The ‘Fiduciary Rule’ that Wasn’t

  After years of anticipation — and months of litigation — the Department of Labor’s latest attempt to expand the definition of fiduciary investment advice is now dead.

That said, and with apologies to Mark Twain, reports of the “death” of the fiduciary rule are somewhat exaggerated. The 2024 version — the so-called Retirement Security Rule — was vacated, which, in legal terms, means we treat it as if it never existed.

But ERISA’s fiduciary framework remains very much alive.

Indeed, for advisors already serving as fiduciaries for retirement plans under the Employee Retirement Income Security Act of 1974, the practical impact of the recent court ruling is minimal. Advisors serving as 3(21) fiduciaries or 3(38) investment managers were — and remain — subject to ERISA’s duties of prudence and loyalty. 

Many advisory firms, frankly, had already adopted procedures and business models that would likely have satisfied even the Obama-era fiduciary rule.

Where the rule would have mattered was around the edges of the retirement advice marketplace, particularly in the increasingly scrutinized area of rollover recommendations.  That’s where the Labor Department — across three administrations — tried, unsuccessfully, to extend its oversight. 

And however well-intentioned those efforts were in terms of protecting rollover decisions, they always struck this writer as something of a stretch.

The Rollover Question

Under the longstanding framework — rooted in a 1975 regulation — an advisor becomes an ERISA fiduciary only if the advice satisfies a five-part test, including that it be provided on a “regular basis.”  As a result, a one-time recommendation to roll assets from a plan to an IRA would likely fall outside that definition.

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The now-abandoned rule sought to change that dynamic by broadening the circumstances under which advice would trigger fiduciary status — basically laying the foundation for a rule that said a single advice recommendation that was the basis for an ongoing relationship could qualify.  With the rule’s demise, that expansion isn’t happening — at least for now. 

So, it’s not as though there is no fiduciary rule — but to fall under its auspices, advice will need to meet the five-part test — as it has for the past 50 years.

A Familiar Regulatory Patchwork

The result is that the retirement advice marketplace continues to operate under a patchwork of standards.

Advice to a plan sponsor about investment options or plan design typically falls squarely under ERISA fiduciary obligations. But recommendations made to participants — particularly those involving distributions or rollovers — may instead fall under securities regulations such as Regulation Best Interest (a.k.a. Reg BI). 

In practice, the same advisor may operate under different regulatory regimes depending on the conversation.  For sponsors and participants, the distinction is rarely obvious.  And therein lies the danger.

Participants — and often plan sponsors — tend to assume the advisor across the table is already acting in their best interests. 

And this is as good a time as any to remind those you serve about the difference(s).

The Industry Has Already Moved

Even so, the demise of the 2024 rule doesn’t necessarily signal a return to the past[i].

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Over the past decade — beginning with the now-vacated Department of Labor Fiduciary Rule — many firms have shifted toward advisory models that emphasize fiduciary relationships, level fees, and reduced conflicts of interest.

In other words, while the regulatory framework remains largely unchanged, many advisors' business practices have already evolved.  And while some corners of the industry (looking at you, insurance) have resisted that shift, retirement-plan advisors largely haven’t.

Not the End of the Story

If the past decade has shown anything, it’s that the debate over fiduciary advice isn’t a single rulemaking — it’s a regulatory cycle.

For now, the practical reality is simple: advisors who were ERISA fiduciaries before remain ERISA fiduciaries today, and those who weren’t haven’t suddenly been “transformed”. 

But there remain rules — and standards — in place and active despite the recent ruling.

The larger question — whether rollover advice should carry fiduciary responsibility — will likely be settled only in the next regulatory round. Or maybe even by Congress.

-          Nevin E. Adams, JD

[i] Indeed, in addition to the five-part test, PTE 2020-02 remains in effect.

Commencement "Address"

This is the time of year when the nation’s graduates line up for accolades (and their diplomas). It is, for them, a beginning—a commencement of a new phase in their life. 

But ahead of that, most are given the “opportunity” to hear some words of wisdom and inspiration from an individual that they have likely never heard of (though their parents may have). In that spirit, I’d like to offer the graduates of 2023 some lessons I’ve picked up along the way:

Your first job can be like your first love—it will either bring a smile for years to come—or it can break your heart. And sometimes both. 

Just because you’re young(er), people are going to assume you know things you don’t—and assume you don’t know things you do.

Everything you’ve heard about your elders isn’t true. But some of it is.

There actually ARE stupid questions.

If your current boss doesn’t want to hear the truth, it may be time to look for a new one.

There can be a “bad” time even for good ideas.

Your work attitude often affects your career altitude.

When you don’t have an opinion, “what do you think?” is a good response. And sometimes even when you do.

People who ask for something ASAP probably want it sooner than you think is possible.

Emails (generally) don’t have to be answered right this minute.

Don’t be afraid to pick up the phone—BEFORE it rings.

If the only time your boss hears from you is when there’s trouble, don’t be surprised if they don’t look forward to your visits.

Book some quiet time in your day.

Most meetings really COULD be replaced with an email.

The world is made up of introverts and extroverts—learn and respect the difference(s).

A picture may be worth a thousand words, but it pays to read the fine print.

Never say you’ll never…

Always sleep on big decisions.

There is an inverse relationship between the number of people in a meeting and its productive output.

Never let your schooling get in the way of your education.

Sometimes the questions are complicated, but the answer isn’t.

And most of all, don’t forget that you’ll want to plan for your future now—because retirement, like graduation, seems a long way off—until it isn’t.

Congratulations to all the graduates out there. We’re proud of you!

- Nevin E. Adams, JD

Advisor Value ‘Adds’

Most of the attempts to affix a value to having an advisor tend to focus on investment returns or cost savings. Both are valid, objective measures that can have a real, substantive impact on retirement security—but, at least with the best advisors—there’s usually more.

Indeed, years ago as a fiduciary of another firm’s 401(k) plan, and while I had always felt comfortable with the decisions the plan committee had made, as our little company grew to be less little, I was increasingly aware of the personal liability associated with my role, and the small amount of time I was able to dedicate to the task alongside my “day job.” 

