend of the court, told the justices that in its assessment, the ongoing monitoring of investment options was "not limited to circumstances in which the fund changed so much that it's like a new fund is being put in place.” 

It remains to be seen how the Supreme Court’s view of the level of review and the circumstances that trigger it will affect the outcome of this case. We’ll have an answer by June.

That said, the words that linger in my mind — and that I think plan fiduciaries should remember — also came from the Assistant Solicitor General: “You have a duty to look on a periodic basis and, really, how are you going to know if there have been changes unless you looked.”

How indeed.

- Nevin E. Adams, JD

5 Things Plan Sponsors Should Know

Whether or not you’re in the habit of making New Year’s resolutions, this is a time of year when reassessments seem appropriate, and perhaps in no area as much as that of retirement plan administration. Many find themselves in the role of plan sponsor (or plan committee) with no background, limited training, and far more responsibility than they may appreciate at the outset.

For those of you who find yourself starting the year with new plan sponsor clients, or new members of the plan committee, or perhaps even incumbents who could benefit from some New Year’s resolutions, here’s five things every plan sponsor should know:

How much your 401(k) plan costs.

Okay, fees are just one of several factors plan sponsors need to consider, but when the fees for services are paid out of plan assets, there is an obligation to understand the fees and expenses charged. This is important because you are expected to ensure that the fees paid and services rendered to the plan are reasonable. It’s hard to know if the fees paid are reasonable if you don’t know what they are. Oh, and even if the plan fees were determined to be reasonable in the past, they need to be monitored. Things change over time, after all.

Need some help? Check out this information from the Employee Benefits Security Administration. 

The services that you receive for those 401(k) fees.

As noted above, determining reasonability of fees and services means not only understanding the fees paid, but also the services provided for those fees. Larger fees may, of course, be reasonable for more expansive or comprehensive services. But also note that paying big fees for unnecessary services could be considered unreasonable.

See also “Tips For Selecting And Monitoring Service Providers For Your Employee Benefit Plan.”

How much of your 401(k) plan fees/costs go to whom.

Arguably, knowing how much who is being paid for what is required to assess reasonableness. But the Department of Labor now requires that “covered service providers” (CSP) furnish in writing “the services to be provided and all direct and indirect compensation to be received by a CSP, its affiliates, or subcontractors. You can find out more about these requirements here.

Who the plan fiduciaries are.

Odds are, if you as a plan sponsor are reading this, you are one. But don’t take my word for it. Check out “Meeting Your Fiduciary Responsibilities.”

The responsibilities — and obligations — of plan sponsors.

Since you (probably) are one, you should make sure you know what your responsibilities are, the extent of your personal liability, and what kind of insurance is maintained by your employer to address that exposure.

Fiduciaries have important responsibilities and are subject to standards of conduct because they act on behalf of participants in a retirement plan and their beneficiaries. In addition to paying only reasonable plan expenses, these responsibilities include acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them, following the terms of plan documents, and carrying out their duties prudently.

That brings up a sixth item for our plan sponsor list: If a plan fiduciary lacks the expertise to fulfill those duties, they should, of course, consider hiring a professional to help them.

- Nevin E. Adams, JD

Thanks Giving - A Retirement Plan Professional's List

Thanksgiving has been called a “uniquely American” holiday, and one on which it seems fitting to reflect on all for which we should be thankful.

Here’s my 2014 list:

I’m thankful that retirement plan coverage and participation is up, if slightly, and that there seems to be a expanding national dialogue about how to expand that.

I’m thankful that a growing number of policy makers are willing to admit that the “deferred” nature of 401(k) tax preferences are, in fact, different from the permanent forbearance of other tax preferences — even if the governmental accountants and academics remain oblivious.

I’m thankful that so many employers offer access to a retirement plan in the workplace — and that so many workers, given an opportunity to participate, do.

I’m thankful that most workers defaulted into retirement savings programs tend to remain there — and that there are mechanisms in place to help them save and invest better than they might otherwise.

I’m thankful that those who regulate our industry continue to seek the input of those in the industry — and that so many in our industry, particularly those among our membership, take the time and energy to provide that input.

I’m thankful that participants, by and large, continue to hang in there with their commitment to retirement savings, despite lingering economic uncertainty, and competing interests, such as rising health care costs.

