'Nothing' Doing

If you’ve been asked in the past two weeks what to do about the market (and who hasn’t), I’m sure your response has been something along the lines of . . . “Nothing.”

There are, of course, more eloquent ways to express that sentiment. And, let’s face it, when it seems that everyone is asking that question—it’s generally well past the time when it is prudent to try and do—well, anything.

Still, it seems that throughout my professional career, every time the market plunges (even when it stays down for an extended period), the pundits all seem to say the same thing; “the fundamentals are sound,” “we’re going through a period of short-term volatility,” or “we were due for a correction” (sometimes all of the above). Granted, this period seems unusual—there is a non-financial cause (the coronavirus outbreak) that is projected/anticipated to have a financial impact of unknown size and duration. That it has emerged at the outset of what is likely to be one of the more contentious election cycles in memory will, of course, only fan the flames of uncertainty—which is, at its core, the heart of all market volatility.

As for the admonitions to “stand pat,” while we’d all like to believe that we don’t need to do anything (and it’s generally too late anyway), there’s something to be said for a timely, comforting voice of reassurance. Better yet if that reassurance comes from someone knowledgeable in such matters—and better still when that reassurance comes from someone familiar with the particulars of our investment portfolio and financial needs/aspirations.

Plan sponsor fiduciaries are generally appreciative of those messages. They bear responsibility for the prudence of such investments, after all—and the reassurances of experts that prudence has been manifested in their decisions (or their non-decisions) is understandably welcome. Most are only too happy to pass along those reassurances to the retirement plan participants on whose behalf their decisions (or non-decisions) have been made.

Indeed, it’s a rare 401(k) enrollment meeting or education pamphlet that doesn’t remind us all that 401(k)s are long-term investments, that they continue to benefit from the on-going benefits of dollar-cost averaging, and perhaps increasingly that their investment in a diversified asset allocation “solution” like a target-date fund or managed account means that they needn’t concern themselves with those kind of interim swings.

Tough times can engender resentment and, in extreme cases, litigation, after all.

But they can also foster an appreciation for expert counsel, and that current reassurance that the inevitable “storm” has been anticipated—and that tough times can bring with them, opportunity.

- Nevin E. Adams, JD

Will your portfolio be fortified by a 49ers win – or get chipped by the Chiefs?

That’s what adherents of the so-called Super Bowl Theory would likely conclude. The Super Bowl Theory holds that when a team from the old National Football League wins the Super Bowl, the S&P 500 will rise, and when a team from the old American Football League prevails, stock prices will fall.

It’s a “theory” that has been found to be correct nearly 80% of the time – for 40 of the 53 Super Bowls, in fact.

Not that it hasn’t had its shortcomings. One need look back no further than last year’s win by the AFC’s New England Patriots over the NFC champion Los Angeles Rams to find an exception – the S&P 500 was up more than 30% in 2019. And then it was just the year before that a win by the NFC champion Philadelphia Eagles against the AFC Champion Patriots (who once were the AFL’s Boston Patriots) also turned out to be a loser, marketwise, with the S&P 500 down more than 6% (though for most of the year it was quite a different story). Ditto the year before when the epic comeback by those same AFC Champion Patriots against the then-NFC champion
Atlanta Falcons didn’t forestall a 2017 market surge.

Nor is it always the Patriots who play Super Bowl Theory spoilers – the year before that the AFC’s (and original AFL) Broncos’ 24-10 victory over the Carolina Panthers, who represented the NFC, also proved to be an “exception.”

Market Makings

That string, however, was an unusual break in the streak that was sustained in 2015 following Super Bowl XLIX, when the AFC’s New England Patriots bested the Seattle Seahawks 28-24 to earn their fourth Super Bowl title. It also “worked” in 2014, when the Seahawks bumped off the legacy AFL Denver Broncos, and in 2013, when a dramatic fourth-quarter comeback rescued a victory by the Baltimore Ravens (over the San Francisco 49ers, it should be noted) – who, though representing the AFC, are technically a legacy NFL team via their Cleveland Browns roots.

Admittedly, the fact that the markets fared well in 2013 was hardly a true test of the Super Bowl Theory since, as it turned out, both teams in Super Bowl XLVII the Ravens and the San Francisco 49ers – were NFL legacy teams.

However, consider that in 2012 a team from the old NFL (the New York Giants) took on – and took down – one from the old AFL (the New England Patriots – yes, those New England Patriots). And, in fact, 2012 was a pretty good year for stocks.

Steel ‘Curtains’?

On the other hand, the year before that, the Pittsburgh Steelers (representing the American Football Conference) took on the National Football Conference’s Green Bay Packers – two teams that 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. According to the Super Bowl Theory, 2011 should have been a good year for stocks (because, regardless of who won, a legacy NFL team would prevail).

But as you may recall, while the Dow gained ground for the year, the S&P 500 was, well, flat.
And then there was the string of Super Bowls where the contests were all between legacy NFL teams (thus, no matter who won, the markets should have risen):

• 2006, when the Steelers bested the Seattle Seahawks;
• 2007, when the Indianapolis Colts beat the Chicago Bears 29-17;
• 2009, when the Pittsburgh Steelers took on the Arizona Cardinals (who had once been the NFL’s St. Louis Cardinals); and
• 2010, when the New Orleans Saints bested the Indianapolis Colts, who had roots back to the NFL legacy Baltimore Colts.

Sure enough, the markets were higher in each of those years.

As for 2008? Well, that was the year that the NFC’s New York Giants upended the hopes of the AFL-legacy Patriots (yes, those  Patriots) for a perfect season, but it didn’t do any favors for the stock market. In fact, that was the last time that the Super Bowl Theory didn’t “work” (well, until this past year – oh, and the year before that  – and the year before…).

Patriot Gains

Times were better for Patriots fans in 2005, when they bested the NFC’s Philadelphia Eagles 24-21. Indeed, according to the Super Bowl Theory, the markets should have been down that year – but the S&P 500 rose 2.55%.

Of course, Super Bowl Theory proponents would tell you that the 2002 win by the 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 (the one that probably nobody except Patriots fans and disappointed Panthers advocates remember because it was overshadowed by Janet Jackson’s infamous “wardrobe malfunction”) 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 (couldn’t resist).

