A Glidepath of/for Life

I’ve been getting a lot of … comments … of late about my version of “retirement.”

I heard it both a couple of weeks back speaking at an event sponsored by The Standard—and again last week at the NAPA DC Fly-In Forum—that I was setting a poor example for retirement aspirations (all good-natured, and generally followed by a quick comment that they were glad to see me nonetheless).  So much for long walks on the beach or reading in a rocking chair, I suppose. But it’s my first “go” at retirement, after all—no practice rounds (even my vacations over the years have been a bit “busy”) beyond the “space” provided by COVID’s lockdowns.

That said, my days are definitely different now. And, though it’s perhaps not apparent from the content I (still) produce in any given week (blame the plaintiffs’ bar—if they’d quit suing, I’d have less to write about), I’m pleased to report that I’m (beginning) to ease into new daily patterns; (more) time on the treadmill, actually reading books that have nothing to do with retirement plans/ERISA (or even reality), planning trips, actually putting a bucket list to paper, and yes—even the occasional afternoon nap.  
       

The shift is, admittedly, subtle (my wife would tell you it’s still largely non-existent). But there’s a definite shift in focus from where I’m sitting (albeit not yet in a rocking chair).

To that end, I recently had the opportunity to listen in on a webcast featuring a good friend of mine, Jeanne Thompson, who is now mapping out her own version of “retirement.” Now, I’ve long appreciated Jeanne’s talents for data analysis (and, more significantly, her ability to convey the potential impact and import of that data in a way that “normal” people can grasp)—and on this particular webcast she crafted a perspective on life that mirrored the markets—with both bull and bear passages, but also life choices—as a series of asset allocation decisions. And, as with investing, how the different “markets” of one’s life/career can be influenced by, or sometimes run counter to prevailing forces.

As asset allocation traditionally differentiates between stocks, bonds and cash, Jeanne breaks life down into three major elements: sleep, life and work. Those are broad swathes of existence, to be sure, but when you are talking about something like work/life balance, it’s not a bad place to start from. And, as she graphed out her career experience on that webinar, it was easy to see how life events—promotion to a new position, marriage, the arrival of children, and the “emptying” of that nest were reflected in those allocations of time.

In life, as with the markets, there are external influences that force shifts in those allocations. And yet, we have—or should have—some sense of the allocation we believe to be desirable to meet our goals.  And, if we’re mindful of that compass, we know that adjustments are appropriate from time to time—and that if those adjustments are ignored—well, the results can be…unfortunate.

But, as with any asset allocation decision, it starts with knowing your goals, your time frame(s) to achieve them, an appreciation for the cognizance of the surrounding environment(s), and a commitment to rebalance over time, as appropriate.

And you don’t even have to wait till “retirement” to do so.

- Nevin E. Adams, JD

Markets Timing

As it happens, I’ll commemorate an anniversary of my birth this weekend.

It’s not a particularly significant one—it doesn’t end in a 5 or a 0, won’t trigger any new savings opportunities or impact (catch-up, RMD trigger, forbearance of withdrawal penalties, or Social Security)—but it is a birthday, and therefore a day upon which to reflect (and to wonder anew why we don’t make more fuss about our mothers, who—let’s face it—did the real work on that day).

Traditionally, on my birthday weekend (and the 4^th of July holiday), I have taken a look at my current asset allocations and, when circumstances warranted, rebalanced. There’s no magic to those points in time. It’s not the ONLY time I look (and act)—but it happens to be a time when, whatever is going on in the market, I have a calendar-driven opportunity to take a breath and take a longer view. And, let’s face it, this year has been a bumpy ride in the markets.

The mantra in times of volatile markets is, inevitably, “stay the course”—wise counsel in most situations, particularly since the impulse in such times is often action that one comes to regret in the fullness of time. However, for some, just sitting still and “taking” what the markets choose to inflict on your retirement savings can be excruciating. 

For me, anyway, this year will be a little different. Most significantly, as I near my “retirement” threshold, I’ll actually be shifting into a different pace of accumulation. And, for the first time in my working career, I will be doing it with my retirement savings accumulated into a single place (well, technically two—one for Roth, the other for the traditional pre-tax rollovers). That said, and my birthdate notwithstanding, I still have plenty of investment runway to ride.  

That said, and while my weekend should be a bit less structured than usual, here are some things I have traditionally done—that you, or those you support, may find useful—particularly with the current market uncertainties.      

Get started on rebalancing by changing the investment elections of NEW contributions, rather than transferring existing balances. It will take longer to realign the entire account, but at least you aren't realizing those as-yet-unrealized losses.

Increase current deferral rates. When you think about just how much cheaper those retirement plan investments are now, compared to a year ago, it's hard to pass up that kind of bargain. More so if you aren't yet saving at the maximum level of the match.

Consider automated rebalancing. Most providers now have in place mechanisms that will, on some preset frequency (monthly, quarterly, annually), automatically rebalance individual accounts in accordance with investment elections. It's a good way to keep things in balance without having to worry (or remember) about the best time to do so—calendared events notwithstanding.