I’m thankful for objective research that validates the positive impact that committed planning and preparation for retirement makes.

I’m thankful for the perspectives that remind us that the “golden age” of pensions wasn’t. And that allow us to appreciate the strengths of the current system, even as we work to improve it.

I’m thankful that the prospects of fee disclosure seem to have made the realities less of a shock than might otherwise have been the case for some.

I’m thankful that fewer seem to think that their 401(k) is free – though more than a bit concerned that some (including, according to surveys, some plan sponsors) still do.

I’m thankful that plan design enhancements such as automatic enrollment, contribution acceleration, and qualified default investment alternatives continue to be adopted — and hopeful that more plan sponsors will see fit to extend those advantages to their existing workers as well as their new hires.

I’m thankful for qualified default investment alternatives (QDIA) that make it easy for participants to create well-diversified and regularly rebalanced investment portfolios — and for the thoughtful review of those options by prudent plan fiduciaries.

I’m thankful that the “plot” to kill the 401(k) … (still) hasn’t …

I’m thankful, in this anniversary year, for the foresight of those who brought ERISA into being — and for all who have, in the subsequent 40 years, worked to make it better through legislation, regulation and interpretation.

I’m thankful for the team here at NAPA, and for the strength, commitment and diversity of the membership. I’m thankful to be part of a growing organization in an important industry at a critical time. I’m thankful to be able, in some small way, to make a difference on a daily basis.

I'm thankful for the warmth with which readers and members, both old and new, have embraced me, and the work we do here. I'm thankful for all of you who have supported — and I hope benefited from — our various conferences, education programs and communications throughout the year. I’m thankful for the constant — and enthusiastic — support of our advertisers.

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

 

Here’s wishing you and yours a happy Thanksgiving!

 

- Nevin E. Adams, JD 

Motion "Sensers"

I’m not sure exactly when I was introduced to the concepts behind Sir Isaac Newton’s laws of motion.  While behavioral finance has laid claim to the concept of (and means of combatting) inertia in benefit plan design, Newton’s first law of motion (sometimes called “the law of inertia”)—first published in the late 1600s—reminds us that (in layman’s terms), an object at rest remains at rest; or perhaps more precisely, an object continues to do whatever it happens to be doing unless a force is exerted upon it.

However, the one I remember most from earlier days is the third law of motion—the notion that for every action there is an equal and opposite reaction.  To this day, I have a “Newton’s cradle” at my desk.

While Newton’s laws were intended to explain the motion of objects, they do seem to have application in matters of human interaction as well.  One need only look at the increasingly strident levels of partisanship on Capitol Hill to appreciate the stridency of “equal and opposite” reactions.

A recent EBRI publication[1] noted that recent decisions by some employers to eliminate health benefits for spouses who were eligible for coverage through their own employer could represent a “tipping point” in employment-based health benefits.  While the report noted that in 2012, 7 percent of employers did not cover spouses when other coverage was available to them, it also cautioned that as of late 2012–early 2013, another 8 percent of large employers were reporting that they planned to exclude spouses from coverage when other coverage was available.

These decisions come at a time when employers are wrestling with how to control the rising cost of providing health benefits to workers, in part due to the requirements of the Patient Protection and Affordable Care Act of 2010 (PPACA).[2]  In fact, one large employer that recently made the decision to drop spousal coverage under those circumstances specifically said, “since the Affordable Care Act requires employers to provide affordable coverage, we believe your spouse should be covered by their own employer.”

EBRI’s analysis indicates that the costs of covering spouses may well represent a tempting cost reduction target for some.  The report notes that, in 2011, policyholders spent an average of $5,430 on health care services, compared with $6,609 for spouses, and—even adjusting for factors such as gender, age, and overall health status—found that spouses still have health care costs that are roughly 7 percent higher than policyholders.

The report cautions, however, that while “first-mover” firms may save money in the short run by eliminating working spouses from their plan, those costs could come back to them over time as other employers embrace that approach—basically returning policyholders to their coverage who heretofore were covered as spouses in other programs.

Ultimately, any savings from those moves will depend upon each firm’s composition of couples and their respective employment statuses.  Indeed, given prevailing levels of cost sharing, the report notes that employers might end up worse off under a change in spousal coverage policies, particularly since employers generally subsidize employee-only coverage more than they subsidize family coverage.