That advisor delivered in all the ways I had hoped he would—but there was value well beyond that in terms of the structure he brought not only to our discussions, but to our process. Things like:

The Discipline to Meet

Internally driven committee meetings are frequently a casualty of whatever crisis emerges on any particular day. As human beings we are wont either to assume that nothing will happen unless we are present, or that because others will be there, our voice isn’t required.

Having a committee and not having committee meetings is potentially worse than not having a committee at all. In the latter case, at least ostensibly you know who is supposed to be making the decisions. But if there is a group charged with overseeing the activities of the plan, and that group doesn’t meet, then one might well assume that the plan is not being properly managed, or that the plan’s activities and providers are not prudently managed and monitored, as the law requires.

However, the presence of an outside advisor helps bring a seriousness both to the gathering itself and the agenda.

The Discipline to Educate

Individuals are chosen to be on these committees for a variety of reasons, some better (and some much better) than others. But the first thing our advisor did at that first committee meeting was to acquaint the members with what was expected of them. That included the requirement to act solely in the interests of plan participants and beneficiaries, the importance of process (and documenting that process), and the implications of the prudent expert rule.

It also included reminders that by being on this committee they were a fiduciary under ERISA, that that brought with it personal liability (and, in our case, how the company had chosen to insure them), and that each of us was responsible for the actions of other plan fiduciaries. 

Sure, I could have delivered all those messages—but it meant a lot more coming from that external, expert resource.

The Discipline to Establish an Investment Policy Statement

While I have known attorneys who have counseled against having a written investment policy statement (IPS), I can’t recall a plan advisor of my acquaintance who wouldn’t insist on it (I may now hear from some, of course). ERISA doesn’t require one—and some lawyers see it as a smoking gun (if you don’t follow its terms, it certainly can be). But in its best form it establishes investment guidelines for the plan—and plan fiduciaries, and plan advisors in particular, will generally find it easier to conduct the plan’s investment business in accordance with a set of established, prudent standards if those standards are in writing. And in writing crafted in the objective, cold, clear light of day, rather than in the throes of tumultuous market (or plan) conditions.

In sum, you want an IPS in place before you need an IPS in place—and in my experience any advisor worth their salt will demand that as a starting point.

The Discipline to Remove Funds

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

As a consequence, you routinely see new fund options added, while old and unsatisfactory funds linger on the plan menu, a general reluctance to undertake an evaluation of long-standing providers in the absence of severe service issues, and an overall inertia when it comes to adopting potentially disruptive plan features like automatic enrollment or deferral acceleration.

Whether or not the plan has an official IPS, plan fiduciaries are expected to conduct a review of the plan’s investment options as though they do. Sooner or later, that review will turn up a fund (or two) that no longer meets the criteria established for the plan. Oh, and make no mistake—there will be someone with money in that fund, maybe even a senior executive.

Rational thought reminds us that leaving an inappropriate fund on the plan menu—and allowing participants to invest in it—is a bad thing. But human beings, including those who serve on plan committees, have a hard time walking away from a “bad” investment.

The Discipline to Document

I’ve heard it said that when it comes to ERISA, “prudence is process—but only if you can prove it.” To that end, a written record of the activities of the plan committee(s) is an essential ingredient in validating not only the results, but also the thought process behind those deliberations.

But as anyone who has ever participated in a group meeting of any kind knows, it’s hard to fully participate while taking notes. And sometimes those notes don’t make sense by the time you get around to writing them up. An advisor can help with that—and that matters because those minutes can provide committee members (both past and future) with a sense of the environment at the time decisions were made, the alternatives presented, and the rationale offered for each, as well as what those decisions were. They also can be an invaluable tool in reassessing those decisions at the appropriate time.

The current emphasis on fees and plan costs, while important, brings to mind a quote by Oscar Wilde, who once famously described a cynic as someone “who knows the price of everything and the value of nothing.”

As an advisor, what are YOU bringing to the table?  As a plan sponsor, what are you getting from your advisor?

- Nevin E. Adams, JD

4 Reasons Why Plan Sponsors Should Care About the Fiduciary Proposal

As I talk to retirement plan advisors and plan sponsors around the country, there seem to be three camps of thought on the Labor Department’s fiduciary reproposal:

• those who think it will be a big deal;
• those who think it will be a big deal but manageable (once certain key issues are addressed); and
• those who are nearly completely oblivious as to the proposal, its potential impact or its current status.

Unfortunately for advisors in the first and second category, nearly all plan sponsors seem to be in the third group.

Here’s why plan sponsors should care about the proposal.

You might have to change your plan education materials.

Remember back when your plan education materials only had generic fund references, and your participants struggled to figure out which of the specific funds on their plan menu were supposed to match up with those colored pie chart pieces? Remember how frustrated they were when you couldn’t tell them? And how poor the results were? Perhaps not, because you’ve been able to show sample asset allocations including actual fund names for well over a decade now as participant education.

However, as currently proposed, the Labor Department’s fiduciary proposal would consider any specific fund references to be advice, not education. And that would make the folks who provide such materials fiduciaries. And that would likely mean a return to education materials that aren’t nearly as educational.

You might have to change advisors.

The rules about how advisors work with retirement plans and retirement plan participants are getting ready to change, arguably in ways as significant as at any time since the passage of ERISA. For some advisors, that may mean that they will want to focus on different areas, some may choose to focus on different size plans, or to forgo working with plan participants altogether.

And while this could also bring a whole new generation of advisors to choose to work with these plans, this is a big change. And though we don’t yet know what the ultimate result will be, things will likely not be the same, particularly for smaller employers, who may very well find that the advisors they work with now will not be willing (or able) to serve their plans under the new regimens.

Your advisor might be more expensive.

There are doubtless advisors and advisor practices out there who won’t have to change a thing in order to comply with the new regulations, and whose fee structure won’t be affected. But others will, and those who do have to make changes could have to make a lotof changes – and that could affect how, and how much, they charge. And that could, of course, have an effect on others.