Bronco ‘Busters’

Consider also that, despite victories by the AFL-legacy 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 (that have now returned to the City of Angels) and the Baltimore Ravens did nothing to dispel the bear markets of 2000 and 2001, respectively.

In fact, the Super Bowl Theory “worked” 28 times between 1967 and 1997, then went 0-4 between 1998 and 2001, only to get back on track from 2002 on (though “purists” still dispute how to interpret Tampa Bay’s 2003 victory, since the Buccaneers spent their first NFL season in the AFC before moving to the NFC).

Indeed, the Buccaneers’ move to the NFC was part of a swap with the Seattle Seahawks, who did, in fact, enter the NFL as an NFC team in 1976 but shuttled quickly over to the AFC (where they remained through 2001) before returning to the NFC (see below). And, not having entered the league until 1976, regardless of when they began, can the Seahawks truly be considered a “legacy” NFL squad? Bear in mind as well, that in 2006, when the Seahawks made their first Super Bowl appearance – and lost – the S&P 500 gained nearly 16%.

As for Sunday’s contest, the 49ers have been here before – this is their seventh appearance, having won 5 (and being the first team to do so), but having fallen short their last time. If they do prevail, that sixth Lombardi trophy will tie them with the Patriots and Steelers in the all-time list. As for the Chiefs, well, it’s been a half-century drought for them in the Super Bowl, though the last time they appeared (January 11, 1970 – Super Bowl IV) they were victorious (over the heavily favored Minnesota Vikings). Only the New York Jets (51 years) have endured a longer stretch in between titles. The Chiefs did appear in what was subsequently dubbed Super Bowl I (but at the time more simply the AFL-NFL Championship Game).

Trivial “Pursuits’

Super Bowl LIV will be played at Hard Rock Stadium in Miami Gardens, Florida. While it’s the sixth Super Bowl to take place at the stadium, it’s had a different name for almost every championship -- Sun Life Stadium (XLIV, 2010), Dolphin Stadium (XLI, 2007), Pro Player Stadium (XXXIII, 1999), Joe Robbie Stadium (XXIX, 1995).

This happens to be the first time a Super Bowl will feature two teams with red as a primary uniform color, although it’s the “home” town Chiefs who will be in their traditional home red jerseys with white pants for the game. That said, dating back to 2005 with the Patriots in Super Bowl XXXIX, the team wearing white jerseys has won 12 times.

All in all, it looks like it should be a good game.

And that – whether you are a proponent of the Super Bowl Theory or not – would be one in which regardless of which team wins, we all do!

- Nevin E. Adams, JD

Note: Seattle is the only team to have played in both the AFC and NFC Championship Games, having relocated from the AFC to the NFC during league realignment prior to the 2002 season. The Seahawks are the only NFL team to switch conferences twice in the post-merger era. The franchise began play in 1976 in the NFC West division but switched conferences with the Buccaneers after one season and joined the AFC West.

BTW, in case you were wondering, the Super Bowl is measured in Roman numerals because a football season runs over two calendar years.

What Does the Super Bowl Portend for Your Portfolio?

Will your portfolio fly with the Falcons, or might it be pummeled by the Patriots?

That’s what adherents of the so-called Super Bowl Theory would likely conclude. The Super Bowl Theory holds that when a team from the old National Football League wins the Super Bowl, the S&P 500 will rise, and when a team from the old American Football League prevails, stock prices will fall.

It’s a “theory” that has been found to be correct nearly 80% of the time — for 40 of the 50 Super Bowls, in fact.

Granted, for most of 2016 it might have looked as though it would be right again, following the AFC’s (and original AFL) Broncos 24-10 victory over the Carolina Panthers, who represented the NFC.

It was an usual break in the streak that was sustained in 2015 following Super Bowl XLIX, when the New England Patriots (yes, those same Patriots) bested the Seattle Seahawks 28-24 to earn their fourth Super Bowl title. It also “worked” in 2014, when the Seahawks bumped off the Denver Broncos, a legacy AFL team, and in 2013, when a dramatic fourth-quarter comeback rescued a victory by the Baltimore Ravens — who, though representing the AFC, are technically a legacy NFL team via their Cleveland Browns roots. Admittedly, the fact that the markets fared well in 2013 was hardly a true test of the Super Bowl Theory since, as it turned out, both teams in Super Bowl XLVII — the Ravens and the San Francisco 49ers — were NFL legacy teams.

However, consider that in 2012 a team from the old NFL (the New York Giants) took on — and took down — one from the old AFL (the New England Patriots, who once were the AFL’s Boston Patriots). And, in fact, 2012 was a pretty good year for stocks.

Steel ‘Curtains’?

On the other hand, the year before that, the Pittsburgh Steelers (representing the American Football Conference) took on the National Football Conference’s Green Bay Packers — two teams that 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.

There was the string of Super Bowls where the contests were all between legacy NFL teams:

• 2006, when the Steelers bested the Seattle Seahawks;
• 2007, when the Indianapolis Colts beat the Chicago Bears 29-17;
• 2009, when the Pittsburgh Steelers took on the Arizona Cardinals, who had once been the NFL’s St. Louis Cardinals; and
• 2010, when the New Orleans Saints bested the Indianapolis Colts, who had roots back to the NFL legacy Baltimore Colts.

Sure enough, the markets were higher in each of those years.

As for 2008? Well, that was the year that the NFC’s New York Giants upended the hopes of the AFL-legacy Patriots for a perfect season, but it didn’t do any favors for the stock market. In fact, that was the last time that the Super Bowl Theory didn’t “work” (until this past year).

Patriot Gains

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 that year. However, the S&P 500 climbed 2.55%. Of course, Super Bowl Theory proponents would tell you that 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 (the one that nobody except Patriots fans remember because it was overshadowed by Janet Jackson’s infamous “wardrobe malfunction”) 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.

Bronco ‘Busters’

Consider also that, despite victories by the AFL-legacy 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 and the Baltimore Ravens did nothing to dispel the bear markets of 2000 and 2001, respectively.

In fact, the Super Bowl Theory “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 2003 victory, since the Buccaneers spent their first NFL season in the AFC before moving to the NFC).

