'Inside' Straits

 A recent Wall Street Journal (WSJ) article asked what I view as a rhetorical question; “Do you really know what’s inside your 401(k)?” Rhetorical in that I suspect the answer from most people — certainly if they’re honest — is “no.”

Now there are many aspects to a 401(k) that bear scrutiny, but the article was focused on target-date funds (TDFs) — a mechanism that I think has been a boon for most of the novice investors (and savers) that I suspect most 401(k) participants (still) are.

You check one box (heck, these days that box is checked for you) and tap into the expertise — and ongoing expertise at that — of professional money managers to provide your retirement savings with a diversified portfolio mix. No longer do you have to concern yourself with weightings of stocks and bonds, value versus growth, domestic versus international — just leave it to the experts. 

But the WSJ article’s focus was a cautionary note — mostly concerned at the unexpected things that a collective investment trust (CIT) vehicle (now 52% of all TDF assets, according to the article) might open the door to — specifically alternative investments, notably so-called “private investments.” Which, the article points out, might undermine the cost advantages of the CIT with those alternative holdings that are more expensive, less transparent/readily valued, and illiquid.

Indeed, the author goes so far as to comment, “As far as the managers of private assets are concerned, the ‘target’ in target-date funds is you.” Of course, his concern is that the less rigorous reporting requirements of a CIT (compared to a mutual fund) would allow investors to be taken advantage of — as though they’re actually even skimming that mutual fund prospectus.

Let’s face it — target-date funds with all their simplicity (at least in the choosing) and promise have been pitched as a “do it for you” solution, and tens of millions of (too) busy, preoccupied participants have trusted their retirement savings to these vehicles assuming that the professional investment class — not to mention the plan sponsor fiduciaries that screened them — know what they’re doing.

Unfortunately, in some cases, that trust may have been misplaced.

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Something not mentioned in the WSJ article is that most of the manufacturers of those vehicles several years back embraced a “through” retirement date glide path, rather than the “to” retirement date that was the original “pitch.” The latter meaning that you’d gradually move to a much more conservative asset mix at your projected retirement date. And while there is still certainly a modest shift in that direction, the shift in emphasis means that I suspect there are a lot of folks nearing retirement that have a portfolio mix that is significantly more exposed to stocks than they might expect and/or want.[i]

Some of this shift is, doubtless, a sense that individuals want to stay invested in those funds, irrespective of retirement date.[ii] Some doubtless a desire to report better returns, since I suspect most fiduciaries are (still) paying more attention to the current returns than the conceptual integrity of the glidepath.

Regardless, it is, to my eyes, anyway, a shift from the original premise — and one that I suspect many participants haven’t noticed, and one on which plan fiduciaries may not have focused. The inclusion of alternative investments (particularly when folks are talking about 20% allocations) is one thing — but the structural glide path of these options, particularly when positioned as a default investment, strikes me as even more fundamental.

That said, and as the WSJ article closes, “None of this means you should turn your back on these funds, which can give you a powerful boost toward a sustainable retirement. It does mean you’ll need to know what you own and speak up if you don’t like it. The ultimate hands-off investment is going to require you to be a lot more hands-on.”

I would say that goes double for those responsible for the selection and monitoring of these plan options.

• Nevin E. Adams, JD

 

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[i] Note — not saying that the shift in glidepath focus isn’t legit, or even beneficial — it just seems that most folks probably missed that “memo.”

[ii] Cynics might even suggest that the shift is a function of TDF managers simply wanting to keep hold of that money all the way through the individual’s retirement, rather than handing it over to a different manager. 

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….”

'Going' Concerns

“When the going gets tough, the tough get going,” or so goes the old saying.

It’s a saying with the requisite amount of bravado to stiffen one’s upper lip and shore up one’s resolve as we plough through yet another tough market cycle; a period in which, by all traditional measures, “alternative” investments should be a good place to seek shelter from the storm.

This time may be different, of course. Real estate, one of the most popular (at least in terms of its presence in pension portfolios), served to set off most of the recent market tumult, and is still struggling to make its way back (though one should be careful about the level to which one expects it to return). Private equity, writ large, feels a more precarious move at present, and hedge funds—well, many no longer live up to the name, despite their fee structures.

There are, of course, a growing number of alternatives to stocks and bonds—the traditional standard against which an investment is deemed to be “alternative”—but to boldly go where no one else is going is generally anathema to pension plan fiduciaries.


Of course, there will be (and perhaps already are) institutional investors with a perspective and horizon long enough to wade into this storm surge, those whose skins are “tough” enough to make the kind of prudent investment in strategies and sectors that can (and often has) pay big dividends in the long run.

But caution seems to be the watchword of the day, and many—perhaps most—are not altogether certain that we have weathered the storm. The world’s pension obligations loom large, the returns needed to sustain them less certain, the pockets from which new investments arise already “picked.” In a growing number of places, those already dependent on such promises are rioting in the streets (some days it seems likely that those expected to fund those obligations may join them), but those protests will not fill those depleted coffers, nor will they likely have any good effect in ameliorating the current market unsteadiness.

The going’s still tough—but the tough will, as they are wont to do, keep going.

The question, as yet unanswered, is where—and what—they will be going to.

—Nevin E. Adams, JD