These changes might not be effective immediately, and how – and how much – will obviously depend on exactly what form the final regulations take. There will almost certainly, at least at the outset, be fewer advisors working with retirement plans. As for what that may mean to their costs, only time – and the final regulations – will tell.

Your advisor may not be able/want to help participants with their rollover decisions.

Today many retirement plan advisors only work with plans, or with participants in those plans. However, a growing number either work with participants as they consider a rollover decision, or have others in their firm who do. Participants who have developed a relationship with a plan advisor while they are accumulating retirement funds often have an interest in extending that relationship to the time when they are trying to figure out what to do with a rollover, or how to create a reliable stream of retirement income that won’t end before their retirement (particularly since a significant percentage of plans don’t offer a systematic withdrawal option). Similarly, plan sponsors, who have undertaken a review and monitoring of those advisors while they work with plan participants have generally prefer to see those discussions taking place with that trusted advisor than with some random advisor off the street.

And for those plan sponsors who want to encourage ex-employees to roll those balances over to another account, the current plan advisor can be a valuable help in facilitating that decision.

However, the Labor Department’s current proposal would, at best, greatly complicate this relationship. The services provided to a participant among many in a workplace retirement plan are quite different from that for an individual in a rollover situation, or one who would be rolling those savings into an individual retirement account (IRA), with the broader array of choices and decisions that would entail. However, the DOL’s current proposal would restrict even a level-fee plan advisor from working with an individual participant circumstance if he or she charged more, even if the level of service was significantly different and more complicated, even if he or she charged a flat fee for those highly individualized services.

That’s why the American Retirement Association and NAPA have advocated for a “level-to-level” compensation exemption that would address this issue.

Of course, at this point, these potential issues are just that – potential issues. The Labor Department has taken great pains to assure legislators, industry professionals and the public at large that they have listened, and are making a serious effort to address the major concerns expressed regarding the proposal (our concerns are outlined here and here).

Still, the devil is (always) in the details, the “proof” in the pudding. But as we wait to see how the Labor Department has chosen to address the concerns expressed, plan sponsors – and advisors – who haven’t yet given consideration to the potential new landscape for retirement plan education and advice would be well advised to do so.

- Nevin E. Adams, JD

Direction-Less?

Generalizations are often misleading, but I think it’s fair to say that some people (specifically those of the male gender) are notoriously reluctant to ask for directions—even when it’s painfully clear to everyone else traveling in their company that they are “lost.” If you’re not one of those people, I’ll bet you know someone (and probably more than one someone) who is.¹

The rationalizations offered by those refusing to seek help are as varied and variable as the individual circumstances that bring those hesitations to light: a shortage of time; certainty that, however lost they seem, they actually know where they are (or will be shortly); a lack of trust in the reliability of the instructions they might receive; the inconvenience of stopping…this despite the knowledge (frequently even among those reluctant to ask directions) that the modest investment of time to seek assistance will likely be far less than the time (and aggravation) that they will expend trying to find their own way.

When it comes to retirement planning, reluctance to seek help seems even more widespread. In fact, the 2013 Retirement Confidence Survey found that fewer than half of workers surveyed have ever tried to calculate what they need to save for a comfortable retirement (see “Guess Work?”)—and that’s not a new finding in a survey that now spans nearly a quarter-century.

The use of retirement planning “help,” in the form of on-line calculators and professional retirement advisors, has been linked to higher levels of retirement confidence—and with justification, according to new EBRI research.³ Turns out that the respondents to the 2013 Retirement Confidence Survey² in the lowest-income quartile who had sought the input of a financial advisor cited savings goals that, compared with those who did not, would reduce the risk of running short of money in retirement by anywhere from 9 to nearly 13 percentage points, depending on family status and gender. Those in the lowest-income quartile who used calculators chose savings targets that would, if they achieved those goals, decrease their probability of running short of money in retirement by anywhere from 14 to more than 18 percentage points.

Unfortunately, only about one-fourth of the sample studied (25.6 percent) used either of these two methods.

Why, then, have so few sought direction? Doubtless the reasons for not doing so mirror those above: a lack of time, a lack of confidence in the directions, or in the individual providing that assistance. Perhaps in the case of retirement projection calculators, the tools may be too hard to find, too complicated to use, or simply just one thing too much to do in an already too-busy day. This, it seems fair to say, despite the knowledge that seeking help would surely provide a better outcome.

What about those who didn’t seek help, who “guessed” at those retirement savings targets? Well, there were more in that category in the RCS sampling (44.6 percent)—and, perhaps not surprisingly, they tended to underestimate their savings needs—in effect, citing a goal that would leave them short of their projected financial needs in retirement.

Baseball great Yogi Berra once cautioned that “You’ve got to be very careful if you don’t know where you’re going, because you might not get there.” When it comes to retirement, the problem generally isn’t getting there—it’s getting there before you are ready.

Nevin E. Adams, JD

¹ These individuals may be harder to spot these days with the widespread availability of GPS devices, but they can still be found.

² See the 2013 RCS, on-line here.

³ “A Little Help: The Impact of On-line Calculators and Financial Advisors on Setting Adequate Retirement-Savings Targets: Evidence from the 2013 Retirement Confidence Survey” on-line here.

Replacement “Window”

There is an old adage that cautions about the consequences “when you assume…”

And yet, the business of retirement planning is replete with any number of so-called “common wisdom” rules of thumb. Doubtless many have well-intentioned origins – to make complicated concepts easier to grasp, and thus to address.

One of the more pervasive notions is that a realistic target for retirement savings can be determined by accumulating a sum that will provide an income stream equal to a percentage of one’s pre-retirement earnings – a sum that is generally expressed as 70-80% of what you earn prior to retirement. This starting point - generally called
a "replacement ratio" - includes any number of imbedded assumptions, perhaps most significantly that the individual will need to spend less post-retirement, generally understood to be on things such as taxes, housing, and various work-related expenses (including saving for retirement).