Indeed, the Buccaneers’ move to the NFC was part of a swap with the Seattle Seahawks, who did, in fact, enter the NFL as an NFC team in 1976 but shuttled quickly over to the AFC (where they remained through 2001) before returning to the NFC (see below). And, not having entered the league until 1976, regardless of when they began, can the Seahawks truly be considered a “legacy” NFL squad? Bear in mind as well, that in 2006, when the Seahawks made their first Super Bowl appearance — and lost — the S&P 500 gained nearly 16%.

As for Sunday’s contest, the Patriots have been here before (to put it mildly), the Falcons just once — and that back in 1999 (in fact, the entire Falcons roster put together has fewer Super Bowl appearances than Tom Brady alone). The Patriots will be wearing white (11 of the last 12 Super Bowl winners were wearing white jerseys, according to CBS News — guess who the exception was? HINT: Their jerseys were green). The Patriots are a slight (3 point) favorite, but then a year ago, the Panthers headed into the game favored by 6.

All in all, it looks like it will be a good game. And that — whether you are a proponent of the Super Bowl Theory or not — would be one in which regardless of which team wins, we all do (but my portfolio is with the Falcons)!

- Nevin E. Adams, JD

Editor’s Note: Seattle is the only team to have played in both the AFC and NFC Championship Games, having relocated from the AFC to the NFC during league realignment prior to the 2002 season. The Seahawks are the only NFL team to switch conferences twice in the post-merger era. The franchise began play in 1976 in the NFC West division but switched conferences with the Buccaneers after one season and joined the AFC West.

"Game" Changers

Major League Baseball recently showcased its best and most popular in the “Midsummer Classic,” better known as the All-Star Game. Purists can (and have) taken issue with the involvement of the fan vote, the intermittence of the designated hitter rule, and the impact that this contest can eventually have on the home field advantage in the World Series. Still, even casual fans of the game can relish the opportunity to see so many great players together on the field for one special night (those who don’t care about baseball can perhaps relish the fact that for a couple of days, there won’t be any baseball games or scores with which to contend).

It has been my good fortune to have had the opportunity to spend my entire career working with employee benefits, in a widely varied range of capacities. It has also been my great pleasure over those years to meet, and in some cases, work directly with, some truly talented people—who care deeply, passionately, about helping others enjoy better lives and retirements. Most, I am happy to say, could look back on their careers and find numerous examples where they made a difference, sometimes in the betterment of a single individual’s retirement prospects, and often across a broader spectrum. Some have had—or made—the opportunity to impact and influence thousands of lives during the course of their career.

In a couple of months the Employee Benefit Research Institute will announce the recipient of the 2013 Lillywhite Award.¹ The award was launched in 1992, the year that Ray Lillywhite, for whom the award was named, retired. Lillywhite, a pioneer in the pension field for decades guided state employee pension plans, and helped found numerous professional organizations and educational programs. He retired from Alliance Capital at the age of 80 after a 55-year career in the pension and investment field. Throughout that career, Ray exemplified not only excellence, but also innovation in lifelong achievements, teaching, and learning.

2012 Lillywhite Award Winner Bill Sharpe & EBRI CEO Dallas Salisbury

I recently was looking back over the list of Lillywhite Award recipients (available online here), remembering some old friends, some newer acquaintances, and recalling the contributions of some I never had a chance to meet—individuals like Stanford University’s Bill Sharpe, CalSTRS’ Jack Ehnes, Pension & Investments’ Mike Clowes, Russell’s Don Ezra, to name a few. It brought to mind the contributions of others not yet on that list that I’ve met along the way—individuals who have had an impact, influenced the direction of employee benefits, and over the course of their careers helped make things better for others, whose “outstanding service enhances Americans’ economic security.”

Next week’s All-Star roster may well represent the best baseball has to offer at present, a roster that includes some that may one day be regarded as the best in their field, who may change the outcome of a particular contest, and who—in rare situations—can even transform the nature of the game itself.

EBRI’s Lillywhite Award acknowledges the best of the best in the investment management and employee benefits fields. I’m betting you know some of these individuals, these game changers—and perhaps someone whose contributions warrant this kind of recognition.

If so, I’d encourage you to nominate them for this prestigious award—today.

Nevin E. Adams, JD

¹Nominations for the 2013 EBRI Lillywhite Award are scheduled to close on July 31. The winner will be announced shortly after Labor Day, and will be presented during the Pensions&Investments West Coast Defined Contribution Conference, October 27–29 in San Francisco.

The nomination form for the 2013 Lillywhite Award is available online here.

More information about the award is available online here.

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.

“Consistent” Messages

By some accounts, inertia has long been the bane of the voluntary retirement system—and a great deal of money and time has been spent overcoming the reluctance of workers to become savers, and of savers to do so at levels sufficient to achieve their retirement goals.

That same inertia likely accounts for the fact that, once set on a savings course, or better still, set on one that improves on that initial setting,¹ participants in overwhelming numbers appear to “stay the course”—and do so through good times and times that aren’t as good.

So, what happens to those participants who stay the course, those“steady,” consistent participants?

The Employee Benefit Research Institute (EBRI), through the EBRI/ICI Participant-Directed Retirement Plan Data Collection Project, has long tracked the changes in consistent participant accounts in a database that is the largest, most representative repository of information about individual 401(k) plan participant accounts in the world.² The EBRI/ICI project is unique because it includes data provided by a wide variety of plan recordkeepers and, therefore, portrays the activity of participants in 401(k) plans of varying sizes—from very large corporations to small businesses—with a variety of investment options.

Drawing from that database, which includes demographic, contribution, asset allocation, and loan and withdrawal activity information for millions of participants, EBRI has for years produced estimates of the cumulative changes in average account balances—both as a result of contributions and investment returns—for several combinations of participant age and tenure.

