Less Than You’d Think

 “Larry Fink Knows Less About Retirement Than You’d Think an Investment Billionaire Would.”

That’s the provocative title of a recent Substack column by Andrew Biggs, a senior fellow at the American Enterprise Institute.[i] Not that Biggs offered a truly harsh criticism. Rather, he equated the comments of Larry Finks with that of “someone who reads the newspaper, the same as you or me.” 

Of course, and as yours truly has commented on any number of occasions — and what Biggs calls out — is that “much of what you read about retirement in the newspaper or online or even in so-called studies just isn’t correct.” To put it mildly.

In this recent column, Biggs offers a detailed account of what the actual data shows versus what Mr. Finks (and SO many others[ii]) have held out as reality.

Those with no retirement accounts don’t have retirement savings.

Fink is quoted as saying that 57 million Americans “don’t have any savings or retirement plan.” However, Biggs points out that “the Federal Reserve’s Survey of Household Economics and Decisionmaking acknowledges that many Americans save for retirement outside of an employer-sponsor plan.” That happens to be things like IRAs, an ordinary savings or investment account, real estate, a small business or farm. 

Biggs notes that Fed data show that 84% of non-retirees and 92% of retirees have retirement savings over and above Social Security. He puts the number with NO retirement savings as about 10% of 200 million American adults, or 20 million. Many of those are young enough that it shouldn’t be a problem (now), and others — Biggs notes that Fed data indicates that two-thirds of these non-savers make less than $50,000 — so no retirement savings makes economic sense (again, for now) — but Social Security stands to do a good job of replacing that level of income.

Those depending on Social Security alone will be living in poverty. 

Speaking of which, Finks also cautioned that those who have only Social Security as a resource will find themselves “living in poverty, below the poverty line.” Now, if you don’t know where the poverty line is these days — well, I’m sure you’re not alone. 

But for those interested in the actual numbers, Biggs cites Social Security Administration statistics that show that a middle-income two-earner couple retiring in 2023 would receive about $44,400 in Social Security benefits per year — which would be more than TWICE the official poverty threshold. Even if only one member of the couple worked, they still would receive around $33,300, about 1.8 times the poverty line, he notes.  It’s not a LOT of income, mind you — but it’s not below the poverty line.

Most Americans only used to live to age 67.

This by way of commenting that the current retirement system is outdated — designed for a time when people didn’t live as long as they do today — true enough — to a point. But as Biggs points out, there’s a difference between life expectancy at birth — and life expectancy in retirement. He explains that in 1940 — the first year in which Social Security paid retirement benefits — a 65-year-old man could expect to live an additional 13 years and a 65-year-old woman an additional 15 years (according to the Social Security Administration). In 2025, life expectancy as of age 65 has increased to 19 and 22 years for men and women. So, that’s more years — but not nearly the gap implied by data that includes life expectancy at birth.

You’re now “on your own” when it comes to retirement.

The implication here is that people didn’t used to be “on their own” — presumably because everybody had an employer-provided pension. This is one of the more persistent myths of our time because we have actual data that not only shows that the absolute peak of pension coverage in the private sector was 39%. Moreover, Biggs reminds us that a 1972 NBC News investigation revealed that “9-in-10 employees who nominally participated in a traditional pension never received a penny from it, thanks to strict vesting rules and the occasional corporate bankruptcy.” That’s right — nary a penny. 

And — as Biggs reminds us, “according to the Bureau of Labor Statistics, 72 percent of private sector employees in 2024 had access to a retirement plan at work, far more than ever were offered a traditional pension.” In a real sense, most of us have always been on our own, we just didn’t know it. And now, thanks to the 401(k), we’re ever so much more likely to retire with something to show for it.

The good news? 

Biggs closes by noting that “more Americans are participating in retirement plans than in the past, Americans and their employers are contributing more to retirement plans, and we’re working longer and delaying claiming Social Security. In short, pretty much everything experts say Americans should be doing, we already are doing.” Which, of course, (as Biggs notes), “helps explain why Congressional Budget Office data show the average over-65 household’s income in 2021 was over twice the average in 1979, even after accounting for inflation. And why retirees’ incomes have grown significantly faster than incomes for working-age Americans.”