As the EBRI report reminds us, decisions about benefit plan design, like so many other decisions, should be made thoughtfully—and with an eye toward the realization that, for every action there can be an equal, opposite, and sometimes greater, reaction.

Nevin E. Adams, JD

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[1] “The Cost of Spousal Health Coverage” is available online here.

[2] PPACA requires that employers with 50 or more workers provide health coverage to workers and dependent children until they reach age 26. It does not, however, require employers to provide health coverage to spouses, whether or not they are eligible for other health insurance.

A Year-End "Review"

This is the time of year when many people both look back at the year just past—and ahead to the next with a fresh perspective. It’s also that time of year when many make lists.

So, whether you’re looking to make some New Year’s resolutions, or just looking to improve your overall financial situation, here are 10 things to check off your 2013 list—and that can get your 2014 list off to a strong start.

1. Deal with debt (see Savings Resolutions for the New Year).
2. Establish a savings goal for retirement (see Estimate “Ed”).
3. Save for retirement—at work, or on your own (see Saving for Retirement Outside of Work).
4. Save early so that your savings can work for you (see The “Magic” of Compounding).
   
5. If you do have a retirement plan at work, make the most of it (see Making the Most of your Retirement Plan).
6. Maximize your savings—see if you’re eligible for the Savers’ Credit (see Credit Where Credit is Due).
7. See if a Roth 401(k) makes sense for your situation (see To Roth or Not?).
8. Know how much you’re paying for your retirement savings (see Shedding Some Light on your Workplace Retirement Plan Fees).
9. Keep an eye on your retirement savings investments (see Are Your Savings Investments Over-weighted?).
10. Don’t forget that you may have other important savings goals as well (see College “Education”–Saving For College).

Of course, a good place to start—any time—is to Choose to Save.^® You can find a wide variety of tools and resources—including the popular and widely recommended BallparkE$timate—at www.choosetosave.org[1]


Nevin E. Adams, JD

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If you are interested in, or working on, issues of financial literacy or savings education, you’ll want to check out $avings Account$, a free monthly update from the American Savings Education Council (ASEC) on the latest research and updates on new (and old but relevant) tools, as well as keep you up-to-date on various events, conferences, and symposiums relevant to ASEC’s Mission: To make saving and retirement planning a priority for all Americans.  You can sign up online here.

[1] Organizations interested in building/reinforcing a workplace savings campaign can also find a variety of free resources there, courtesy of ASEC.  Choose to Save® is sponsored by the nonprofit, nonpartisan Employee Benefit Research Institute Education and Research Fund (EBRI-ERF) and one of its programs, the American Savings Education Council (ASEC). The website and materials development have been underwritten through generous grants and additional support from EBRI Members and ASEC Partner institutions.

Single Best Answer?

A mainstay of multiple-choice test instruction is the admonition to select the “single best answer.” Now, generally there really is only one valid answer, but there are times when the questions posed are sufficiently imprecise, or the potential answers specific, that more than one response is viable. That’s where the test architect can always fall back on their notion of “best” answer– because, even if a credible argument can be made for an alternative, it’s a lot easier to grade when there’s only a single, pre-determined result.

When it comes to projecting possible outcomes in situations where there might be hundreds, perhaps thousands, or even millions of different results, it’s not uncommon to pick a single point to focus on. For example, projections in financial analysis might use the most likely rate of claim, the most likely investment return, or the most likely rate of inflation, whereas projections in engineering analysis might use both the most likely rate and the most critical rate. That choice provides a point estimate, one that ostensibly provides a best single estimate for purposes of analysis.

The downside of this approach, of course, is that it does not fully cover the fact that there is a whole range of possible outcomes, some more probable, some less. The alternative, a stochastic modeling, doesn’t just pick a single likely result, but uses random variations to look at what a broad range of conditions might be like. It does this based on a set of random outcomes, projects results, and then repeats with a new set of random variables. In fact, this process is repeated thousands of times.
When the modeling is done, you can look at a distribution of outcomes – and with that not only consider the most likely estimate, but what ranges are reasonable as well. It is, quite simply, a more complete and realistic assessment of potential outcomes, because, unlike so-called “deterministic” models that rely on picking a single point of experience, it includes a wide range of possibilities.