Moreover, the replacement rate approach represents, at best, an indirect approach in evaluating whether retired workers can maintain their standard of living in retirement – because what matters is not how much you have to spend, but how much you need to spend. A recent research report sponsored by the Society of Actuaries’ Pension Section, “Moving Beyond the Limitations of Traditional Replacement Rates”, also highlights the limitations of relying on replacement rates. A recent paper published by the Center for Retirement Research at Boston College (“How Much to Save for a Secure Retirement”) acknowledges that “the most direct approach would be a comparison of household consumption while working with consumption after retirement” – before launching into a discussion that instead draws on a relatively simplistic series of assumptions , not the least of which is that the goal of retirement saving is a replacement rate of 80-percent of one’s pre-retirement income.

The problem is that these assumptions are just that – and, as a result, in some cases that 80% will be more than is required – and for some it will, unfortunately, be less. Furthermore, most of the assumptions underpinning such replacement ratio targets are implicitly using a 50 percent probability of success.

Additionally, these replacement rate models tend to ignore one – or more – of the most important retirement risks; investment risk, longevity risk, and risk of potentially catastrophic health care costs.

The reality is that there is no “correct” single replacement rate, but the factors that undermine those simplistic rules of thumb are quantifiable. Those factors, and the importance of probabilities in retirement planning are detailed in “Measuring Retirement Income Adequacy: Calculating Realistic Income Replacement Rates (EBRI Issue Brief No. 297).

After all, it isn’t what you have accumulated at retirement that matters, it’s how much you have left at the end of it.

- Nevin E. Adams, JD

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.

IMHO: Catching Your Drift

I recently found myself driving in an unfamiliar city without the aid of a GPS (global positioning system).

Sadly, I had become so accustomed to having that device available, I hadn’t even taken the time to print out instructions from any of the usual Internet sources, and while there were maps in the vehicle, none were of the area in question. That didn’t matter, I told myself—because I had made that drive before, had a pretty good idea of where I needed to be and, armed with a pretty reliable memory for such things, I set out with only a little trepidation.

Just about the time I was getting pretty confident in my ability to navigate without all the high-tech “crutches,” I was thrown a series of curves. The primary route was closed due to construction, the rerouting didn’t seem to take into account where I was trying to get to, an unexpected one-way street suddenly emerged going the “wrong” way, and then I found myself directed onto a parkway whose designers had apparently never contemplated the need of a misdirected driver to pull off and turn around.


In just a matter of minutes, I went from coasting along cool and confident to a state of growing concern (it felt suspiciously like panic) as I began to be drawn what I was sure was miles off my designed course, and heading further away all the time.

Then I remembered that I DID have a GPS on my phone. One that, admittedly, lacked the calm, reassuring voice of the more traditional version giving me step-by-step directions, but it was something. However, it wasn’t the ability of the device to offer routing instructions that I found most useful—the screen was too small (and my need to watch traffic too great) to do much with that feature.

The feature that saved me that day was the blue dot—that element of the GPS that, with a simple touch, will show where you are. That information, presented on the map of my surroundings, allowed me to not only find where I was, but to then visualize where I needed to be and begin heading in that direction. Oh, I missed a turn or two after that, but thanks to that locator “dot,” I quickly saw when I made those mistakes and was able to remedy them before going miles out of my way.

Most participants don’t set out on their retirement savings journey with a confident sense that they know where they are going, much less any real sense of how to get there. Nonetheless, by the time they sit through an education session (or two), make their way through the attendant materials, and try to complete the requisite enrollment forms, they may well feel that they are heading in the right direction.

And then, something happens—it doesn’t have to be an “event” like the financial crisis of 2008 (though it can be); sometimes it’s as simple as just not having had the time to pay attention to your account while the market decides to go on a losing (or winning) streak, or it can simply be a result of the preoccupations that come with those ordinary, but often unplanned, changes in your daily (and financial) life. It can be any of a series of things that pop up just about the time you think you have nothing but smooth sailing ahead; the things that crop up to suddenly “close for construction” the path you had thought you’d be able to follow for a long and uneventful journey.

At times like that—and, arguably, at any time—it’s important for participants—and plan sponsors—to have some kind of idea not only of where they want to be, but where they are relative to that destination.

Because, after all, it’s a lot easier to stay—and get back—on track the sooner you find out you’ve begun to drift from it.

—Nevin E. Adams, JD .

The IKEA “Experience”

We spent some time this past weekend getting my eldest daughter squared away in her new apartment. It’s her first, and as with nearly all first apartments, there is a lot you need to get that you never needed in your room at home or in your dorm away at college. So we headed out to IKEA.

Those who have never had occasion to visit an IKEA store should check it out at least once. They are mammoth stores—big on the outside and seemingly even more massive on the inside. It’s the kind of store you can easily get lost in (not to worry, they have their own food court inside), and yet it’s very hard to simply get from point A to point B, even if you know what you want to buy. About the only way to get through the store is to wander along the winding path the IKEA folks have constructed that takes you—literally—through every display imaginable.1

But the really interesting thing about the IKEA shopping process is that you not only have to find what you want, you must write down the part number(s), and—at the end of your journey through this mammoth store—you must assemble the requisite pieces/boxes in the warehouse.2 You not only have to make sure that you have each of your purchases, you frequently have to make sure that you have all the (separate) boxes into which your purchase has been divided. Ironically, the consummation of that IKEA shopping experience is that you get to go home and put your purchases together.


Now, I’ve never met anyone who didn’t like the IKEA “experience.” Oh, some might not care for the quality of the furniture, or the selection—and surely I’m not the only one who wonders why I have to do all the work (I understand that it’s supposed to be cheaper, but I haven’t found it to be cheap). But it’s not for those in a hurry, and at the end of the night, I kept feeling like I should be able to present someone else with the bill!

As I was loading up the family van with our purchases, I wondered if this is how participants feel about the current structure of our voluntary savings system: one (still) fraught with a mind-numbing array of choices that have to be assembled at the point of enrollment by participants who want to do the right thing(s), but who find themselves stuck trying to follow an instruction manual they don’t quite understand, surrounded by people who seem to get it (but probably don’t, either), only to find themselves at the checkout counter wondering if they do, in fact, have everything they need—only to then have to go home and put it together themselves.