Better yet, consider shifting to a target-date fund or managed account. You may well be wondering why I would go to the “trouble” of manually rebalancing my 401(k) when there are professionally managed solutions available like target-date funds and managed accounts. The reality is that only one of my previous 401(k)s had target-date funds available on their menu[i]—and I have taken advantage of that regular rebalancing by professionals to some advantage.

None of this has to wait for a birthday, of course. But doing so on a regular basis can be an effective way to ensure that you get that retirement wish when you blow out the candles!

Nevin E. Adams, JD 

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[i] Another had a managed account option (that I didn’t care for).

5 Things You CAN Do After a Market Correction

By now, you’ve heard — and perhaps dispensed — what appears to be the “common wisdom” about the recent market tumult: “stay the course,” “ride it out,” and my personal favorite, “don’t just do something, stand there.”

For all our industry’s long-standing concern about participant inertia, in times like these the inclination to “do nothing” is undoubtedly to the benefit of most participants. That said, one can well imagine that those who are turning to their advisors for help and guidance (wonder what the robo-advisors are saying?) might be a little frustrated with the admonition that the best thing for them to do right now is… nothing.

Early indications are that most retirement plan participants will — again — ride this one out (though there are some exceptions. But, hey — while the markets have your attention, here are five things participants can, and should, do:

Check your account balance. While a lot of experts will tell you to avoid looking at your account right after a big drop in the markets, if you’re making individual fund choices, it’s probably worth checking out how your account is currently invested. If you haven’t checked in a while, you might find that it’s gotten “out of balance” from your original investment selections.

Get started on rebalancing. While this may not be a great time to rebalance your entire account, you can start by changing the investment elections of new contributions, rather than transferring existing balances. It will take longer to realign the entire account, but at least you aren’t realizing those as-yet-unrealized losses.

Increase your current deferral rate. This is the biggie. When you think about just how much cheaper those retirement plan investments are compared with a few days ago, it’s hard to pass up that kind of bargain. More so if you aren’t yet saving at the maximum level of the match.

Look into automated rebalancing. If you still make and maintain individual investment fund choices in your retirement account, it can be hard to pick the best time to make a change. (Hint: a period of extreme market volatility is almost never the best time.) However, the vast majority of providers now have in place mechanisms that will, at some preset frequency (e.g., monthly, quarterly, or annual), automatically rebalance those accounts in accordance with your established investment elections. It’s a good way to keep things in balance without having to worry (or remember) about it.

Think about getting some professional help. Odds are, even if you like keeping up with the markets, it’s not your day job. A good, trusted advisor is always a great option, but you might find it useful to look into a solution that is professionally managed all the time — such as a balanced fund, target-date fund or managed account option.

So, yes, there are some things you can do after a market correction, or even on a regular basis. And one more thing: There’s no time like the present.

- Nevin E. Adams, JD

Moving Targets

Before target-date funds were “cool” (or widely available), I had steered my mother toward an asset-allocation fund as a good place to invest her retirement plan rollover balance.

The logic was, I thought, impeccable: A professional money manager would be keeping an eye on and rebalancing those investments on a regular basis. The fee was reasonable, and the portfolio was split about 60/40 between stocks and bonds, which also seemed reasonable in view of her investment horizon. From time to time Mom would call and ask if we needed to rebalance that investment — and I confidently assured her that there was no need to do so, that the fund’s design took that into account.

Then at some point (though definitely between 2006 and 2008) that professional manager decided that a “better” allocation was to shift the asset allocation to be invested nearly entirely in stocks. Now, knowing how such things work, I can’t imagine that a shift that dramatic wasn’t clearly and concisely communicated to holders on a timely basis — or at least in a manner that the legal profession deemed sufficient. But by the time we realized what had happened — well, that reasonably priced professional fund management wound up feeling more like someone had decided to bet it all on “red.”

With that experience under my belt, and a wary eye on recent market movements, I couldn’t help but notice a Reuters report this week which noted that within the last year, several large target-date fund providers had increased the equity allocations of their TDFs. Now, honestly, I don’t know what their previous allocations were, much less where they currently stand, nor am I privy to the rationale behind these moves. I don't know if it's a broad-based shift across their entire family, or specifically focused on those with longer time horizons.

The Reuters piece is cautionary in tone — basically intimating that these moves might be underway at a time when the markets have peaked, with an undertow of concern that the timing could be problematic. Doubtless the headline will draw clicks, if not concern — after all, you don’t have to be very old or in this business very long, to remember that just prior to the onset of the 2008 financial crisis, several performance-lagging TDF managers made what seemed, at least in hindsight, to be a badly timed equity shift in their portfolios. Nor was it that long ago that we heard concerns expressed by participants, particularly older ones (and subsequently regulators on their behalf) who were, in the aftermath of that crisis, surprised to find just how much exposure their TDF investments had to those equity markets.  

Despite these concerns, TDFs have continued to gain prominence in retirement plans, and in retirement plan participant balances. Consider that nearly three-quarters (72%) of 401(k) plans in the EBRI/ICI 401(k) database included TDFs in their investment lineup at year-end 2012, and 41% of the roughly 24 million 401(k) participants in that database held TDFs. Consider as well that at year-end 2012, 43% of the account balances of recently hired participants in their 20s were invested in TDFs. Older workers have not been as inclined to invest in those options, though it may simply be that, as older workers, they aren’t as likely to have been defaulted there.