And, for those millions of individual participant accounts in the database, we are able to project changes in those average balances based on actual individual rates of contribution and the investment choices in place at a specific point in time.³

As a result, we are able to estimate that the average account balance of an individual ages 25‒34, with one to four years of tenure at his or her current employer,⁴ increased 4.6 percent in June, while a participant ages 55‒64 with 20‒29 years of tenure had an average account increase of 2.5 percent.⁵

This capability is significant for several reasons. It provides a monthly update of a comprehensive perspective on 401(k) account movement. It has provided the ability to quickly and accurately estimate the impact of major market swings on a broad swathe of the 401(k) market.⁶

And it serves to remind us that those 401(k) balances are affected not just by the investment markets, but by the savings we invest—consistently.

-Nevin E. Adams, JD

You can access reports of both cumulative and monthly average account changes at http://www.ebri.org/?fa=401kbalances

¹ Via plan design devices such as automatic enrollment, contribution acceleration, or asset allocation funds that rebalance automatically over time.

² As of December 31, 2010, the EBRI/ICI database included statistical information on about 23.4 million 401(k) plan participants, in 64,455 employer-sponsored 401(k) plans, representing $1.414 trillion in assets.

³ That specific point in time being the annual update of recordkeeping information from data providers, currently 12/31/2010. The projections assume no change in behavior (such as deferral rates or interfund transfers).

⁴ For individual participants in the database from December 31, 2010 to the valuation date of June 30, 2012.

⁵ Note that that increase is based on not just investment returns, but also new contributions. Note also that contributions tend to have a larger percentage impact on the rate of growth in smaller accounts.

⁶Perhaps most notably for an Oct. 7, 2008, congressional hearing on “The Impact of the Financial Crisis on Workers’ Retirement Security.” See EBRI’s testimony online here.

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%.

"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

Listening Post

With our PLANADVISER National Conference just one week away, I found myself turning back to my notes from the PLANSPONSOR National Conference in June.

Some of these came from presentations, others originated from the audience, and still others arose in the dozens of side conversations at breaks and such in between the official conference sessions. Some, honestly, are something of a synergy among the three. See if they don’t get YOU thinking…


You may not be responsible for the outcomes of your retirement plan designs, but someone should be.

How you spend your weekend is a microcosm of retirement.

“Free money” isn’t.

Retirement income is a lot less of a problem when you have saved a pile of money.

You can lead a horse to water, after all—but you can’t make him think.

No one expects taxes to be lower in retirement any more.

Auto-enrollment is still viewed as a very paternalistic type of event.

When it comes to fee comparisons, eventually there will be better sources of information, but right now it’s still a bit mystical.

Providing revenue-sharing information to participants is like giving car keys and whiskey to teenage boys.

If you don’t know how much you’re paying, you can’t know if it’s reasonable.

You want your provider to be profitable, not go out of business.

Retirement income is a challenge to solve, not a product to build.

If you’re having trouble connecting with an employee group, find—or create—a missionary within that group.

When selecting plan investments, keep in mind the 80-10-10 rule: 80% of participants are not investment savvy, 10% are, and the other 10% think they know enough—and usually chase returns.

While it’s a good idea to have fiduciary insurance in place to cover a loss, you should have a well-documented fiduciary process in place to avoid claims in the first place.

Now is a good time to renegotiate fees.

When advisers are examined, their plan clients usually are also.

Never ignore a letter from the IRS.

Left to their own devices, participants still don’t do anything.

Tax payers effectively subsidize the benefits of 401(k)s. Of course, they also subsidize the ability of many Americans to no longer pay federal income taxes.

A corollary: The tax benefits of 401(k)s are tiered toward those who actually pay taxes.

The best way to stay out of court is to avoid situations where participants lose money. The second best way is to have a well-documented prudent process.

Annuitization of defined contribution balances only makes sense if those balances are big enough to annuitize.

Some participants do opt out of automatic enrollment.

“Free money” is still a powerful incentive for participants.

The biggest mistake a plan fiduciary can make is not seeking the help of experts.

You can be in favor of fee disclosure and transparency and still think that legislation telling you how to do it is misguided.

The single most effective way for individuals to ensure that they have sufficient income in retirement is to accumulate more wealth; the amount of their savings before retirement defines their options in retirement.


I’m often asked how we come up with our conference and magazine topics, how we manage to keep our pulse not only on what’s coming down the road, but what people are focused on in the here and now.

The simple answer is—we listen. And when we listen, we all learn.

—Nevin E. Adams, JD

Grecian 'Formula'

While the markets were in an apparent freefall last week, I could hear former Treasury Secretary Hank Paulsen on the TV in the next room telling (lecturing?) the Financial Crisis Inquiry Commission that the problems that led to the 2008 meltdown could, and should, have been dealt with sooner, and that we could, and should, have moved faster—and with more to stave off the crisis. The criticism then—as it was last week in Europe—was that this was a time to act, not to think; that if we didn’t act—act now, act decisively, and without question—well, the results would be catastrophic.

It is a theme that runs through Paulsen’s recent book, “On the Brink,” as he drags the reader from one impending crisis to another during those fateful weeks of 2008. In Paulsen’s retelling, those who back his “need for speed” are thoughtful and prescient; those who don’t, well, their motivations are generally painted as either blinded to the seriousness of the situation or hopelessly ideological. From the former Goldman Sachs CEO’s perspective, we weren’t bailing out Wall Street, we were saving the very financial system itself (though he was willing to let the politicians claim that they were saving jobs). And perhaps we were, so we set aside our doubts and concerns, gave the experts what they said they needed—and plenty of it—and hoped they knew what they were doing.

Now, in fairness, the financial system did stabilize and the markets did—eventually—return to some semblance of normality. Until ….

Now I, perhaps like many of you, am not yet quite sure what to make of the crisis bubbling in Greece, much less the response of the EU and the International Monetary Fund (IMF), and what that might mean to us. But the chorus—we must act, act now, act decisively, and without question, or else—well, it’s a little too familiar to those of us who thought we had already been there, done that. But, once again, we’re told that if we don’t, things will get worse, much worse—and we’re (again) afraid that’s not an exaggeration.

Déjà View

But make no mistake: There are some clear and disturbing parallels between this “rescue” and the ones that have gone before. Once again you have a sudden infusion of apparent wealth on paper that fueled a borrowing binge that fueled a spending spree that fueled more borrowing, until things reached a point where the system was no longer willing to loan money (despite lucrative fees)—at which point, the whole thing should fall apart. But at that point the outstanding debt is so large that that same system that empowered that situation now claims that failure is not an option. It’s not just that bank, or that automobile company, or that country…it’s all the other things that depend on them….

