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

Pats or Giants? Your Portfolio May Care

There could be a lot more riding on Sunday’s Super Bowl than you think.

If the results of the Super Bowl exert any influence on the markets – as proponents of the so-called Super Bowl Theory claim – then 2012 could prove to be truly tumultuous.

For the "uninitiated," the theory (invented/popularized by the late New York Times sportswriter Leonard Koppett) says that a win by a team from the old National Football League is a precursor to rising stock values for the year (at least as measured by the S&P 500), but if a team from the old American Football League (AFL) prevails, stocks will fall in the coming year.

This year we have a team from the old NFL (the NY Giants) taking on one from the old AFL (the New England Patriots, who once were the AFL’s Boston Patriots). So, if the Giants prevail, 2012 should be a good year for stocks – and if things go the Patriots’ way, well…

On the Other Hand…

Of course, as even loyal proponents will admit, this theory used to work a lot better than it has in recent years. The most obvious (and recent) proof of that was Super Bowl XLII, where these same two teams met – and the underdog New York Giants pulled off a remarkable victory – but the S&P 500 still shed…well, we don’t really need to relive that here (particularly for Patriots fans).

Last year’s contest brought together two classic NFL teams; the Pittsburgh Steelers (representing the American Football Conference) and the National Football Conference’s Green Bay Packers. Both those teams had some of the oldest, deepest, and yes, most “storied” NFL roots, with the Steelers formed in 1933 (as the Pittsburgh Pirates), and the Packers, founded in 1919. So, according to the Super Bowl Theory, 2011 should have been a good year for stocks (because, regardless of who won, an NFL team would prevail). But, as you may recall, while the Dow gained ground for the year, the S&P 500 was – well, flat.

On the other hand, 2010 turned out pretty well – a year when the New Orleans Saints bested the Indianapolis Colts, though it was, after all, also a Super Bowl featuring two teams with NFL roots. And it was also the case in 2009 when both Super Bowl teams - the Arizona Cardinals and the Pittsburgh Steelers – had NFL roots (the Arizona Cardinals by way of one time being the St. Louis Cardinals), AND in 2007 when the S&P 500 rose 3.53% as the Indianapolis Colts beat the Chicago Bears 29-17. That also turned out to be the case in 2006 when the Pittsburgh Steelers (yes, again) defeated the Seattle Seahawks in another battle of two legacy NFL clubs. That turned out to be a good year for equities, with the S&P 500 closing up more than 13%.

Except When It Doesn’t…

Of course, as even loyal proponents will admit, this theory used to work a lot better than it has in recent years. The most obvious (and recent) proof of that was the aforementioned Super Bowl XLII where the New York Giants pulled off a remarkable victory – but the S&P 500 still shed…well, we don’t really need to relive that again (particularly for Patriots fans).
Times were better for Patriots fans in 2005 when they bested the NFC’s Philadelphia Eagles 24-21. According to the Super Bowl Theory, the markets should have been down for the year. However, in 2005 the S&P 500 climbed 2.55%.

Of course, the 2002 win by those same New England Patriots accurately foretold the continuation of the bear market into a third year (at the time, the first accurate result in five years). But the Patriots 2004 Super Bowl win against the Carolina Panthers failed to anticipate a fall rally that helped push the S&P 500 to a near 9% gain that year, sacking the indicator for another loss.

Consider also that, despite victories by the old AFL Denver Broncos in 1998 and 1999, the S&P 500 continued its winning ways, while victories by the NFL legacy St. Louis (by way of Los Angeles) Rams (with the just-retired Arizona quarterback Kurt Warner calling plays) and the Baltimore (by way of NFL legacy Cleveland Browns) Ravens did nothing to dispel the bear markets of 2000 and 2001.