And I wonder if, when they tally up that bill, they too will observe that it’s probably supposed to be cheaper that way—but find that it’s not exactly cheap.

—Nevin E. Adams, JD

1 This turns out to be an interesting way to create the kind of “impulse” purchasing that most retail stores only have positioned at the checkout counter, as one continually wanders past interesting things that you hadn’t even thought you needed. On the other hand, the maps posted along the way that purport to show you where you are were not exactly reassuring to those in a hurry.

2 A place reminiscent of that last scene in “Raiders of the Lost Ark” (albeit with numbered shelves and aisles).

Hurricane Forces

It’s been a stressful week—and it’s not over yet.

Over the past 10 days, I’ve managed to survive three college move-ins, an earthquake in our nation’s capital and—with a little luck—a hurricane bearing down on the Northeast even as I write this column.

Now, I know it’s summer—Labor Day is only a week off—and there’s a lot looming over our industry’s head, but the fact is, I am—perhaps like many of you—having trouble focusing on anything other than Hurricane Irene.

See, we live in a neighborhood that seems particularly prone to losing power, and we’re frequently the last in our town to have it restored—and that’s when we don’t have a hurricane sweeping the Eastern seaboard!

It’s bad enough to be without power for several days, but the last time it happened, it was accompanied by some significant rainfall, and we quickly found out (the hard way) that the sump pump that normally keeps that extra water from pouring into our basement requires electricity to function. Fortunately, we were able to borrow a neighbor’s generator before things got too out of hand, and once we were past that crisis, I determined never to go through that again. Figuring that a small portable generator was a prudent investment, I did a little online shopping, decided I knew NOTHING about portable generators, made a mental note to go back to it when I had time to deal with it… and never did.

Now, life throws a lot of curve balls at you—and forces of nature, more often than not, simply happen with little, if any warning. Hurricanes, on the other hand, you tend to see a long way off. Oh, there’s always the chance that they will peter out sooner than expected, that landfall will result in a dramatic shift in course and/or intensity, or that, like with Hurricane Katrina, the real impact is what happens afterward.

But still, hurricanes don’t generally spring up out of nowhere the way that tornadoes (or earthquakes) do. Incredibly, these massive storms with 100+ mile-per-hour winds seem to creep slowly toward land (with the relentless determination of a zombie in a George Romero classic) over a series of days.

In theory, that provides you with time to prepare—but, this week anyway, it mostly seems to have provided time to wonder why I didn’t do more.

I suppose a lot of participants are going to look back at our working lives that way as they near the threshold of retirement. They’ll remember the admonitions about saving sooner, saving more, the importance of regular, prudent reallocations of investment portfolios. Sure, you can find yourself forced suddenly into an unplanned retirement, but most have plenty of time; not only to see it coming, but to do something about it.

But only if they choose to do so before their retirement storm makes landfall.

—Nevin E. Adams, JD

Expert Opinions

I learned a long time ago that when it comes to things like automobile maintenance, home repair, or gardening, I’m better off hiring an expert. Now, I have friends who derive great pleasure from things like “puttering around” in the backyard, who relish the accomplishment of laying down their own carpet or wallpapering a bathroom, who derive great satisfaction from installing their own car stereo or home entertainment center. But as for me, I’m happy to support our nation’s economy by paying someone who actually knows how to do such things. It’s not that I CAN’T do those things, mind you—it’s just that they take time I don’t have to do things I’m not good at for a final result with which I am never completely satisfied.

And, if I’m honest, because I don’t like those tasks, I put off doing them—as long as humanly possible.


One of the most common information requests I get from advisers is help in proving to sceptical plan sponsors that they should hire an adviser. While I don’t always know the particulars, the vast majority of these situations don’t arise where an adviser is already involved. Rather, these tend to be situations in which the plan sponsor has not previously hired an adviser and is questioning why he or she needs to undertake that additional expense to do something they (still) feel perfectly capable of doing themselves.

In truth, by the time you take into account the types of programs many providers now make available, with screened investment menus, pre-packaged investment policy statements, automatic enrollment and contribution acceleration campaigns, not to mention an expanding array of qualified default investment alternative (QDIA) choices and materials that tout the support of a large, sophisticated financial institution, you can hardly fault a plan sponsor for wondering why he or she needs an adviser.

To me, the reason is simple: because, while a plan sponsor probably can fulfill his/her fiduciary duties without the assistance of an independent financial adviser, IMHO, left to their own devices, they are, quite simply, less likely to do so. They are more likely (perhaps much more likely) to be beholden to a limited investment menu and “standard” fee structures, less likely to have regular and productive investment committee meetings, less likely to renegotiate their current arrangements on a regular basis, less likely to undertake needed change, and far less likely to exercise the discipline of a consistent process in doing so. Like those “distasteful” household chores, even among the most committed plan sponsors, these complicated decisions tend to drift to the back burner of life.

Hiring an adviser is no panacea for a plan sponsor who is not willing to own up to its fiduciary obligations—but, with the right adviser, that decision can go a long way toward helping ensure that those fiduciary obligations are met.

—Nevin E. Adams, JD

Mixed Messages

We had wrapped up a very successful half-day adviser event ahead of our annual Awards for Excellence dinner last week. As we closed up the session, a co-worker of mine commented to me as an aside, “Nobody ever told me I needed to be saving 12% before.”

Now, this co-worker has nothing to do with our magazines, or the content that fills our Web sites and newsletters. He just happens to work at a company that, among other things, publishes information about retirement plans. He’s a participant in our benefit plans, of course—and so he has probably been exposed to all the same types of education and savings materials as anyone (perhaps more). He’s a smart guy (he’s pursuing his MBA at night), tech-savvy, and he pays attention. And yet, it wasn’t till he was effectively sitting there as a fly on the wall in a room full of the nation’s best retirement plan advisers that he overheard someone put forth a specific savings-target figure.

