'Springing' Forward?

 This past weekend most of America underwent a rather painful change — though it’s probably only just setting in.

I’m talking about the legally mandated move to Daylight Saving Time (for most of us[i]). That’s right, at 2:00 a.m. on March 9, clocks around the nation “sprang forward,” reversing course from last fall when the move was to “fall back” to standard time.

It’s a “movement” laid at the feet of none other than Benjamin Franklin who, in what’s been characterized as a “satirical” letter to the editor of The Journal of Paris in 1784 pitched “the economy of using sunshine instead of candles.” 

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

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

What About Retirement?

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

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

We similarly have, though perhaps not as myopically, enthusiastically embraced the use of professionally managed target-date funds as a default investment — though most seem to have surreptitiously adopted a “through” retirement glidepath that may, or may not, align with participant expectations. Managed accounts, ostensibly with a more personalized focus, stand to enhance and improve participant investment allocations — provided the fees are commensurate with the promised value. 

We seem to be stuck with DST and its implications for yet another season, despite what appears to be annual legislative attempts (promises?) to undo it. And so, probably for the rest of this week at least, most of us will be a bit “discombobulated.” 

It is worth remembering, however, that we aren’t “stuck” with the traditional defaults — that we can “spring” forward, regardless of the season — and there are plenty of good reasons — and options — to do so.

Nevin E. Adams, JD 

 

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[i]  I’m looking at you, Arizona, Hawaii, and… Daylight Savings 2025: The US States Where Clocks Don't Change - Newsweek

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

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

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

Checking Your 401(k) Smoke Detectors

Daylight saving time doesn’t really live up to its name—but as you’re resetting clocks, anxiously awaiting the realignment of circadian rhythms and changing smoke detector batteries, it might be a good time to (re)consider the following.

Do you have fiduciary liability insurance?

I’m NOT talking about the Fidelity Bond required of every ERISA plan (this protects the plan and its participants from potential malfeasance on the part of those who handle plan assets. In fact, the plan is the named insured in the fidelity bond). I’m also NOT talking about the corporate governance policies that many organizations have in place for actions undertaken by organization officials. These may not cover you, and they very likely won’t cover actions taken as an ERISA plan fiduciary even if you are covered. 

What you need to check for is something called Fiduciary Liability Insurance. This policy typically protects the plan’s fiduciaries from claims of a breach of fiduciary responsibilities—an important protection since ERISA plan fiduciaries have personal liability, not only for their actions, but for the actions of their co-fiduciaries. Just remember; the cost of the insurance can be paid by the employer or by the plan fiduciary—but not from plan assets.   

Do you have an investment policy?

Note that I said investment POLICY, not an investment policy STATEMENT. While plan advisers and consultants routinely counsel on the need for, and importance of, an investment policy statement (IPS), the reality is that the law does not require one, and thus, many plan sponsors—sometimes at the direction of legal counsel—choose not to put one in place.

Of course, while the law does not, in fact, specifically require a written IPS—think of it as investment guidelines for the plan—ERISA nonetheless basically anticipates that plan fiduciaries will conduct themselves as though they had one in place. And, generally speaking, plan sponsors (and the advisors they work with) will find it easier to conduct the plan’s investment business in accordance with a set of established, prudent standards—if those standards are already in writing, not crafted at a point in time when you are desperately trying to make sense of the markets.

Are your plan’s target-date funds (still) on target?

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

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

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

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

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

Is your plan committee capable?

Today the process of putting together an investment or plan committee runs the gamut—everything from simply extrapolating roles from an organization chart to a random assortment of individuals to a thoughtful consideration of individuals and their qualifications to act as a plan fiduciary.

There is, or should be, a legitimate, articulatable reason why each and every member of your plan/investment committee was selected. They, and every other member of the committee, should know that reason. If you can’t articulate that reason (or can’t with a straight face), they shouldn’t be on the committee—for their own sake, and the sake of every other committee member.

Note also that, over time, committees have a tendency to expand, sometimes based more on factors like internal organizational politics than on valuable perspectives or expertise. But human dynamics are such that the larger the group, the more diffused (and sometimes deferred) the decision-making. So, it’s worth revisiting that articulatable reason—and making sure it’s still valid—on at least an annual basis.

Do you need help?

ERISA only requires that the named fiduciary (and there must be one of those) make decisions regarding the plan that are in the best interests of plan participants and beneficiaries, and that are the types of decisions that a prudent expert would make about such matters. ERISA does not require that you make those decisions by yourself—and, in fact, requires that, if you lack the requisite expertise, you enlist the support of those who do have it. 

That’s where qualified retirement plan advisors and/or experienced third-party administrators (TPAs) can make a big difference—both in making sure you have good policies and procedures in place—and that they are kept up to date! 

Think of it as a smoke detector for your retirement plan. It might not save you any daylight—then again…

- Nevin E. Adams, JD

"Stuck" in the Muddle?

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

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

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

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

What About Retirement?

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

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

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

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

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

Nevin E. Adams, JD 

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

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

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