Deterministic models can predict outcomes under a few economic and demographic scenarios but don’t generally present a distribution of the wide range of scenarios that could arise from different combinations of economic and demographic variable values. Only stochastic models – like that embodied in the EBRI Retirement Security Projection Model® (RSPM) - can measure the "risk" of their performance measure values, because stochastic models, using Monte Carlo methods, are based on probability distributions. Said another way, stochastic modeling brings into account the volatility and variability of experience that are part of living in the real world.

Those deterministic models may offer a “single” answer, but life is rarely that simple – and projections that attempt to help us make better decisions about the future needn’t be.

- Nevin E. Adams, JD

1. The EBRI Retirement Security Projection Model®(RSPM) simulates 1,000 alternative retirement paths for each household to explicitly model investment, longevity and stochastic healthcare risks (i.e., nursing home and home healthcare costs).

2. More information on stochastic versus static/deterministic modeling can be found here.

Thanks, Giving

After a dozen years here at PLANSPONSOR, effective November 1, I have joined the Employee Benefit Research Institute (EBRI) in Washington, D.C., as Director, Education and External Relations, and Co-Director of the EBRI Center for Research on Retirement Income.

I have long had a strong personal and professional admiration for the work that EBRI does in helping provide our industry with valuable and objective information and am thrilled to be able to be part of those efforts at this critical juncture.

It has been my great privilege over this past decade and change to share with you some of my thoughts and observations in this space. You have been generous both with your comments and commentary on those musings, as well as our publications overall.

While it’s not quite Thanksgiving, I thought I would dedicate this final “IMHO” to sharing some of the things for which I’m thankful:

I’m thankful that the vast majority of plan sponsors continued to support their workplace retirement programs with the same match and options as they had in previous years—and that so many of those who had to cut back in prior years still seem committed to restoring those original levels.

I’m thankful that participants, by and large, hung in there with their commitment to retirement savings, despite the lingering economic uncertainty. I’m especially thankful that many who saw their balances reduced by market volatility and, in some cases, a reduction in their employer match were willing and able to fill those gaps, in most cases by increasing their personal deferrals.

I’m thankful that most workers defaulted into retirement savings programs tend to remain there—and that there are mechanisms in place to help them save and invest better than they might otherwise.

I’m thankful for the time, cost, and effort employers expend each year on health-care coverage for their workforce—and continue to do so, despite the uncertainties still attendant with health-care legislation.


I’m thankful that those who regulate our industry continue to seek the input of those in the industry—and that that input continues to be shared broadly in open forums. I’m thankful that so many in our industry take the time to provide that input.

I’m thankful that so many employers have remained committed to their defined benefit plans and—often despite media reporting to the contrary—continue to make serious, consistent efforts to meet funding requirements that are quite different from when most initially decided to offer these programs.

I’m thankful that plan sponsors will soon have better access to more information about the expenses paid by their plans—and optimistic that it won’t be as bad as some fear. I’m thankful that we’re no longer talking about whether fees should be disclosed to participants and are now trying to figure out how to do it.

I’m thankful that the “plot” to kill the 401(k)…hasn’t…yet.

I’m thankful that we might—finally—be ready to have a national, adult conversation about retirement income and entitlement programs.

I’m thankful to have been given an opportunity to be part of something great here at PLANSPONSOR; to have seen a little internal e-mail publication called “NewsDash” come to reach—and touch—the lives of nearly 70,000 readers worldwide. I’m thankful to have been able, in some small way, to make a difference—and to have before me a marvelous opportunity to continue to do so.

I'm thankful for the warmth with which readers, both old and new, have embraced me and the work we do here. I'm thankful for all of you who have supported—and I hope benefited from—our various conferences, designation program, and communications throughout the years. I’m thankful for the constant—and enthusiastic—support of our advertisers throughout good times—and not-so-good times.

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

Thank you!

Nevin E. Adams, JD

My new email is nadams@ebri.org.

Best for Success

Today PLANSPONSOR opens nominations for our Retirement Plan Adviser of the Year awards.