Now, like any good plan sponsor, I can explain that. I don’t know his individual financial circumstances (I’d have to “work” even to find out how much he’s saving at present), have no idea when he plans to retire, and can’t possibly guess at the viability of Social Security or other resources at that date. He may marry “well,” he may have a rich uncle—heck, he might even win the Lottery. I can tell you that his employer offers a solid 401(k) plan, with a robust investment menu (reviewed on a regular basis with our financial adviser), a generous match, access to both managed accounts and target-date funds, and the opportunity for him to sit down with a financial adviser (paid for by his employer, I might add) or get a consult via the phone, as well as through an assortment of Web-based tools. Looking over the plan’s structure, administration, and fees, it’s hard not to feel that (in the words of the Lone Ranger), “Our work here is done.”


Except, of course, it obviously isn’t.

Now, I don’t know that 12% is the right answer in his individual case. For all I know, that’s still not going to be “enough”—or, based on the combined results of the aforementioned individual circumstances yet to be discerned, it might be way too much. Obviously, there are many logistical impediments to us divining with precision what the “right” amount is for every individual situation (including our own).

That said, IMHO, any number of plan design features convey a different message to participants. A significant number of plans still don’t provide for an automatic (or even immediate) enrollment. Those who do generally default employees into these programs at a mere 3% of pay, which, in most plans, isn’t even enough to qualify for the full match. Many plans match those deferrals only up to 6% (or less), auto-accelerate at just 1% increments, and—if we’re rigidly adhering to the outline provided in the Pension Protection Act—probably cap those automatically accelerated deferrals at 10% of pay.

We all know that the motivations for those plan designs are nearly as varied as the plans that employ them: They represent the plan sponsor’s sense of a competitive benefit structure, they match the expectations of their current workforce, or perhaps they are simply what the employer can afford at any particular time. Yet, we all see evidence every day that participants read into these structures a kind of “code” that these are the “right” answers to provide them with a financially secure retirement, rather than representing decisions made for reasons that, while generally sound, are completely unrelated to ensuring individual retirement security.

We’ve long held off giving people a specific target for savings, for a host of real and legitimate reasons. I wonder if the time hasn’t come to put a target out there for participants—one that might not be precisely the “right” number for every individual situation, but one that will give them something to aim for, rather than continue to duck the issue and hope for the best.

It’s a message that I think participants are ready for—and there’s no time like the present.

—Nevin E. Adams, JD

What Lies Ahead - Part 2

If 2010 was not quite the return to “normal” we might have hoped, there was more than enough—both new and old—to draw the attention of plan sponsors. Here is the second part of our look at the trends that were on our mind this past year—and those just over the horizon.

Stop Gaps: Closing the Pension Funding Gap

What we said last year: It remains more expensive—and complicated—to walk away from pension commitments than most realize, though many employers remain committed to their pension plans for reasons that transcend those financial considerations. Still, it seems likely that freezes, both hard and soft, will continue to be applied, certainly in the private sector. The public sector’s commitment to pensions remains largely unabated—and yet, a sense remains that it may only be a matter of time before fiscal realities bring about a different result.

Where we are: For the very most part, little has changed. Pension funding remains a challenge, with the funding gap seemingly constantly buffeted between the ups and downs of the markets and interest rates, despite the conscientious efforts of most plan sponsors to keep up with ever-tightening funding requirements.


What’s ahead: It remains more expensive—and complicated—to walk away from pension commitments than most realize, though many employers remain committed to their pension plans for reasons that transcend those financial considerations. Still, it seems likely that freezes, both hard and soft, will continue to be applied, certainly in the private sector, while in the public sector, financial pressures seem likely to result in a different future solution for newer hires. Sound familiar?

Conflicts of Interests—Advice Regulations

What we said: Will we ever get final advice regulations? Almost certainly, though almost certainly regulations very different from the ones put forth a year ago. Or perhaps they will not come until after the concepts embodied in the PPA have been recrafted by legislators, such as Congressman Rob Andrews (D-New Jersey), who has already introduced legislation (the aptly named “The Conflicted Investment Advice Prohibition Act of 2009”) that would do just that. Between now and then, participants will continue to get advice the way they always have—or have not.

Where we are: Well, we now have those regulations—a proposed final version, anyway. For the most part, they seem to have restored and shored the status quo. Not that that’s a bad thing.

What’s ahead: The final proposed regulations will, likely, become the final regulations, at least in the important areas. The big change in advice seems more likely to emerge from a different direction—the recently proposed regulations on the definition of a fiduciary, not so much because it will change the rules on advice, but because the controversy on advice has largely revolved around trying to avoid becoming a fiduciary while offering advice (and getting paid for doing so). And it seems likely that if the proposed fiduciary regulations become law, the advice net some have tried so hard to become ensnared in will, quite simply, be inescapable.

Tax Treatment—Paying Now or Paying Later

Where we are: For years, much of the impetus for the growth in tax-deferred savings plans has been the premise that one’s taxes and/or income would be lower in one’s retirement future. Those prospects no longer seem quite so certain, and new Roth provisions for workplace retirement plans offer today’s retirement savers a different kind of choice. That, coupled with a unique window of opportunity to convert tax-deferred balances (albeit at a price), has some seeing the benefits of tax-deferred saving in a whole new light.

What’s ahead: As with self-directed brokerage accounts, the Roth conversion window (and its affiliated tax acceleration) seems most likely to appeal to the highly compensated minority. Of course, the impetus for the conversion itself is not only the timing window, but also the (still) looming sunset of the Bush Administration’s tax cuts (well, it was looming when I wrote this). Of course, the real issue may be a shift in assumptions about taxes; what if they won’t be dependably lower in retirement?

—Nevin E. Adams, JD

Editor’s Note: If you missed it, you can check out the rest of the list HERE

Liability Driven?

Having recently had a couple of new members join our 401(k) investment committee, I asked our investment adviser to conduct a briefing so that the new members – and those already serving on the committee – would have a better understanding of the responsibilities of being on that committee.

Most of that session focused on what was expected of them: the requirement to act solely in the interests of plan participants and beneficiaries, the importance of process (and documenting that process), and the implications of the prudent expert rule.