We’ve seen this before—and more than once—from investment banking to the foreclosed house down the street.

Now, if this was your compulsive gambler of a brother-in-law on the wrong side of another “can’t miss” bet that put him (and perhaps your sister) in trouble with his bookie’s “collection agency,” you’d doubtless bail him out, and insist that he check into rehab (at least the first time). Indeed, that’s what the Greek “austerity plan” is all about: raising the retirement age to 63 (from 61), freezing pay and cancelling year-end bonuses for public-sector workers (no simple thing that, when something north of a third of the population works for the government), hiking the nation’s VAT to 23% from 21%, and cutting retirement pensions by 14% (by some accounts, those pensions currently provide an 80% replacement ratio, adjusted for wage inflation).

This, of course, is also what set off those riots in Greece last week—and the concerns about what that portends for the implementation of this new bailout, and its ability to stem the tide, took a bit of “austerity” out of all of our retirement security last week.

Once again politicians have been led (many willingly and happily) down the primrose path by so-called financial experts—told that there was, after all, a free lunch; lured into a sense of complacency and then, abruptly, told something else. It is a formula that has, again, taken us to what is being painted as a pivotal point, a crisis beyond which a chasm lies. We worry—that they are right, that it won’t be the last, that we’re not doing enough, or that we’re doing too much - again.

And then, somewhere in the dim reaches of consciousness perhaps, we realize that the folks telling us what we absolutely have to do now—without thinking, without questioning, without hesitation—look suspiciously like the folks who got us into this mess in the first place.

—Nevin E. Adams, JD

"To Do" List

10 Things You’re (Probably) Doing Wrong—or Not Doing Right—as a Plan Fiduciary

Being a plan fiduciary is a tough job—and one that, it’s probably fair to say—is underappreciated, if not undercompensated. In my experience, most who find themselves in that role (see “IMHO: Duty Bound”) I think do an admirable job of living up to the spirit, if not the letter, of their responsibilities.

Nonetheless, there are plenty of areas in which we could do a better job, and the purpose of this column—and the one will follow it next week—is to focus on those issues that come up regularly in my discussions with plan sponsors, advisers, and industry experts.

A couple of disclaimers up front: first, if you’re taking the time to read this, odds are you are probably doing a better-than-average job as a plan fiduciary. Second, you may well be able to identify things that are not on this list. This is a list compiled based on three decades of experience working with retirement plans; numerous conversations with providers, plan sponsors, regulators and advisers; as well as a review of documented compliance shortfalls.

Note also, however, that there is frequently a difference between doing all that the law requires and doing everything that you could do. This listing is a combination of the things that you must do and things that you do not have to do—but that, if done, would keep you and your plan(s) in good stead. I hope you find this list informative, and that you draw insight and comfort from its contents, as well as a reminder of the awesome responsibilities you have as a plan fiduciary.

1. Not having a plan/plan investment committee

ERISA only requires that the named fiduciary (and there must be one of those) make decisions regarding the plan that are in the best interests of plan participants and beneficiaries, and that are the types of decisions that a prudent expert would make about such matters. ERISA does not require that you make those decisions by yourself—and, in fact, requires that, if you lack the requisite expertise, you enlist the support of those who do have it.

You may well possess the requisite expertise to make those decisions—and then again, you may not. But even if you do, why forego the assistance of other perspectives?

However, having a committee for having a committee’s sake can not only hinder your decisions— it can result in bad decisions. Make sure your committee members add value to the process. (Hint: Once they discover that ERISA has a personal liability clause, casual participants generally drop out quickly.)

2. Not HAVING committee meetings

Having a committee and not having committee meetings is potentially worse than not having a committee at all. In the latter case, at least you ostensibly 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 convene, 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.

3. Not keeping minutes of committee meetings

There is an old ERISA adage that says “prudence is process.” However, an updated version of that adage might be “prudence is process—but only if you can prove it.” To that end, a written record of the activities of your plan committee(s) is an essential ingredient in validating not only the results, but also the thought process behind those deliberations.

More significantly, 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 and making adjustments as warranted—properly documented, of course.

4. Not having an investment policy statement

While plan advisers and consultants routinely counsel on the need for, and importance of, an investment policy statement, the reality is that the law does not require one, and thus, many plan sponsors—sometimes at direction of legal counsel—choose not to put one in place. Of course, if the law does not specifically require a written investment policy statement (IPS)—think of it as investment guidelines for the plan—ERISA nonetheless basically anticipates that plan fiduciaries will conduct themselves as though they had one in place. And, generally speaking, you should 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 not crafted at a point in time when you are desperately trying to make sense of the markets. In sum, you want an IPS in place before you need an IPS in place.

It is worth noting that, though it is not legally required, Labor Department auditors routinely ask for a copy of the plan’s IPS as one of their first requests. And therein lies the rationale behind the counsel of some in the legal profession to forego having a formal IPS; because if there is one thing worse than not having an investment policy statement, it is having an investment policy statement—in writing—that is not followed.

5. Not removing “bad” funds from your plan menu.

Whether or not you have an official IPS, you are expected to conduct a review of the plan’s investment options as though you do. Sooner or later, that review will turn up a fund (or two) that no longer meets the criteria established for the plan. That’s when you will find the true “mettle” of your investment policy; do you have the discipline to do the right thing and drop the fund(s), or will you succumb to the very human temptation to leave it on the menu (though perhaps discouraging or even preventing future investment)? Oh, and make no mistake—there will be someone with a balance in that fund. Still, how can leaving an inappropriate fund on your menu—and allowing participants to invest in it—be a good thing?

Next week – the rest of the list…

- Nevin E. Adams, JD

“Talent” Ed

As a kid, I remember sitting in church listening to a sermon about what I have since come to know as the “parable of the talents,” found in the book of Matthew in the New Testament.

Now, for those of you who slept through those sermons, the story(1) is about a man who is going out of town and gives three of his servants different amounts of money to hold for him while he is gone. The first is given five “talents”(2), and on his master’s return, he proudly gives him back the five he was left with—and another five! The second servant, who was left with two, returns those to the returning master—and two more besides. Both of these servants are commended and given more responsibility.