The scary thing to me is that the comments like those above — made in public forums and in the headlines — are viewed as not only factual, but uncontroversial — even by retirement industry leaders.  

In this business we tend to see the challenge of helping Americans prepare for retirement as a glass that’s only half-full, rather than appreciating the amazing progress we’ve made — progress that might be less than you’d think… especially if it’s based on flawed assumptions. 

- Nevin E. Adams, JD

 

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[i] You can read the rest of his impressive bio at Andrew G. Biggs | American Enterprise Institute - AEI

[ii] Some of these are a “repeat”:  Talking Points: Facts Versus Factoids and Talking Points: A Retirement Crisis of Complicity.

‘Damned’ (Even) If You Do

 The flurry of lawsuits unleashed on holders of the BlackRock LifePath target-date funds is not without precedent—but it’s surely a head scratcher.

I’m referring, of course, to the recent swarm of lawsuits challenging nearly a dozen of the nation’s largest 401(k) plans and their decision(s) to select, and hold, on their investment menu the BlackRock LifePath target-date fund suite. It’s a decision that the Shah Miller law firm (on behalf of multiple ex-participant plaintiffs) says was the result of fiduciaries who “chased low fees” over performance.[i]

Of course, it’s not unusual for these types of lawsuits cite obscure articles as authority, rely on Form 5500 data that often doesn’t tell the whole story, state as fact things that are really only theories (or opinions), lean on averages, or base comparative conclusions on surveys distorted by sampling size or content. 

But in a characterization straight out of George Orwell’s 1984, this one draws straight from a point of analysis that, to my eyes, anyway, seems to say one thing while the plaintiffs’ attorneys claim to see something completely the opposite. “War is peace,” if you will.

Setting aside for a minute the reality that performance isn’t necessarily indicative of an imprudent process[ii]—and that it’s been far more common over the past two decades for fiduciaries to be challenged on the allegedly “excessive” fees than performance (though the latter is often tagged on to the fee claim), the plaintiffs here have challenged the selection of a fund suite that Morningstar has identified as among the “best” in that category—run by an “innovative team with topnotch resources.”

Nor is the Morningstar evaluation irrelevant here—indeed, the plaintiffs lean heavily on it to draw their conclusions of poor performance, though they do so primarily by challenging the benchmark, insisting that the suite be benchmarked against other target-date suites—despite their striking difference in focus and glidepath. See, the BlackRock series operates with a “to” retirement date focus, rather than the “through” retirement focus that most others in this space have now embraced (and all of the ones the plaintiffs point to). That means, of course, that the asset allocation, certainly in the components nearing retirement age, are more conservative than those that are managing for 20-30 years beyond that. And—in bull markets, anyway—more conservative often means lower performance. On the other hand—and certainly if your goal is to wind down your investment risk as you approach retirement… and here one can’t help but remember 2008… (not to mention 2022…) 

Not that the BlackRock glidepaths are overly conservative—in fact, the Morningstar commentary (and the lawsuits that cite it) acknowledge that for newer target date funds—those for younger investors—BlackRock’s have tended to be more equity-laden, at least compared with those the plaintiffs would have serve as its benchmark. This lawsuits seem to mistake this difference for some kind of “equity discrepancy,” rather than a deliberate, thoughtful glidepath, one oriented to do what all target-date funds once claimed to—to move to more conservative asset allocations as one neared the target date (and, arguably still do, though the “throughs” have a different endpoint in mind). 

There is, of course, a certain tendency among plan fiduciaries to seek the comfort of the pack in making plan design and investment decisions—which is understandable when one considers the personal liability that comes with that assignment. But these suits seem to create a not-so-subtle inference that any glidepath that varies from the through retirement “pack” is going to be viewed as imprudent—not based on a bad or unreasoned theory, but rather based on a specific time window when certain strategies simply don’t match those of different philosophies. 