Winning “Streaks”

All in all, the Super Bowl Theory has been on the money more often than not – much more often than not, in fact - but in true sports fashion, has had some winning streaks and some rough patches. Consider that it “worked” 28 times between 1967 and 1997 – then went 0-4 between 1998 and 2001 – only to get back on track from 2002 on (purists still dispute how to interpret Tampa Bay’s victory in 2003, since the Buccaneers spent their first NFL season in the AFC before moving to the NFC).

As for Sunday – the oddsmakers are giving the nod to the Patriots – though not by much.

It looks like it could be a good game – and that, whether you are a proponent of the Super Bowl Theory or not – would be one in which whoever wins, we all will!

Nevin E. Adams, JD


Note:

Other exceptions included: 1970, when AFC Kansas City won, and the S&P index gained 0.1%; 1984, when AFC Los Angeles Raiders won, and the S&P rose 1.4%; 1990, when NFC San Francisco prevailed, and the S&P lost 6.56%; and 1994, when NFC Dallas triumphed, but the S&P index fell 1.53%.

Conference 'Calls'

As I was listening to, and participating in, panels at our Future of Asset Allocated Funds conference in California this past week, I was struck again by how much things have changed in the past year.

For example, at this conference a year ago, when we broached the notion of marrying a risk-based approach with a target-date offering, the general feeling seemed to be that that would be tantamount to taking a perfectly good, clean, and simple concept—and ruining it. This year, the room was not only ready for the idea, there was widespread enthusiasm for it.

Similarly, a year ago, when we asked folks about the wisdom of putting a family of risk-based and date-based funds on the same retirement plan menu, well, the consensus would have been that you would be playing with fire in terms of confusing participants. This year, the notion not only seemed to be that it could be managed—but that it would be a real enhancement to the program.

A year ago, the importance of understanding and being able to benchmark the glide path of a target-fund family was front and center, and the “debate” was all about how much of that 2010 fund should be in stocks. This year, that allocation discussion had “evolved” - into a vigorous debate around whether those glide paths were—or should be—designed to take participants “to” or “through” the stated target date (see “IMHO: When You Assume…” ).

What Plan Sponsors Want

Considering what has transpired over the past 12 months, it’s hardly surprising, IMHO, that we’ve all got a somewhat different perspective. And, when PLANSPONSOR’s annual Defined Contribution Survey is published next month, you’ll see further evidence—strong majorities (among thousands of plan sponsors) expressing an interest in getting more detailed descriptions of glide path AND end date, a greater explanation of underlying funds and asset classes, and a clearer explanation of fund expenses.

You’ll also see a surprisingly robust minority continuing to express doubt that the target-date option available through their recordkeeper is the “most appropriate.” Despite that, I also found it interesting that very few (at least by show of hands) in last week’s audience were enthusiastic about the prospect of a government/regulator-imposed target-date “standard” for these vehicles.

One thing that wasn’t in evidence at our conference: a sense that plan sponsors were giving up on the asset-allocation solutions, or a sense that participants are any better equipped to deal with those investment decisions now than they have ever been. If anything, the events of the past several months seem to have engendered a sense that professionally managed investment solutions are more important than ever. Indeed, the clear sense of those in attendance was that, while some participants may have been surprised—perhaps shocked—at what the market’s slide did to the “target” investments of those nearing retirement, most were still better off in those “one-size-fits-most” vehicles than if they had been left to their own investment devices.

That said, there was a clear sense among those in attendance that participants needed more than just to be “dumped” in a solution, even if it was one “good enough’ to provide qualified default investment alternative (QDIA) protection.

There was, IMHO, a strong sense that there was benefit in an asset-allocated solution that took the individual into account, one that was willing to provide the participant-investor with the opportunity to understand what they were getting into, and to be able to make a conscientious choice about how, and when—and yes, perhaps even “if”—to get out.


- Nevin E. Adams, JD



See also “End” Points?