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

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

A Different World

The world has, of course, undergone much change since we first launched those awards, and advisers now have an expanded array of tools at their disposal to make those results a reality—legislatively sanctioned automatic enrollment, contribution-acceleration designs, qualified default investment alternatives, and a broadly greater emphasis on transparency and disclosure of fees. These steps have been good for our industry, great for participant retirement security and, IMHO, have served to raise the bar for our award at the same time.

So, what will we be looking for this year? Well, there are many attributes that can make for a good adviser, or an adviser that is good for a particular plan. But when it comes to choosing an adviser or adviser team that stands apart from the rest, that not only sets an example, but a standard for the industry, I look for advisers that:

Have established measures and benchmarks for plan success. Those benchmarks should include the measures noted above: participation, deferral rates, asset allocation. If an adviser can’t tell me what those targets are and how your plan stands in relation to those targets, IMHO, they are using the “wrong” benchmarks. I’m also interested in advisers who not only use those as a matter of course in running their business, but who develop them in partnership with their plan sponsor clients—and who regularly and routinely communicate those results.


Fully and freely disclose their compensation. I’m frankly a lot less concerned with how advisers get paid than that their plan sponsor clients know what they are paying for those services.

Work at staying current on trends, regulations, and product offerings. The best advisers read, attend conferences and/or informational webcasts, have attained (and maintained) applicable designations, and commit to a regular course of continuing education during the course of the year. This business is constantly changing; if your adviser is not constantly learning, you are being left behind.

Encourage and inspire their clients. Client referrals have always been a key element in our award, and as the overall quantitative standards rise, the significance of the qualitative element afforded by client references (and award nominations) will almost certainly increase. How often does your adviser talk with you? How often do they visit? How—and how often—do they communicate with you regarding regulatory and legislative changes? Do you feel like they know what’s going on – or are you generally the one to break the news to your adviser?

Are willing to accept fiduciary status with the plans they serve. This is an area our judges have debated vigorously over the years. I’ll admit some great advisers have been blocked from accepting fiduciary status by forces they don’t control. I’m not (yet) saying you have to be willing to accept fiduciary status in order to get my vote, but it’s a factor—and, IMHO, an increasingly important one.

That’s what I’m looking for—and looking forward to acknowledging—this year. If your adviser – or adviser team – is worthy of that recognition, I hope you will take the time to nominate them today!

You can nominate an adviser colleague or associate for PLANSPONSOR’s Retirement Plan Adviser of the Year, or Retirement Plan Adviser Team of the Year at https://www.research.net/s/5XYL2KR

“Fifth” Avenues

The year we began publishing PLANADVISER was a big year in many ways for me – it marked my twentieth wedding anniversary, it was the year my father passed away, the year my eldest went off to college for the first time, and also the year that “catch-up contributions” became an item of more-than-passing interest to me.

In recent weeks, I’ve had occasion to think back on those past five years, and all that has transpired – the Pension Protection Act, QDIAs. the back-and-forth on fiduciary advisers, the first wave (and subsequent flurry) of revenue-sharing lawsuits, the growing emphasis on transparency and disclosure, the growth – and questions about – target-date funds, the “normalization” of a fiduciary role for retirement plan advisers, and more recently, the back-and-forth on an expanded fiduciary definition. Like many of you, I can still recall the tumultuous news of September 2008 – all hitting during our PLANADVISER National Conference that year.

While it’s fun and interesting to look back at what’s gone on the past several years – to imagine what might have been, and perhaps to rue what has, it’s clear that we’ve all come a long way over the past five years - and little question that we have an interesting road ahead as well.


Here are five things I think we can count on for the next five years:

Participant fee disclosure won’t matter.

Let’s face it; most participants don’t do anything with their retirement accounts. Most never realign balances, most don’t ever change the amount they defer, and – thankfully, most leave those accounts alone at times when we’re all worried that they will not. I’m betting, for all the angst about participant fee disclosures, most won’t read them – and even fewer will do anything in response. With luck, by the time they get those disclosures, they won’t feel the need.

Plan sponsor fee disclosure will matter.

It’s no easy thing for a plan sponsor to up and change providers. All other things being equal, most would rather crawl over hot coals than deal with all the additional work (and decisions) attendant with those changes. That said, once fee disclosures become more public, and, shall we say, “systematic” – well, I expect plan sponsors will have a lot of “help” reviewing the information. While I don’t expect a massive surge in provider changes, I think it’s fair to say that a lot of “haggling” will take place.