However, the third servant, who was only entrusted with one talent, tells his returning master that, knowing his master was the demanding type, he opted instead to bury his talent, so that he could return it safely—which he does. For his conservatism, this poor guy is called wicked and lazy, has the one talent taken from him and given to the guy who already has 10, and gets tossed out on the street.

Now, in church this was supposed to illustrate the importance of using the talents endowed on you by the Almighty to their fullest. Years later, I saw this as some kind of capitalist saga (Matthew was a tax collector, after all). But I remember wondering—even as a small boy—what would have happened if one of the two “good and faithful” servants had lost some of that money. Surely the poor guy who managed to give back everything with which he had been entrusted would have looked pretty good by comparison.

Another Look?

The ERISA Advisory Council recently heard testimony about (among other things) stable value and retirement security—and yes, stable value as a QDIA default option (see “Prudential Calls for Stable Value Funds as QDIAs”). Now, in view of what has transpired over the past several months, it’s hardly surprising that people might want to take another look at a less volatile investment. On the other hand, well before we slid into the current market slump, I spoke with, and heard from, many plan sponsors who “got” the logic behind the asset allocated solutions sanctioned by the Department of Labor as a QDIA option—but really weren’t comfortable putting “other people’s money” in an option that could fluctuate in value (see “IMHO: Other People’s Money”). In fact, way back in 2007, only about a third of respondents to a NewsDash poll (albeit an unscientific sampling) said that stable value shouldn’t be accorded QDIA status, while nearly half were in favor of that proposition (see “SURVEY SAYS: Should There be a Stable Value QDIA?”).

Of course, that perspective was pretty roundly criticized at the time by the “experts” in the field, frequently in the kind of condescending tones reserved for those who question the science behind global warming claims. Indeed, much like the parable’s servant who sought to safeguard, rather than put at risk, his master’s money, those who pressed for its inclusion, were taken to task for having the temerity to suggest staying with a default that had long been in place without incident.

But from the beginning, plan sponsors realized that there was a downside to diversified investment solutions: They could lose value. And, while stable value investments have their share of problems, they seem to have—in a way that not all target-date funds have—delivered what people expected.

The Issues

Don’t get me wrong—I “get” the issues with stable value; the concerns about transparency, illiquidity, fees, even insurer risk. These need to be addressed. I also appreciate that much of the current discomfiture with target-dates will dissipate with the next market upturn (other than the whole “misunderstanding about how much would be invested in equities when a participant hit retirement age” thing). And I do believe that, over the long haul, a diversified solution doubtless serves the average participant “better.”

I appreciate that fiduciaries are expected to make the “right” decisions, even when they aren’t the easy ones, and that participants defaulted into funds of whatever ilk are generally free to change that at their discretion. Moreover, I understand and appreciate the value and importance of a diversified portfolio—and acknowledge that, just because the DoL didn’t include stable value in its list of “core” QDIA vehicles, plan sponsors are in no way precluded from having it on their menu, or using it as a default fund (many have, and haven’t changed—and now, IMHO, probably won’t, QDIA status notwithstanding).

Still, when it comes to retirement planning, I think there is something to be said for getting what you expect—and getting back what you put aside.

—Nevin E. Adams, JD

1 Matthew 25:14-30 (King James Version)

2 A unit of value, though this is said to be the origins of the word “talent” as a reference to a gift or skill

Clock Work

In recent weeks, those favoring a government solution to the issue of retirement security/savings have championed the soundness of Social Security. Despite (or perhaps because of) a recent Trustees report that revealed that the markets had taken a toll on Social Security’s finances, Alicia Munnell, director of the Center for Retirement Research, noted, “The system has enough money to pay full benefits for decades, although for a few years less than previously reported because of the financial/economic crisis.” And so it has.

The same thing is true of the nation’s private pension plan insurer, the Pension Benefit Guaranty Corporation (PBGC), and in fact that point was made repeatedly by Charles Millard, the former director of that agency, as he was repeatedly questioned about the wisdom of championing a new, although hardly radical, IMHO, asset allocation shift that would have resulted in an asset allocation of 45% in fixed-income, 45% in equities, and 10% to alternative investment classes. The agency's previous policy set an equity investment target of just 15-25%, although the actual level of equity investments was 28% at the end of fiscal 2007, and 30% at April 30 (see “PBGC Funding Gap Ballooning as Plan Terminations Increase”).

That shift has reportedly been halted, at least for the moment, ostensibly because of questions about contacts that Millard had with money managers hired to implement the policies (see “Solis Asks PBGC To Halt New Investment Strategy”), but IMHO, the real “problem” was its move away from a predominantly fixed-income-oriented portfolio.

So, here we have two enormous bodies of capital—both run by the federal government; both tasked with making periodic payments stretching over decades; each with what, IMHO, seems to be an extraordinary reliance on fixed-income investments.

Now, don’t get me wrong—I completely understand the importance of preserving capital (particularly these days), and I’m hugely appreciative of any expression of fiscal restraint on the behalf of the federal government (particularly these days).

Still, despite the acknowledged purpose of these enormous pools of capital—to provide retired workers with a reliable stream of income—most of that “purpose” is still decades away. That’s the good news. On the other hand, we know that both systems, left unchanged, will not have enough money to fulfill the obligations they now have on their plate (much less those that have yet to manifest themselves), based on the current projections.

And yet, with lots of time to go, and huge obligations to be met, it looks as though the federal government is, effectively, trying to run out the clock.

That, of course, is a perfectly viable strategy if the game is almost over, or if you are sitting on a very comfortable lead. On the other hand, the sports world is full of situations where a team went into a “stall” too early, only to lose that lead—and the game.

It would be a mistake of mythic proportion to try to invest our way out of the deficits currently confronting these systems, any more than an individual participant should aspire to compensate for a career of under-saving by betting everything on risky investments.

However, I’m having a hard time understanding how the government’s unwillingness to adopt even the most modest asset allocation reforms will do anything to mitigate the situation—and may well be exacerbating the problem. And when that clock runs out, we’ll all lose.