12 Things You need to Know about Target Date Funds

12 Things You Should Know About Asset-Allocation Funds

Asset-allocation fund solutions have, to put it mildly, exploded on the retirement plan scene—aided in no small measure by the sanction of the Department of Labor’s final regulations regarding qualified default investment alternatives (QDIA). However, the recent market turmoil has drawn a fresh, heightened scrutiny to the philosophy and structure of these popular defined contribution choices and, certainly for plan sponsors, reminded us all that there are differences—significant differences, in fact—in how these vehicles are constructed, how they are managed, and even the philosophies underpinning those designs.

Now, the “right” answer for your program will, in many respects, be unique to your program. On the other hand, there are certain basic questions that plan sponsors should know the answers to in choosing an asset-allocation solution.

Getting Started

1. Are we talking about lifestyle or lifecycle funds?

The terms are used interchangeably all too often. However, funds that structure their allocation based on an individual’s risk tolerance (risk-based) are generally called lifestyle funds. Those that base that allocation on a specific future date (date-based) are referred to as lifecycle funds or, more broadly, target-date funds. While the latter was more prominently cited in the DoL QDIA regulations, a properly structured risk-based fund could work as well—and has seemed to enjoy a much greater receptivity in the marketplace even before those regulations (see #2 below for at least part of the reason). Some plans have both on their plan menu, but that can complicate plan communications. On the other hand, IMHO, risk is going to loom larger on people’s minds going forward.

2. Is a risk tolerance questionnaire part of the process?

In my experience, no matter how short and “approachable” the process of ascertaining a participant’s tolerance for risk, it is never going to be something that is comfortable for most. Still, if you are employing a risk-based solution, you have to have something to base that tolerance on—and you should make sure how comfortable you are with that process/document. Additionally, today there are several risk-based target-date offerings that combine both approaches. I’ve tended to be skeptical about these—IMHO, many still focus more on the risks of losing money than the risks of not having enough money to live on--but, short of imposing some kind of generic sense of tolerance, you have to have some means of assessing comfort with risk if you are going to employ a risk-based alternative.

3. What kinds of history/benchmarks are available?

Just a couple of years ago, there were no benchmarks to speak of in this space (other than those constructed by the firms managing those funds, and those were often composites). Of course, just a couple of years ago, there were not enough funds in this space with enough history to make for a meaningful evaluation. However, time has provided the history many funds were lacking (granted, many would just as soon not have that fourth quarter 2008 result included)—and a new generation of benchmarks and indexes has emerged along with the explosion in these funds. But take note: The benchmarks today are as varied in their underlying philosophy and construction as are the funds themselves. IMHO, you need to first know what you believe about the approach, glide paths, and/or asset allocation before you pick the benchmark.

Fund Construction

4. Are the funds composed of proprietary offerings, or are they “open architecture”?

The “debate” over the relative advantages of open architecture versus proprietary offerings has long been part of retirement plan administration choices, and it is part of the target-date decision as well. Those advocating the benefits of open architecture generally tout the ability to pick “best of breed” investment solutions (while readily being able to dump those that fall short), backed by the notion that no one firm can possibly be that best choice across every asset class. Those pushing proprietary choices take issue with that latter point, while pointing to the benefits of their intimate knowledge of their own product set—not to mention the relative cost efficiencies of a proprietary product. There is no right answer, but the determination should be part of your evaluation.

5. What IS an appropriate asset allocation?

This is the million-dollar question for target-date funds these days. At a high level, this is no more complicated than deciding what is the right mix of stocks and bonds, international and domestic, alternative investments and/or cash for investors at every stage of their investing life—or than picking the firm(s) that you trust to know what that right mix is.

6. How much of what is on your glide path?

The “glide path” sounds like a complicated concept, but it is actually nothing more than how the shifts in asset allocation take place over time. It is the path that these investments take your money on throughout your investing life. Still, for some funds—particularly newer, smaller funds—the asset-allocation strategies outlined in the fund prospectus or fact sheet may still be “aspirational,” may not yet incorporate all the specific strategies that the fund manager has in mind for that time in the future when the funds achieve a certain critical mass. You need to know what the targets are—and know if those targets are part of the current strategy.