Advisers that work with ERISA plans will need to be ERISA fiduciaries.

Arguably it’s already tough to win a piece of ERISA business against an adviser willing to claim fiduciary status. But I think we’ve already passed the tipping point, and if market forces weren’t sufficiently persuasive, the regulators now seem determined to press the issue.

We’ll come to regret our complacency about target-date fund designs.

In the aftermath of the 2008 financial crisis, much was made of the variations in target-date glide paths, the disparity in assumptions that resulted in wildly different results for those just a couple of years away from retirement. Since then, the markets have repaired much of that damage, but little appears to have been done in terms of rethinking the assumptions and structures of those funds. More troubling is how little movement has since been apparent among plans that felt burned, but ostensibly were ignorant (willfully or otherwise) of those differences in 2008.

Retirement income will (still) be the big thing we all say needs to be solved that (still) isn’t.

Mark Twain once famously remarked that “everyone talks about the weather, but nobody does anything about it.” Well, you can’t say that people haven’t been doing things about retirement income. In fact, there have been some pretty remarkable developments over the past couple of years. The Obama Administration has certainly tried to jumpstart the discussion, if not adoption of such designs. A truly comprehensive safe harbor could be a game-changer here – but I’m guessing that there won’t be a target-date “simple” solution here. Not that there should be …

- Nevin E. Adams, JD

“Free” Ride?

I was late to the NetFlix game—switching over only when my local Blockbuster closed its doors. Honestly, I was more than a little skeptical about paying to rent movies while spending most of the month waiting for the mail carrier to shuffle things back and forth.

Those fears (along with concerns drawn from early stories about people being sent movies at the bottom of their list, rather than the newer, hotter releases) have turned out to be mostly a non-issue. More recently, I “discovered” the firm’s online library of free movies—and while I would say that most of them SHOULD be free (some you should be paid to sit through), I have enjoyed having that “extra” feature. Sure, there were times when the Internet delivery speed wasn’t optimal, or when a movie would time out a third of the way through, but heck, it was free.

Until, of course, NetFlix announced a change in pricing policy, a change that would cut the cost of the traditional movie rental service, but that would charge—and charge just as much—for the online movie library. Overnight transforming what had been a nice, free, additional service into—well, a pricey, sometimes erratic, delivery system of older, “b” movies. In short order, my willingness to calmly accept certain service “glitches” associated with a “free” service—well, let’s just say I have completely different expectations when I have to pay for it.


The retirement plan industry has long wondered—and worried—what participants would do if they knew how much they were paying for their 401(k)s. Despite the fact that most of those fees have long been disclosed in fund prospectuses, we’re generally inclined to think that most participants haven’t actually read those disclosures—and those who have probably didn’t understand them. That’s all supposed to change—or at least begin changing—with the participant-level fee disclosures slated to take hold next year.

Personally—and I know I’ll get some pushback on this—I’m disinclined to think it will make a big difference. After all, if there’s one thing that participants have demonstrated over the years it’s a strong and consistent propensity to gloss over (if not glaze over) big, complicated, legalistic disclosures. It doesn’t help that retirement plan fee calculations have become complicated structures, imbedded inside the net asset value of mutual funds, with revenue-sharing offsets of varying amounts (see “IMHO: Out of Proportion”), and most expressed in participant-unfriendly terms like “basis points,” or worse—“bips.”

I’m not optimistic about the new regulated disclosures—too much data, and not enough information, IMHO. That said, there are some new disclosures coming to market from the provider community ahead of those regulations that, IMHO, might actually help participants see—and understand—what they’re paying.

Of course, for most, the concern is not that participants will now know how much they are paying—but that some may, perhaps for the first time, realize that they ARE paying.1

—Nevin E. Adams, JD


1 Consider that a survey published earlier this year by AARP indicated that only a quarter of 401(k) participants realize they are paying fees (see “Most 401(k) Participants Not Aware of Fees They Pay”).