—Nevin E. Adams, JD

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.

Due Process

The recent market tumult has hit Main Street in its retirement pocketbook—and some are once again fretting about their “201(k)s.” You can say all you want that this is a good buying opportunity, but the reality is that our retirement savings accounts have taken a hit, and most people are going to be in mourning, at least for a time.

Regardless of the markets (which we can’t control), we all know that the most important determinant of retirement security is how much we save—something we can, within bounds, control. However, when it comes to saving, there are two big questions looming over us, IMHO: Are we saving enough?—and, more importantly, Can we save enough?

Those of the opinion that Americans are saving enough are few and far between. With a median retirement savings plan balance of less than $125,000 (and that was before the impact of the last several weeks), it’s hard to see how we could be saving “enough” based on historical spending patterns, much less taking into account the projected increases in longevity and health-care costs.

The answer to the second question exposes the Achilles’ heel of the voluntary savings system. For most of us, saving for retirement remains one of those things we do after we pay for food, mortgage, gasoline, and even the kid’s braces. That’s not necessarily an irresponsible approach, IMHO, though it can be. The problem, of course, is that most household budgets get divided into things that have to be paid, those that have to be paid eventually, and what’s left over after you have dealt with the former two. Frequently, retirement savings still slips into the last group—for while we often give lip service to the need to “pay yourself,” most people still see it as saving toward something you’d like to have one day, not a bill that has to be paid.

How Much Is Enough?

But, to the point: If retirement savings was a bill, how big would it be? That’s the $64,000 question—and, unfortunately, there tends to be some disparity depending on who you ask and the assumptions you employ. However, if you assume a need to replace roughly 70% of pre-retirement income (and that number is too low, by some accounts), and if you assume that you are looking at a 30-year-old employee who makes $50,000, a recent Vanguard study puts that annual savings rate at 17% of pay—per year. Even if the worker makes no more than $25,000, the deferral rate would need to be 14%. There is disagreement on the amount that needs to be replaced, though 70% is about as low as any credible source still goes. The bottom line—what’s likely to be required is likely more, perhaps much more, than anybody you work with is currently saving.

Can—or will—workers save at that rate? Well, some are already close to that, certainly once you factor in an employer match. But again, those rates of saving “work” only if you start early—and, of course, if you are “only” trying to replace about 70%. If you think you’ll need more—or if you start later—or if you are trying to replace a higher income—you’d need to save more, or hope for other sources of income.

What does that mean for the future of retirement? Well, for those still in the workforce—and certainly for those on the “wee” side of 55—I suspect retirement will start later, and perhaps start differently, than it has for today’s retirees. Some will try to stay in the workplace longer (let’s face it, you won’t even get full Social Security benefits today if you retire at 65), though they may look for ways to cut back or “phase down” ahead of full retirement.

This actually works out to be a powerful savings strategy. I have seen any number of studies that suggest that working till 70—continuing to add to your nest egg—while at the same time forestalling tapping into it for another five years can transform many (most?) of those projections of inadequate savings accumulations into sufficiency (you can see this on just about any retirement projection calculator as well).

Want “Adds?”

On the other hand, it’s one thing to want to work longer (“want” perhaps not being the best word to describe that decision), and perhaps another altogether to have that option. Indeed, statistics suggest that workers routinely depart the workforce prior to their 65th birthday, and frequently not of their own volition (and not because they have achieved the requisite level of retirement income security). Consequently, while working longer may be part of the plan, you can’t afford (no pun intended) to simply expect that will be an option.

These past several weeks, much has been said about the economic crisis foisted on the “rest of us” by those who promised a free lunch to others who were willing to be duped, or were at least willing to be led to believe (of course, some drew that conclusion on their own) that what couldn’t be afforded now would be available at more favorable terms in the future. $700 billion later (before add-ons), we’re not even sure who we’re “helping.”

It’s not too much of a stretch to see a similar pattern emerge in retirement savings. There are plenty of folks who, rather than make a tough choice today, have chosen to put off the day of reckoning. They’re hoping for a time when it will be easier to save for retirement, a time when it will be more affordable—and some, no doubt, are simply hoping that someone else will solve the problem for them. And yes, some got rich while fostering those illusions.

Like it or not, retirement savings is a bill. It may look like “no money down” today, but there’s one heck of a balloon payment coming.

- Nevin E. Adams, JD

Reference Points

For most 401(k) plan participants, this has been a good quarter—to lose your statement.

Sure, we all know that the lower prices make this a good chance to invest new contributions at a bargain price (once we get past the concern that those prices won’t continue to fall), but there is a very real possibility that some (many?) participants will see a 09/30 balance that is lower than it was a quarter ago, wiping out three months’ worth of contributions (and then some).

It is interesting—and perhaps fortuitous—that, even as the markets struggle, asset allocation choices are available on a growing number of retirement plan menus. That they are increasingly a favorite as a plan default option—even as a growing number of automatically enrolled participants are defaulted into them—represents, IMHO, one of those rare occurrences where a much-needed solution is actually available and in place before the crisis it is designed for hits.

Having said that, it is also a year when even diversified portfolios are taking it on the chin. And participants defaulted into those choices—even participants who actively embraced the convenience of the “just pick one” solution—may not fully appreciate the benefits of that alternative.

On the other hand, these are the kinds of markets where the benefits of diversification should stand out, but only if you are able to provide them a point of reference. In a quarter when the S&P 500 shed 9% of its value, those target-date funds may look very good indeed.

The Bigger Picture

There is another aspect to this, of course—because all target-date funds are not created equal. Despite the commonality in naming structures, there are marked differences in fees, in their choice of fund structures and, most critically, in their glide paths—the underlying asset allocation, and the philosophy that underpins it. Of course, plan fiduciaries have an obligation to prudently select and monitor all investment options, a standard in no way diminished or excused when it comes to these target-date funds (or, more broadly, the qualified default investment alternative (QDIA) enclave to which they now belong).

Still, their relative newness has made it difficult to objectively evaluate their appropriateness, at least according to traditional standards, while their limited availability on specific recordkeeping platforms has perhaps made it seem less necessary (after all, if you only have one target-date family to choose from, what choice do you really have?).