Fees

7. Do the funds have a fee “wrapper” in addition to the underlying fund charges?

Particularly when a provider incorporates other funds in their offerings, they frequently charge some kind of fee for their expertise in putting together those other funds. This is a fee generally applied as some kind of basis-point charge in addition to the other, regular fees charged by the underlying funds. You will want to know what this charge is, if any, and consider it as part of the total cost of your selection. This fee is generally smaller (sometimes there is no extra charge) for proprietary-only offerings.

8. What are the fees charged by the funds?

Beyond the aforementioned “wrapper” fee, these funds will have all the same kinds of fees typically associated with retirement plan investments. Bear in mind that some of the fund allocations may include some relatively exotic asset classes—and those may carry higher expenses than you are accustomed to seeing. Additionally, you may find some retail share class funds included, even in institutional share class offerings. The bottom line: Keep an eye on the bottom line.

Plan Design

9. Does it fit your investment policy statement?

Most (though not all) retirement plans have an investment policy statement—that essential blueprint for monitoring and managing the investments you make available on your plan menu, set alongside the objectives you have established for your program. However, the blueprint you set out for your plan investments before you introduced an asset-allocation solution may not take their unique contributions—or considerations—into account.

10. How many “life” options are available on the recordkeeper’s platform?
For many plan sponsors and advisers today, there is a harsh reality at the end of the due diligence rainbow—a limited number of asset-allocation options available on your recordkeeper’s platform. In fact, it was not that many years ago that most plan sponsors could only pick from a single option. Limited choices may seem to make the decision easier, but these offerings are not identical, and you and your plan will be better served if you are able to evaluate and choose from a variety of options.

11. They can be misused.

No matter how hard we try to make these types of solutions “idiot proof”—well, let’s just say that you should take nothing for granted. Odds are that automatically enrolled participants defaulted into a QDIA will not fall prey to such mistakes. But, after years of being counseled that they should not “put all their eggs in one basket,” well-meaning participants have been known to try and split their investments across more than one asset-allocation solution. Fortunately, many recordkeepers today can apply system edits to prevent (or at least warn about) such missteps—and advisers also can certainly play a role in this education.

12. Should everyone who retires in 2020 (or 2010, or 2030, etc.) have the same asset allocation?

The simple answer to that question is, probably not. On the other hand, as an alternative that can broadly and efficiently address perhaps the most daunting participant savings obstacle, it is hard to think of a better solution. That is not to say, however, that this solution cannot, with the engagement and involvement of plan fiduciaries, be made even better.

—Nevin E. Adams, JD
.

End "Points"

Several years back, after a day of meetings in Manhattan, I caught the train home. I wound up on one of those “milk run” trains that makes every stop along the way—and, trust me, there are a lot of stops between Manhattan and “home.” To make a long story short, I decided to take a short nap…and woke up just as the train was pulling away from my station.

It wasn’t a big “miss,” mind you. But that 15-minute nap cost me about two hours of time and a lot of aggravation…and, of course, it could have been a lot worse.

It seems that many things long taken for granted in our business are today being subjected to a whole new level of scrutiny, including the very efficacy of the 401(k). The most recent “target” is, of course, target-date funds—and the examiners no less than the U.S. Senate, the Securities and Exchange Commission, and the Department of Labor (see More Details Given on EBSA/SEC Hearing on Target-dates , Senate Committee Takes Aim at Target-Dates) .

That examination is not necessarily a bad thing, of course. The reality is that these offerings have quickly become a de facto investment solution for the nation’s prime retirement savings alternative, and in the past couple of years received nothing less than the official sanction of the DoL itself (at the instigation of Congress via the Pension Protection Act). That said, these solutions have benefited hugely from their simplicity. What is sold is the concept: professional money management, monitored and rebalanced over time. And to some extent, that is also what is bought.

What’s Being Bought

However, IMHO, there is something else that is being bought, if only implicitly—the ability to not have to worry about saving for retirement(1).