However, aside from the obvious motivations in helping my co-fiduciaries know what was expected of them1, at the conclusion of our session, I tried to summarize for our committee three things I think every investment committee member should know—and that, IMHO, kept top of mind, serve to keep an appropriate focus on those responsibilities:

You are an ERISA fiduciary.

Even as a small and relatively silent member of the committee, you direct and influence retirement plan money. I’m not saying that some crafty attorney couldn’t cobble together some kind of legal or practice exclusion that would technically suffice to erect some kind of legal shield—but I suspect that even that would be readily penetrated by a court2.


As an ERISA fiduciary, your liability is personal.

You may be required to restore any losses to the plan or to restore any profits gained through improper use of plan assets. Now, you can obtain insurance to protect against that personal liability—but that’s probably not the fiduciary liability insurance you may already have in place, or the fidelity bond that is often carried to protect the plan against loss resulting from fraudulent or dishonest acts of those covered by the bond. If you’re not sure what you have, find out. Today.

You are responsible for the actions of other plan fiduciaries.

All fiduciaries have potential liability for the actions of their co-fiduciaries. For example, the Department of Labor notes that if a fiduciary knowingly participates in another fiduciary’s breach of responsibility, conceals the breach, or does not act to correct it, that fiduciary is liable as well. So, it’s a good idea to know who your co-fiduciaries are—and to keep an eye on what they do, and are permitted to do.


—Nevin E. Adams, JD

1 As an ERISA fiduciary, you are expected to act SOLELY in the interests of plan participants and their beneficiaries, and with the exclusive purpose of providing benefits to them; to carry out those duties prudently (and by prudent, it is intended that you be a prudent expert); to follow the terms of the plan documents (unless inconsistent with ERISA); to diversifying plan investments (specifically with an eye toward minimizing the risk of large investment losses to the plan); and to ensure that the plan pays only reasonable plan expenses for the services it engages.

A couple of points of clarification: IMHO you can’t follow the terms of the plan documents if you haven’t read them, nor can you ensure that the plan pays only reasonable expenses if you don’t know what the plan is paying, or for what.

2 IMHO, “you don’t have to be a fiduciary to be on the investment committee” should be added to the list of great lies—like “the check is in the mail….”

Thanks Giving

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

Here's my list for 2010:

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 2009 made the commitment to restore some or all of it in 2010.

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—never more so than this year with the absorption and assimilation of requirements under the new health-care law.


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 than 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 a growing number of advisers—and the firms that employ them—are willing to accept responsibility as an ERISA fiduciary.

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 be part of a growing company 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, 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 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.

Thank you!

"Sure" Things

In a very real sense, this has been a “rebuilding” year for many plan sponsors and participants: a time spent rebuilding account balances, resurrecting and/or reviving employer matching contributions, a time for shoring up participation rates, and—in some cases—restoring trust. The markets, overall, have been sympathetic to those causes, but in many respects, the still-soft economic trends doubtless weighed on the kinds of dramatic trend shifts that we have seen in recent years.

That said, only a quarter (24.9%) of some 6,000 plan sponsor respondents said that “all or nearly all” of their participants were deferring enough to take full advantage of the employer match, a reading that declines sharply with plan size. Additionally, participation rates were roughly flat with a year ago; with responding plans reporting a combined participation rate of 71.5%, compared with 72.3% a year ago. The median participation rate was also lower; 75.0% in 2010, compared with 78% in last year’s survey.

As for automatic enrollment, the 2010 trend line was mixed. While the overall adoption rate was slightly lower this year, there was a discernable uptick in adoption at the largest programs (62.7% in 2010, compared with 52.3% a year ago) and about a 10% increase in the number of mid-size and large programs—but small and micro plans showed no change at all. The overall pace of contribution acceleration—that process of providing for annual increases in the rate of deferral—slipped from a 15.5% adoption rate in 2009 to just one in 10 plans this year (though most of that decline came from the smallest plans). However, even the adoption rate at the largest plans was effectively flat from a year ago.


The number of plans not offering some form of financial/investment advice continued to shrink. In this year’s survey, fewer than one in four plan sponsors did not offer that support, though larger programs were more likely to eschew the option. Relying on a financial adviser outside the plan was the preference for 37.5% of this year’s respondents, though that option was significantly more appealing to micro and smaller employers. While there continued to be different trend lines in different market segments, there was a distinct and noticeable trend across market segments toward offering—and accepting—“help.”

But as I sorted through the results of our annual Defined Contribution Survey, the one thing that emerged as something of a theme across multiple categories was—a lack of clarity. Plan sponsor respondents—and I maintain that those who respond to our survey are some of the most knowledgeable and actively engaged in their responsibilities—expressed what I thought were relatively high levels of uncertainty around several key plan-design elements: fees, target-date glide paths, retirement-income offerings, the focus of their investment policy statements, and even the “best” option for a qualified default investment alternative (QDIA).

Now, that may simply be a reflection of the wide array of choices available, the pace of new product development, and the unsettling effects of volatile markets. In fact, it might even reflect a certain level of prudent humility on the part of serious plan fiduciaries, who are aware of just how much they don’t know in the midst of that change and turbulence and are willing to own up to that reality.

After all, as Mark Twain once said, “It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so.”

—Nevin E. Adams, JD

"Interests" Bearing

Last week the Labor Department issued a proposal that would, by its reckoning, provide the first update to the definition of an ERISA fiduciary since shortly after the birth of the federal regulation (see DoL Broadens Fiduciary Net.

The move was much-anticipated and, in the eyes of many, long overdue. Clearly, the Labor Department wanted to narrow the exceptions to that definition (that were, somewhat ironically, put in place by the Labor Department of 1975) and, in the process, subject more advisers to ERISA’s fiduciary standards.

At a high level, the Labor Department is seeking to restore the two-part test for fiduciary status found in ERISA, one that was expanded to be a five-part test in the 1975 regulations. The proposal seeks to set aside the additional conditions that the advice be rendered “on a regular basis,” that the advice would serve as a “primary basis” for investment decisions with respect to plan assets, that the recommendations are individualized for the plan, and that the advice be provided pursuant to a mutual understanding of the parties. Instead, the new proposal would impose fiduciary status when a person renders investment advice with respect to any moneys or other property of a plan, or has any authority or responsibility to do so, and receives payment (direct or indirect) for that advice.