But with the passage of time, we now not only have more choices, we have begun to accumulate track records, and just as significantly, a more refined sense of purpose for these offerings—some have, in fact, refined their purposes. True, as things stand today, for many, the gap between their stated goals and the reality of their asset allocations looms large—and, IMHO, the stated goals of many are still obtuse to the point of obfuscation. Nonetheless, we are rapidly reaching the point where such ambiguities can be appreciated.

The passage of time has also brought a new generation of indexes for these funds. Perhaps not surprisingly, in view of the breadth of philosophies underlying the various glide paths, this new generation of indexes—most of which are only just being brought to market, and some of which are still in incubation—bring to the table different philosophies about how these offerings should be evaluated. In other words, while this new generation of indexes purports to provide a standard against which target-date fund choices can—and should—be evaluated, there is not yet a consensus on what standards should be applied.

That’s not necessarily a bad thing, of course. People, even experts, have different notions of what constitutes an appropriate asset allocation, and people—perhaps especially experts—are certainly entitled to their varied opinions.

What that means for fiduciaries—and for those who counsel them—is that the selection of that benchmark could be as important as the funds we measure against it.

— Nevin E. Adams, JD

Pay “Back”?

It was an interesting week, to say the least—all the more so since I spent it surrounded by financial advisers.

The downs and—eventually—ups of the market, the absorption of storied brands, and the likely disappearance of others were, as you might imagine, fodder for a lot of cocktail banter and the occasional moment of financial gallows humor. But, after what is surely one of the most momentous weeks in memory, the question for most is—now what?

IMHO, most investors realize that stock markets will go up and down—even, as was the case this week, when those movements are deep and largely unanticipated. Those who rode out the tumult are doubtless relieved that they did (having the wisdom to “stay the course” is a time-honored rationalization for inertia). As one adviser told me, the only person that gets hurt on a rollercoaster is the one who tries to get off in the middle of the ride.

On the other hand, when malfeasance and/or malevolence seem to underlie those dramatic swings—and there are rumored culprits aplenty for this current mess—we should not be surprised that their confidence in our free market system of investment, their trust in those “stay the course” assurances, is shaken.

It’s not just that loans were made to people who couldn’t afford them—by people who shouldn’t have made them in the first place. Nor that those loans’ increasingly generous terms were encouraged by politicians pandering to constituents and “constituencies” and—let’s face it—driven by the greed of both lenders and borrowers willing to believe that there really was a free lunch. That that “free” lunch fed on itself, fueling prices that no one ever thought were sustainable over the long term—but that just about everyone thought could go on for just a bit longer—wasn’t the real issue…though that, of course, provided the impetus for even more bad loans that wound up being “packaged” in bundles that purported to provide diversity, even as they served to obscure just how tainted the underlying bundle had become (and just as surely, in some cases, served to rationalize a suspension of prudent evaluation).

That those chickens eventually came home to roost—and with a vengeance exacerbated by short-selling “vultures” (doubtless cousins of the speculators that have driven gasoline prices to record highs with little or no market justification)—should have surprised no one, for we have seen this cycle repeated time and again.

What may be different this time—at least in terms of its visibility—is the actions and “leadership” of those who will, despite their complicity in the debacle, walk away with more money than most Americans will see in their entire lives.

That, and the pervasive sense that “we” are paying for those exorbitant exit packages—with our retirement savings. IMHO, my love for our free markets notwithstanding, it’s time some of “them” paid for what they’ve done to the rest of us.

- Nevin E. Adams, JD

Don’t Just Do Something, Stand There!

If you’ve been asked in the past two weeks what to do about the market (and who hasn’t), I’m sure your response has been something along the lines of…“Nothing.”

There are, of course, more eloquent ways to express that sentiment. And, let’s face it, when it seems that everyone is asking that question – it’s generally well past the time when it is prudent to try and do something. Still, it seems that throughout my professional career, every time the market plunges (even when it stays down for an extended period), the pundits all seem to say the same thing; “the fundamentals are sound,” “we’re going through a period of short-term volatility”, sometimes even that that period of “short-term volatility” was anticipated (apparently even an innocuous footnote about the possibility of such things “counts”).

Naturally, we’d all like to believe is that we don’t need to do anything in these times of - “uncertainty” - because, well ahead of the current tumult, things have already been done to protect us on the downside. However much we would like to believe that, there’s something to be said for a timely, comforting voice of reassurance. Better yet if that reassurance comes from someone knowledgeable in such matters – and better still when that reassurance comes from someone familiar with the particulars of our investment portfolio. That’s why, to some extent, I find the platitudes from various economists somewhat disingenuous; not only are they blissfully ignorant of my own personal asset allocation, what they always seem to be saying, IMHO, is “don’t take your money away from us.”

Still, plan sponsor fiduciaries are generally appreciative of those messages. They bear responsibility for the prudence of such investments, after all – and the reassurances of experts that prudence has been manifested in their decisions (or their non-decisions) is understandably welcome. Most are only too happy to pass along those reassurances to the those on whose behalf their decisions (or non-decisions) have been made.

Those retirement plan participants are often reminded that their 401(k)s are long-term investments, that they continue to benefit from the on-going benefits of dollar-cost averaging, and perhaps increasingly that their investment in a diversified asset allocation “solution” means that they needn’t concern themselves with those kind of interim swings. And, for the most part, at least in my experience, on a day-to-day basis most are oblivious to a fault about the status of those investments. They may have a passing awareness that the markets are down, and some consciousness that their retirement plan investments could be impacted.

There is, however, a new generation of participant-investor emerging. One that has, consciously or, increasingly, unconsciously, relinquished control of that portfolio to experts – individual advisers, perhaps in the form of managed accounts, or less personalized solutions, such as target-date funds. What remains to be seen is how some of these “proxies” will fare in troubled markets – and perhaps just as importantly, how they will be perceived as doing.

Tough times can engender resentment and, in extreme cases, litigation. But they can also foster an appreciation for past expert counsel, and that current reassurance that the storm has been anticipated – and tough times can bring opportunity.

So, are the portfolios you’re responsible for standing pat – or just standing still?

- Nevin E. Adams, JD