With target-date solutions, and more specifically with target-date solutions as part of an automatic-enrollment strategy, we’ve been able to set aside many of the messages we once viewed as essential to participant/investor education. We no longer have to teach participants about the importance of asset allocation, the wisdom of “not putting all your eggs in one basket” (quite the contrary, in fact), nor the need to keep an eye on your investments and to regularly rebalance. The message today is, tell us your birth date and “we’ll take care of all that.” And so we have.

There are two problems with that approach as I see it. The first is one of message—I think we may well have given a fair number of participants a message, if only subliminally, that they no longer need to worry about their retirement savings because we’ve attended to their retirement investing(2). That, of course, can be easily remedied—an effort that will doubtless be encouraged by the sustained market downturn and its impact on investors of all kinds. Still, for many, I’m sure the recent downturn has left them feeling the way I did as I watched the train pull away from my station.

The second problem is perhaps more insidious—and it is that “problem” that I suspect regulators will be trying to deal with next month. It is quite simply that, at the moment, we have lots of target-date funds on the market with nearly identical names—but very different philosophies. And, like it or not, in an age where we’re selling “don’t worry about it”— somebody has to.

Personally and professionally, I would hate to see us “fix” the problem by complicating the simplicity of a target-date choice. On the other hand, how can we continue to hold out a dozen different versions of the “right” asset allocation mix for a particular point in time without doing a better job of articulating that those differences exist, and explaining what those differences are?

What’s a Target-Date?

I’d start by explaining “target-date.” Once upon a time, the target-date was widely understood as being your retirement date, but more specifically, it was the date on which you would stop accumulating money for retirement and start drawing it down; and, yes, in most cases that was focused on the year in which the investor turned 65. Of course, these days, the definition of retirement is less precise; it’s not always 65, for one thing, and a growing number may leave a full-time career for a while and renter the workforce a couple of years later. Those kinds of changes, if not always in the control of the individual participant, are at least things that he or she is in a position to be aware of.

But for any number of target-date solution providers, the target-date in their fund family name is only a mile marker along the way, rather than the destination itself. They have developed strategies that ostensibly take the participant investor not only beyond that retirement date, but, in some cases, to the date upon which they leave this mortal coil.

Now, there’s nothing wrong with that as a strategy if the participant-investor understands that and appreciates what that means. On the other hand, if they think—as I am sure many do—that the target-date is the end, the point at which they are “done”— well, they could well wind up, as some surely have, being taken beyond their intended station—with no easy way to get back.

—Nevin E. Adams, JD

(1)I realize as well as anyone that you don’t invest your way to retirement security. But we also know that most participants tend to concentrate on the things they can’t influence (picking investment funds, market trends, the availability of a company match) rather than their rate of saving—ironically, the one thing that they can, subject to certain economic realities, control.

(2) While automatic-enrollment programs are clearly an effective means of getting workers to save for retirement, I’ve worried in this column previously that it might also insulate them from these issues (see IMHO: “Expert” Opinions).

Poll Positions

There was an intriguing survey published last week, but one that, IMHO, generates as many questions as answers.

The online survey (accurately, if somewhat inelegantly, titled “Investors’ Beliefs about the Role of Target-Date Funds in Retirement Planning”—see Workers Might Have Wrong Idea about Target-Date Funds) captured the sense of 251 respondents, most (55%) of whom were earning less than $50,000/year, but many (75%) of whom were saving for retirement. A full third were age 55 or older, and none was younger than 25. Consequently, while we know nothing about how they are saving, or the size of the programs in which they participate, one might well expect that they have at least a passing familiarity with one of the most popular and powerful 401(k) investment tools—target-date funds.

Not so. Only 16% said they had even heard of target-date funds prior to reading the description in the survey, and apparently even among those, 63% weren’t able to explain the concept. From the response(s) shared (and there weren’t many), it seems that they “got” the date part, but tended to associate that with a maturation of that investment —worse, that on that date, a certain guarantee would be fulfilled.