The Implications

That change is almost certainly going to drive some of those advisers (and their sponsoring organizations) away from these programs, though I am hard-pressed to mourn that loss (the proposal left intact the exemption for education, and if those lines are easily crossed, by now surely we all know where they are). Those who remain may well charge more for their services in compensation for the extra exposure, certainly in the short run. However, those who do so will be competing against organizations and advisers that made that commitment years ago and who appear to be competing quite successfully already. Consequently, if the newly “converted” seek to profit by a rapid escalation of their fees, I suspect they won’t find that to be a successful strategy.

Those responsible for closely held stock valuations are most likely to feel some pain in the short run. After all, they have long enjoyed a special dispensation from fiduciary status At this writing, I’m not altogether sure how one conducts a security valuation that is exclusively in the interests of the plan participants and beneficiaries—but I’m no more comfortable with the notion of a valuation that ignores the impact that those valuations could have on the exposure of the plan that takes on those assets based on that valuation.

One of the most interesting aspects of the proposal was the Labor Department’s expressed interest in reconsidering its position that a recommendation to a plan participant to take a permissible plan distribution would not constitute investment advice, even when combined with a recommendation as to how the distribution should be invested. Said another way, the DoL is now willing to consider that such encouragement could constitute advice at a level sufficient to trigger ERISA fiduciary status. In announcing its interest, the DoL noted that “[c]oncerns have been expressed that, as a result of this position, plan participants may not be adequately protected from advisers who provide distribution recommendations that subordinate participants’ interests to the advisers’ own interests.” In fact, there has already been litigation involving rollover advice—and there are any number of stories out there about advisers persuading participants to take advantage of early withdrawal provisions and pull their money out of the plan to put it in their hands. Not that that couldn’t be advantageous for the participant—but shouldn’t the adviser encouraging them to pull money from ERISA’s environs be held to that same standard of care?

Of course, at this point, the proposal is just that—though it will be interesting to see the comments that are made on this new definition over the next 90 days (1).

As for where this takes us, it has not always been clear that all plan sponsors fully appreciated the significance of working with advisers willing to put plan and participant interests ahead of their own. But they should; and, IMHO, this proposal will improve the chances that they—and their participants—will benefit from that protection, whether they seek it or not.

—Nevin E. Adams, JD

(1)Comments on the proposal can be submitted electronically by e-mail to e-ORI@dol.gov (enter into subject line: Definition of Fiduciary Proposed Rule) or by using the Federal eRulemaking portal at http://www.regulations.gov.

Scale "Model"

I’ve long had an issue with weight scales, for the perhaps obvious reason that, these days, they frequently deliver a message I’d just as soon not receive. See, even when I’m feeling pretty good about the way I look and feel, those scales generally remind me that is at a weight that I know is not “appropriate” for my height.

Over the years, I have rationalized that gap in any number of ways; that those scales are frequently inaccurate, that the definitions of “appropriate” are skewed, even that I’m wearing clothes (or shoes) at the moment that are throwing things off (hey, I’ve got pretty big feet). But since I know, deep down, that those are, after all, mere rationalizations for avoiding the truth, these days I pretty much just treat stepping on scales as I would stepping on a rusty nail—which is to say, I avoid them at all costs…at least until I manage to get back on a regular exercise regimen.

My sense has long been that that is how participants approach the issue of figuring out how much they need to save for retirement. It’s not that they don’t know they should know that number, and not always that they just don’t have time to deal with it. Mostly, they have a sense that the number will be larger than they would like it to be, and that, coupled with a sense that the savings they have accumulated will be smaller than it is “supposed” to be—well, let’s just say they don’t want to be reminded that their retirement plan health isn’t good.

There was some of that in the “National 401(k) Evaluation” published by Financial Engines (see Report Highlights Savings Gaps, Ways To Close Them). The report was, in fact, replete with signs that most participants in the sampling are not in very good shape when it comes to retirement, with roughly three-fourths not on track to replace 70% of their pre-retirement income at age 65. When you consider that about a third have badly allocated portfolios (the report somewhat euphemistically terms these “inefficient”), and that nearly 40% are not contributing enough to receive the full match—well, let’s just say that there are some obvious reasons for the gap.

IMHO, it’s more than a bit ironic that studies routinely show that participants who take the time to make that retirement assessment feel better—and are more confident—about their retirement preparations than those who don’t. Of course, it could be that the only ones taking the time to check things out are those who are already reasonably confident that they’ll get a good result; unfortunately, I don’t recall ever seeing a connection between pre-assessment confidence and post-assessment (nor, for that matter, do these confidence assessments typically correlate confidence with savings that justify that sentiment).

Still, I like to think that those who take the time to do the assessment find out that things are perhaps not as hopeless as they had thought—and that, following the assessment, they walk away with a specific action plan for either staying on track, or closing the gap between needs and reality.

Inside the Financial Engines report there are a couple of examples that illustrate the point. One is a 45-year-old participant making $50,000/year who currently has a $50,000 account balance and who is deferring 4% in a portfolio that is overly risky—a combination that the report says will leave him 27% below his idea goal (if the market performs “typically”). But the report notes that if this participant reallocates at an “appropriate” risk level, they can narrow the gap to 23%; if they do that AND save 2% more per year, they can cut the gap to 14%; and if they do both AND delay retirement two years—well, they’re on track. Or, this participant could simply save 8% more a year to achieve the same gap-closing result.

Now, like with my bathroom scale, you can quibble with the assumptions, but the important thing, IMHO, isn’t taking the time to figure out you have a gap—most of us probably have that sense before we ever sit down with our retirement plan statement. Rather, it’s the plan that comes out of that process—the plan that helps us get back where we need to be—that not only helps us feel better, but gives us a reason for that feeling. And, like that bathroom scale model, the longer you put that off, the longer that “recovery” will take – and the harder it will be.

—Nevin E. Adams, JD