Their Own Devices

There’s been a lot of talk about tax policy of late.

It’s an election year, after all—and while most of the rhetoric revolves around targeting only “the wealthiest Americans,” it’s hard to shake a sense that the impact will be less than precisely targeted.

There’s talk of raising the tax rate on capital gains and dividends, for example—as though only the rich invest in stocks and mutual funds. A prominent presidential candidate talks openly about the fairness of increasing the amount of income subject to FICA withholding, and while it certainly sounds “fair,” that could represent a pretty big tax increase for some decidedly unwealthy families (worse, unless the benefit calculations are adjusted—and it would certainly be most unfair to do so—the move won’t even help the Social Security deficit; we’ll just pay out more in benefits to the people from whom we have now taken more FICA).

Another prominent presidential candidate wants to sever the tie between employment and health insurance, and if he is successful, many in the working middle class who currently enjoy that workplace coverage could find some or all of that benefit taxed—and probably shouldn’t hold their breath waiting for a salary boost to compensate for the loss (even more could simply find themselves with the “opportunity” to shop for insurance on their own). Others have resurrected the notion of imposing a “windfall profits” tax on Big Oil—as though we don’t all know who will actually wind up paying for it (note to politicians: It’s been tried before…it didn’t work).

Complicate Ed

Unfortunately, our economic lives are going to get more complicated in the coming months. We’re not technically in a recession, but regardless of such technicalities, many feel—and are hunkering down—as though we are. Ultimately, of course, perception is reality in such matters—and none of the current U.S. presidential candidates has any real interest in convincing us otherwise.

What that means, of course, is that between now and the election, we’re going to have a lot to fret about. Concerns about the rising cost of—well, just about everything—and anxiety about how the markets (and our 401(k) accounts) respond to that uncertainty will almost certainly continue to be the order of the day. In the months ahead, it’s likely to be harder than ever to keep participants focused on, and committed to, their retirement savings. Frankly, even the well-intentioned coverage and focus on 401(k) plan fees (and not all of it qualifies as “well-intentioned”) serves to undermine participant confidence in these programs.

As a solution, the Democratic candidates are touting payroll deduction plans for retirement savings (Senator Clinton’s are voluntary, Senator Obama would make them opt-out for participants) with government matches of up to $1,000. These solutions, of course, relegate the employer to nothing more than a payroll agent in the transaction (Senator McCain has yet to address the issue).

Doubtless, the ease of payroll deduction will spur some takers (certainly Obama’s opt-out version), but one can’t help but wonder how well-served workers, left to their own devices, will be in the retail IRA market, certainly compared with the structure, guidance, and institutional pricing afforded most employer-sponsored plans. It is a shame, perhaps a tragedy, IMHO, that the candidates have yet to consider the opportunity to provide real incentives for employers to “suit up” as a fiduciary for these programs.

But if there is a tragedy greater than the fact that only about three in four eligible actually participate in a workplace retirement savings plan, IMHO, it is that roughly half of working Americans don’t even have the opportunity.

- Nevin E. Adams, JD

Price "Check"

The good news is, Congress is beginning to take a hard look at 401(k) fees.

Unfortunately, that also happens to be the bad news.

They have a lot of company, of course. The Department of Labor has several initiatives currently under way, the Government Accountability Office (GAO) has called for more transparency, and a number of lawsuits have been filed alleging all sorts of fiduciary malfeasance on the subject (a complaint filed against Cigna last week seemed to suggest that having investment management fees netted against the returns in a mutual fund was some kind of conspiracy - see CIGNA Latest Target of 401(k) Fee Suit). In view of all that activity, last week’s hearing before the House Education and Labor Committee was relatively sanguine (see Congressional Committee Hears 401(k) Fee Disclosure Testimony).

Not that there weren’t points of contention (but not as many as one might have thought)—and even a couple of moments of tension between those offering testimony. All in all, those seemed to be rare, however—after all, we appear to be at a period where everyone agrees that we need to provide participants and plan sponsors with better information about the fees assessed against their retirement plan balances.

Comparison Points

Speaking on behalf of the American Benefits Council last week, Robert Chambers presented an intriguing analogy, noting that an automaker like Toyota no longer made cars—they assembled them, outsourcing the preparation of the various components. He made the point that consumers don’t know—or particularly care—what Toyota paid the individual subcontractors, they’re buying the total product. While it was a compelling image of how today’s 401(k) is put together, the analogy falls apart in two key aspects, IMHO. First, most of us buy our own vehicles, and not from a menu selected by our employer. Second, when I go to buy a car, I may not know (or care) how much the manufacturer paid its subcontractors—but I surely know how much I am expected to pay for that car.

Over the past thirty years, participants, and to a lesser extent, plan sponsors, have been lulled into a false sense of security about the fees they pay for these accounts. I don’t know how many actually believe these accounts are free, but I would imagine that a significant number of participants would be amazed at how much they are paying each year (that doesn’t mean those fees are necessarily unreasonable, by the way).

"Under" Currents

You can hear that same concern just below the surface of comments made by the defenders of the status quo—in between phrases about how “fragile” our current system is, and expressions of concern that participants might be so put-off by those revelations that they will eschew participation altogether. It’s not that I don’t understand what they are trying to say, but I wonder sometimes if they have any idea how that line of reasoning sounds. The implication is clear, even to those who aren’t yet convinced there is a problem: If people actually knew how much they were being charged….

The devil, of course, lies in the details—and concerns about how that information will be constructed and shared (and, trust me, it will be shared) were also just below the surface during the hearing last week. The concerns are twofold; that the mandated structure will be prohibitively difficult or costly to produce, or that the complexity of the information and/or the mandate will render a meaningful disclosure impossible (think prospectus). Indeed, IMHO, the scariest aspect of last week’s hearing was that Congress might feel compelled to roll up its sleeves and “help.”

I’m not altogether sure that the industry can be trusted to heal itself, but I do believe that a growing number are confident enough in the value provided—and their ability to explain it—to do the right thing, to place a visible price tag on those services. After all, if you don’t know how much you’re paying—it’s hard to appreciate how much it’s worth!

- Nevin E. Adams