The survey participants were shown a composite description of target-date funds, drawn from “the collateral of three leading providers,” and then were asked if target-dates promise anything. Presumably at least somewhat influenced by those provider descriptions(1), over half (61%) said yes. According to the survey’s authors, when asked what these offerings promised, 69% also got that wrong. Again, the response sampling provided was scant, but suggested that the individuals felt that the funds promised a certain level of financial security—despite market downturns.

That said, in other responses, most (62%) did NOT agree that the funds promised a guaranteed return, nor that those investments would grow faster than other investments (64.5%). A solid majority refused to believe that you would be able to save less in a target-date fund and still meet your retirement goals (70%), nor were they fooled into thinking that there was little or no chance that you would lose money before (76.9%) or after (76.1%) the target-date.

On the other hand, the flip side of those percentages—albeit a distinct minority of the total group—concurred (at least somewhat) with those errant propositions. And that, of course, is a cause for concern, if only because so many participants these days are choosing—or being defaulted into choosing—those target-date solutions(2).

Ultimately, however, as I looked over the survey results, I had to wonder: Were the respondents participants in a plan that offered a target-date option? Had they made, or been defaulted into, one of those options? Had they been ill-served by that decision? Do they think they have been ill-served?

Regardless, this survey, like all too many others, paints a picture of participant savers who doubtless need, and probably want, the kind of professional investment assistance that a target-date solution surely can provide. However, it also reveals a group of participant investors who are just ill-informed enough to fall prey to the bad counsel of unscrupulous advisers or to be disadvantaged by the indiscretions of inattentive plan fiduciaries.

We don’t need a survey to point that out to us, of course. But it doesn’t hurt to be reminded.

—Nevin E. Adams, JD


1 The excerpts, in case you were wondering, were:

“Take the guess work out of investing for retirement. Just decide when you want to retire, and we’ll pick the fund that’s the closest fit. A professional fund manager will keep that fund’s investments on target.”

“A target-date fund is a diversified portfolio of funds that offers all the benefits of asset allocation and active management. Just select your age, and we’ll do the rest.”

“You can get closer to achieving your retirement goals, with a little help from target-date funds.”

“We do the work. You do the retiring.”

2 Not that, IMHO, a lack of participant understanding or appreciation renders these investments inappropriate, certainly since most participants in the survey sampling seemed to understand the boundaries, even if they couldn’t (to the author’s satisfaction, anyway) articulate them.

Staying on Course

One of my favorite quotations is George Santayana’s, “Those who cannot remember the past are doomed to repeat it.” It is also, unfortunately, one of the most overused quotations, generally during times when we are in the middle of repeating an unremembered mistake.

The current financial mess on Wall Street is the most recent example, of course. The problem—like the tech bubble that preceded it, the derivatives mess in the mid-1980s, the junk bond blow-up before that—is not that we don’t see it coming. It’s that we don’t do a very good job of knowing when it will hit. That, and nobody wants to leave the “party” before it’s over. And then we all wind up with hangovers.

On the plan sponsor side, it was interesting to see the encouraging words of a number of public pension plans this week (see "Public Pension Groups: We’re Still OK". Most spoke to the long-term nature of their investments, and the short-term security that comfortable funding levels provided. Some offered a comforting historical perspective—since both they and their members could recall times when the markets were poised even more precariously on the precipice. And most were able to point to returns that were better than most of their participants had been reading about in the headlines—mostly because their diversified portfolios haven’t been hit as hard as the equity-only indexes that get reported.

I thought about that as I reflected on a NewsDash survey this week—and what plan sponsors said they had been hearing from their advisers and providers. Not surprisingly, most had been told to tell their participants “stay the course.”