"Much" Ado

There were three big disclosure announcements last week. The first two were the pushback of the effective date for 408(b)(2) fee disclosures to April 1, 2012, from the previously announced effective date of January 1 of that year. In the same announcement, the Department of Labor also delayed the compliance date for the participant level fee disclosure regulation for most plans to May 31, 2012 (a month ago, the DoL had said that information would have to be made available no later than April 30)—which, from a practical standpoint, means that the information must be provided by August 14, 2012 (45 days after the end of the second quarter in which the initial disclosure is required)(see “Borzi Chats about Upcoming Definition of Fiduciary Rule”).

Those delays are, doubtless, of some relief to the provider community. They’re not pushed back far enough to significantly delay the beneficial impact of the disclosures (though this is not the first time they have been pushed back), but I’m sure even the best-prepared will appreciate a little extra breathing room.

But the more significant “announcement,” to my ears anyway, came on Friday, when Assistant Secretary of Labor Phyllis Borzi noted in an Employee Benefits Security Administration (EBSA) Web chat that the DoL was “considering, as part of the pension benefit statement regulatory initiative, requiring that pension benefit statements for defined contribution plans express the participant's ‘total accrued benefit’ in the form of a lump sum account balance and in the form of a lifetime income stream”


It’s not a new notion, of course. In fact, legislation has been introduced in Congress (twice) that would basically do the same thing (see “Retirement Income Disclosure Bill Makes a Comeback”). And while such a notion is fraught with potential problems (the assumptions, the presentation, and the caveats attendant with that presentation), I think it could be a real eye-opener for participants and plan sponsors alike. In fact, IMHO, it’s the kind of thing that could really make a difference in how people look at their retirement savings accounts.

Make no mistake, it’s going to be complicated. You can’t project retirement income from a couple of pieces of data (ostensibly current age, salary, and current 401(k) balance) without making several key assumptions. Moreover, I can’t imagine that it will be deemed sufficient to simply provide that number and, in a sentence or two, outline those assumptions. Rather, it’s entirely likely that the volume of disclosures accompanying the new piece of information will serve to obscure the impact.

Ultimately, it’s hard to know how good those disclosures will be and how much impact they will have—but, IMHO, if we expect participants to save enough, it seems well past time that we helped them know just how much “enough” is.

—Nevin E. Adams, JD

All for One?

The underlying theme of last week’s PLANSPONSOR National Conference was “measuring up,” a reference not only to the need to measure the performance and outputs of a retirement plan’s designs, but also to the opportunity to increase and enhance it in the process.

Of late, fees are very much on everyone’s mind, as we all prepare for a new series of plan, and ultimately, participant, disclosures. Just ahead of those disclosures, the industry has launched a new generation of plan fee benchmarking services. Each looks at different things, each has its own set of weightings and assumptions, and each draws from a different source.

But for my money, here are 10 things you should know about any service that purports to help you benchmark your plan:

What is the source of the database that serves as a point of comparison?

Is the database itself large enough to be relevant? Does it include relevant points of comparison with your program in terms of plan size, industry, and/or geographic location?

How old is the data on which comparisons are made?

Is the data on which comparisons are made accurate?


Are the comparisons valid? Do they offer an apples-to-apples comparison?

What assumptions are incorporated in the results?

How are the results of the comparison scored?

What are the credentials of the firm/principals behind the service and/or methodology?

Is the benchmark itself relevant to your needs? Does the comparison help you improve your program?

Is the fee paid for the benchmarking service reasonable, and in the best interests of participants?

There are, admittedly, any number of measures of success for a retirement plan—and while some may be “better” than others, and some surely easier to establish, in my experience, the mere process of measuring brings benefits.

That said, there was a moment at last week’s conference where one of our speakers asked a telling question: not if attendees benchmarked their programs (a surprising number were doing so), nor if they were benchmarking against a variety of criteria (most of those in attendance had moved well beyond the standard of “participation rate” as a metric).

No, the question that gave me pause—as well as a good number of the attendees—was, If the individual members of your retirement plan committee were asked “What do you benchmark your plan against?” what would they say?

Because, if you don’t agree on that answer, the rest of the questions may not matter.

—Nevin E. Adams, JD

You may find useful the cover story of the June issue of PLANSPONSOR, which deals with this new generation of fee benchmarking services, HERE

Out of Proportion

Without question the retirement plan industry has prospered from the long-standing practice of relying heavily – and in some situations, completely - on asset-based fees.