Whether or not this time will be different in result, only time will tell. But we can all hope that the communications about such shifts are understood and appreciated by plan participants and plan sponsors before the results make it too late to do so.

Nevin E. Adams, JD

Out of Cite?

Our industry pays a lot of attention to the investment choices that retirement plan participants make; we fret about the type and number of choices on their investment menu, the efficacy of target-date funds, the utilization of active versus passive investment strategies, and the prudence of the asset allocation choices that individuals make—with or without the benefit of tools and/or professional guidance. Unfortunately, once they leave that part of our private retirement system, not so much.

A significant percentage of that retirement plan money winds up in individual retirement accounts, or IRAs. In fact, today IRAs represent more than a quarter of all retirement assets in the U.S., according to a recent EBRI Issue Brief. But there remains a limited amount of knowledge about the investment behavior of individuals who own IRAs, alone or in combination with employment-based retirement plans.

In order to fill this gap, EBRI has undertaken an initiative to study in depth this connection between DC plans and IRAs, and created the EBRI IRA Database,(1) which links individuals (both within and across data providers) in this IRA database and with participants in DC plans. The asset allocation across ages within each IRA type(2) had some minor differences, but, in general, the percentages allocated to equities and balanced funds declined as the owner became older, and the percentage allocated to bonds and other assets increased. Additionally, as the account balances increased, the percentages of assets in equities and balanced funds combined decreased, while bond and “other” assets’ shares increased.

While gender differences abound in many walks of life, male and female IRA owners had virtually identical allocations in bonds, equities, and money in the EBRI IRA database, though males were slightly more likely to have assets in the “other”(3) category, and females had a higher percentage of assets in balanced funds.

Among IRA categories, Roth IRAs had the highest share of assets in equities (59.1 percent) and balanced funds (15.5 percent). Of course, Roth owners are younger, on average, than rollover owners, and Roth IRAs tend to be supplemental savings funded by individual contributions only, whereas rollovers tend to be the main or primary retirement savings for workers nearing retirement or retirees.

Indeed, the most significant difference among IRA types is that Roth owners were much more likely to have 90 percent or more of their accounts invested in equities than in other asset types, and were correspondingly likely to have less than 10 percent of their assets in bonds and money combined. Once again, the likelihood of these “extreme” allocations was very similar across genders.

When comparing the overall percentage of 401(k) assets held in equities (equities, equity share in balanced funds, and company stock) from the EBRI/ICI 401(k) database, the number is relatively close to that found in the IRA accounts (60.0 percent in 401(k) plans and 52.1 percent in IRAs), although the bond and money percentages are higher for IRAs than 401(k) plans (19.9 percent and 11.6 percent, respectively, for bonds and 8.9 percent and 4.4 percent, respectively, for money), while balanced funds constitute more of the assets in 401(k) plans than in IRAs. In sum, while it wasn’t the focus on the study, the average asset allocation found for IRAs was similar to that in 401(k) plans.

Of course, those IRA balances likely aren’t the totality of the retirement savings for these individuals, and thus, whether that particular allocation—looked at in isolation—is “good” news or not, remains to be seen.(4)

- Nevin E. Adams, JD

(1) The Employee Benefit Research Institute’s retirement databases (the EBRI/ICI Participant-Directed Retirement Plan Database, the EBRI IRA Database, and the EBRI Integrated Defined Contribution/IRA Database) have been the subject of multiple independent security audits and have been certified to be fully compliant with the ISO-27002 Information Security Audit standard. Moreover, EBRI has obtained a legal opinion that the methodology used meets the privacy standards of the Gramm-Leach-Bliley Act. At no time has any nonpublic, personal information that is personally identifiable, such as Social Security number, been transferred to or shared with EBRI. None of the three databases allows identification of any individuals or plan sponsors.

(2) The report considered four types of IRAs: traditional-contributions (traditional IRAs originating from contributions, in which distributions are taxable); Roth (in which contributions are nondeductible and distributions are tax free); SEP (Simplified Employee Pension)/SIMPLE (Savings Incentive Match Plan for Employees); and traditional-rollovers (traditional IRAs originating from assets rolled over from other tax-qualified plans, such as an employment-based pension or DC plans, in which distributions are taxable)

(3) “Other” assets includes assets that do not fit into the categories of equities, bonds, money/cash equivalents, or balanced funds. This could include stable-value funds, real estate (both from investment trusts and directly purchased), fixed and variable annuities, etc.

(4) As the EBRI IRA Database expands, more elaborate studies are being conducted. Linked with defined contribution account data, the tracking of movements of money between multiple retirement saving accounts (DC plans and IRAs) is being studied to see what, if any, asset allocation changes are being made when assets are moved between accounts. Furthermore, once individuals have reached retirement, the withdrawal or “spend-down” of those assets over time can be studied based on the longitudinal data that will be available, offering the potential of a far greater understanding of the retirement preparation and post-retirement behavior of Americans as these databases mature.