In view of what has been going on in the markets, that didn’t seem to be bad advice, even if it did seem a bit trite. But I couldn’t help thinking that a broad-based message to all participants to stay put, however well-intentioned, wouldn’t necessarily be good advice for every participant, certainly not for the ones who haven’t yet found their way into a properly diversified portfolio. This should be—and perhaps will, once the “dust” has settled on the current crisis—an opportunity to highlight the importance of diversification, the benefits of ongoing rebalancing.

Having said that, I suspect that “staying the course” is what the vast majority of participants will do. After all, that is what nearly all do, day in and day out, year after year. Inertia in such things is not only the order of the day, it is a behavioral tendency we can focus on, and work around with approaches such as automatic enrollment, deferral acceleration, and asset allocation solutions. Those, in turn, are approaches that allow us to say—confidently and credibly—that participants are best-served by leaving their retirement investments in place.

Staying the course is sound financial advice, after all—but only if the course you are staying on is a good one.

- Nevin E. Adams, JD

A “Simple” Plan

More than a decade ago, my mom was getting her finances ready for retirement. A schoolteacher her whole life (except for that swathe of time when she set that aside to be at home with her brood during their formative years), there weren’t a lot of varied sources and complicated tax planning to worry about. The most significant component was the balance she had accumulated in her 403(b) plan.

Then, as now, I fancied that I had at least enough investment savvy to make reasonable investment decisions for myself–and I’ve never been shy about offering my sense of the markets to anyone willing to listen (and worth every penny they paid for that advice, I might add). But this was my mother’s money–and a significant component of what she would need to live on for the rest of her life. Frankly, I was nervous about making a decision that would wipe out her years of savings.

Fortunately, I had the presence of mind to recommend an asset-allocation fund. Nothing too fancy, certainly in hindsight–just your basic 60/40 mix split between the S&P 500 and Treasury bonds, in a very reasonably priced mix. It helped that Mom had been paying attention in those education meetings over the years: She understood the importance of diversification, the balance of stocks and bonds, and was willing to have a larger exposure to stocks than many in her age cohort might have preferred. And, from the standpoint of a well-intentioned but frequently preoccupied son, it was a relief knowing that someone who actually manages money for a living would be keeping an eye on things.

About six months later, during one of our periodic calls, Mom asked if it wasn’t time to put some of that money in another fund. I was puzzled, Had she been disappointed with the fund’s performance (this at a time when one might well have wished for a higher apportionment to equities)? No, she said she had no issues there. Was it a problem with the fund company itself, I asked? Was she worried about their financial stability? After all, it was a mutual fund, not a bank; so, was she worried that it didn’t really have anything like FDIC insurance? No, she said, there was no problem there, so long as she knew. Well then, I asked, why did she want to move some of it to another fund?

“Because,” she explained patiently,“isn’t it important to diversify my investments?”

Now, I thought I had done a brilliant job of explaining the asset-allocation fund premise–how that diversification was accomplished within the fund on an ongoing basis by people who spent their working hours paying attention to such things. But to her great credit, my mom–who had no real education in investing or the market other than what she got in the workplace–may not have known what to invest in, but she did know that you shouldn’t put all your eggs in one basket.

That wasn’t the last discussion I would have with Mom on the subject (though she let a respectable amount of time pass before she brought it up again). Not because she didn’t hear and understand my explanation, but because, IMHO, after a lifetime of having to make the investment decisions herself, she just couldn’t quite believe that the “right” thing to do was to invest it in a single mutual fund.

Things are even better for participants now, of course. Asset-allocation funds have long since incorporated sophisticated risk evaluations, and target-date funds make it easy for participants to make respectable decisions without even that “bother.” Those solutions have their imperfections, of course. But I wonder how much different the focus of participant-directed savings programs might be today if those kinds of solutions (1) had been available then.

- Nevin E. Adams, JD

(1) I realize that profit-sharing programs have long operated in a “balanced account” structure that didn’t require participant-direction (or, in most cases, participant funding). On the other hand, from the very beginning, accounts funded with employee contributions have sought to give participants the opportunity to decide how to invest their own money.