Now, you can certainly argue that that has resulted in plans paying for services they would not otherwise have engaged, and that it has, in some cases, led to plans paying more than they might if they had been more cognizant of the dollars expended. Indeed, one can argue that the imbedding of those fees inside the fund structure has made it easy, perhaps too easy, for the industry to collect its tolls without drawing the kind of scrutiny they were entitled to.

On the other hand, that structure has made it easier for the industry to provide a broad-based level of sophisticated services to plans of all sizes, and has doubtless made it possible for plans to contemplate hiring an adviser that, regardless of the need and/or benefit, would otherwise have been discouraged by an explicit charge for those services.


That said, there are some issues attendant with the current asset-based fee structure that, IMHO, bear discussion:

Asset-based fees go up – pretty much all the time.

For most of the existence of the 401(k), the markets have been fairly good, and as they say, a rising tide lifts all boats. In this particular case, rising markets have also meant rising fees. Proportionately rising fees, of course, but rising fees nonetheless. That, in turn, has meant that those who make their living off asset-based fees have seen some pretty nice pay increases over time – without necessarily having to do anything more or different to “earn” them. Even in bad markets, the steady flow of contributions has cushioned the blow that might otherwise have tamped them down.

Asset-based fees go down when the work – and risks – go up.

One of the great ironies of asset-based fees is that they do sometimes go down, and at the most “inconvenient” times. One need look back only as far as the fourth quarter of 2008 to remember a precipitous decline in asset values – and asset-value-based fees - at the very same time that many noted a steep increase in the “care and feeding” of plan sponsors and participants who had been shaken by what was happening to their retirement plans (not to mention their plans for retirement). Of course, it would probably be viewed as unseemly (at best) to raise your fees during such times – but that is when your work, and your risks, are generally rising.

The bigger your balance, the more you pay.

Admittedly, when you’re talking about fees based on assets, it makes sense that the more assets you have, the more fees you pay. Perhaps that makes a modicum of sense when you are talking about things like investment management (even then, it seems to me that those with large balances are carrying an ironically disproportionate, albeit proportionate amount of the fees). As “industry insiders”, we all know this – indeed, some go so far as to see a more high-minded result; the “rich” underwriting the costs of the less rich, if you will.

On the other hand, it’s not just the rich that have larger balances – frequently those are the balances of lower-income workers who have, nonetheless, been long-time diligent savers. So, said another way, it’s older, longer-tenured workers are underwriting the costs of the folks who have just joined the plan.

Different funds “share” differently

We all know that different types (and brands) of mutual funds charge different fees. What is less obvious to many plan sponsors is that different types (and brands) of mutual funds provide different amounts of revenue sharing. It is not atypical for a plan sponsor to sit down with a recordkeeper, to figure out what the recordkeeping charges will be, to determine what the aggregate amount of the revenue-sharing rebates will be, and then to determine how to manage the difference. But if some funds provide higher levels of revenue-sharing, then the participants investing in those funds are, effectively, shouldering a larger proportion of the administrative costs of the plan.

There are administrative ways to “level” these fee allocations, but many plan sponsors aren’t even aware that this has crept in.

Out of “sight” IS out of mind.

To me the biggest issue with those “imbedded” asset-based fees is that you never really see how much actual money you’re paying. Oh, it’s not like the fees aren’t “disclosed”, and it’s not as though it’s rocket science to figure it out, at least at a high level. But most plan sponsors are lured into what I consider to be the faux comparisons of basis points, rather than actually stopping to figure out what 100 basis points times the assets in a particular fund actually adds up to – and who gets how much for what.


The reality of our world is that a large, and growing number, of retirement plan advisers are already “fee for service”, and the fee disclosure regulations are widely seen as accelerating that trend.

That said, our industry has gotten comfortable, some even complacent, with a fee system structure that tends to raise, not lower, fees over time, a system that apportions fees on a basis that often has little to do with the costs of providing the services it supports, and one that tends to obscure the real costs of the services they ostensibly underwrite.

The current structure may have been “convenient” – but just because it’s “proportionate”, doesn’t mean it’s always fair.

- Nevin E. Adams, JD