So, how is this particular approach constructed? The analysts at Morningstar see it this way: “This index-based series benefits from BlackRock’s robust approach to asset allocation and a research-intensive culture. They keep costs low by investing exclusively in passive index funds, though this gives management fewer tools to outperform over shorter periods compared with more active strategies that can tactically tilt the portfolio or select talented active managers. Yet, the team continues to innovate, with current research looking at ways to get targeted fixed-income exposures across the glide path.”

The report goes on to note that, “Continuing to revisit prior assumptions and make proactive changes that are backed by rigorous research gives us confidence that the team will continue to evolve the series over the long term to investors’ benefit.”

Little wonder then that the BlackRock suite winds up with a “gold” Morningstar Analyst rating. 

What’s harder to figure out is why the plaintiffs’ bar decided to take to task the large plans and plan fiduciaries that opted for this suite and approach. 

Well, perhaps except for the obvious.

- Nevin E. Adams, JD

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[i] There were other allegations that varied with the plan targeted, but the LifePath funds and performance was the dominant claim.

[ii] At this juncture we have no way to know what processes, if any, the charged plan fiduciaries have in place to provide the prudent process and review required of plan fiduciaries—not that the plaintiffs have kept that from inferring its absence. 

Are We Ready for Retirement Income?

 It’s ironic that programs designed to provide retirement income pay so little attention to the realization of that objective.

That’s right—for the vast majority of participants today, creating that “paycheck for the rest of your life” remains a DIY undertaking. To this day only about half of defined contribution plans currently provide an option for participants to establish a systematic series of periodic payments, much less an annuity or other in-plan retirement income option. 

However, the need for that solution is widely acknowledged—and there are some new, if somewhat familiar, solutions emerging. 

Earlier this month, BlackRock garnered some headlines with news that not only was it building annuity contracts into a target-date fund series, but also that it had already lined up five large plan sponsors (with some $7.5 billion in assets) to implement the option as a default. 

That followed by a few months the March announcement of a consortium of providers (American Century Investments, Lincoln Financial Group, Nationwide, Prime Capital Investment Advisors, SS&C Technologies, Wilmington Trust, N.A. and Wilshire) that had collaborated on a new in-plan target-date fund series with guaranteed income for life baked in. One that is also purportedly “portable among major recordkeepers where Income America 5ForLife is available”).

SECURE ‘Acts’

Those announcements, of course, came in the wake of the SECURE Act, which included three specific provisions designed to overcome the reluctance of plan fiduciaries (and participants?) to embrace these options:

• Portability—generally, it permits special distributions of a “lifetime income investment” when the investment is no longer authorized to be held under the plan, which makes it possible for a participant to keep the investment even if the plan sponsor changes recordkeepers or decides to eliminate the investment from the plan lineup. 
• Disclosures—requires plans to give participants projections of their current account balance as a monthly benefit using assumptions prescribed by the Secretary of Labor, a provision designed to help participants better understand what their projected retirement savings will produce in terms of monthly income in retirement. Or, said another way, to help get them oriented to thinking about turning that retirement savings balance into that proverbial paycheck for life.
• Fiduciary Safe Harbor—which, in essence, provides that a DC plan fiduciary that selects a “guaranteed lifetime income contract” to be offered under its plan, he/she will be deemed to have acted prudently if it follows a series of steps outlined in the law. That means that the fiduciary will not be liable if the insurance company later defaults on its obligation to participants who invest in the contract.

It remains to be seen if all this will actually move the needle—but they do seem to directly confront—and, at least potentially—resolve the issues that have long been put forth as objections to the embrace of lifetime income options on a retirement plan menu. Indeed, both offerings also deal with the more traditional objection to annuity products—their cost—if they actually work.

There’s no question that participants need help structuring their income in retirement—and little doubt that a lifetime income option could help (certainly with some help from a trusted advisor). Wrapping a complicated product (and lifetime income is complicated) in a relatively simple product is certainly one way to ease acceptance. Moreover, doing so with a product in which contributions are defaulted should certainly improve the rate of adoption by participants—if plan sponsors are inclined to make it available on that basis. 

And if advisors are willing to help. 

- Nevin E. Adams, JD