'Holding' Patterns

In one of the more challenging economic years in memory, it is not surprising that the pace of change set in motion in defined contribution plans by the Pension Protection Act slackened. If anything, IMHO, it is remarkable that the adoption of devices such as automatic enrollment and contribution acceleration did not decline.

That said, among a record number of respondents to PLANSPONSOR’s annual Defined Contribution Survey, the pace of automatic enrollment basically flatlined—just 30.8% of plan sponsor respondents said they now employ that approach (though more than half of the largest plans now do), compared with 29.8% a year ago. And, even after the encouragement afforded by the PPA, among those that have adopted automatic enrollment, only about four in 10 extended that to all workers (the rest applied it to newly hired workers only). Perhaps as a result, the average participation rate declined—slightly—to 72.3% this year from 73.8% a year ago, but was nearly unchanged from the 72.7% in the 2007 results.

Despite all the headlines about a variety of firms’ 401(k) match suspension, only about 5% of this year’s respondents had reduced the company match/contribution, with a like number saying that they had eliminated it. Another 5% each were contemplating either cutting or suspending the match. The most encouraging news was that nearly eight of 10 had no plans to reduce, suspend, or eliminate the match, and that, even among those that had, nearly one in four planned to restore it for 2010, while roughly 60% said they planned to remain at the cut or suspended level next year.

Is change in the air? Some, apparently—and for the very most part, it is about “more,” not less: 15.5% have already added investment funds, and 17% have increased the frequency of their participant education. Roughly 9% had changed their qualified default investment alternative or QDIA (likely to a target-date fund), and nearly as many had increased their investment manager due diligence, slightly more than the 7% that had hired, fired, or changed their investment consultant. As for plans for change in the remaining months of this year (the survey was taken over the summer), the trends were much the same—though IMHO not surprisingly, in view of the recent attention focused on target-date funds, an intention to increase due diligence on their target-date option’s glide path registered much higher on the “to do” list.

Speaking of target-date funds, historical performance may not be a guarantee of future results, but for plan sponsors, that was nonetheless the highest-ranked criterion (6.07 on a 7.0 scale). However, advisers can take heart from the finding that the second-most valued criterion was the recommendation of a financial adviser (trumping fund-family reputation, risk profile, glide path, and fees).

Interestingly enough, the lowest-ranked criterion was the recommendation of their DC provider. That doubt showed up in another telling statistic: Nearly 28% of this year’s respondents said they were “not sure” if the target-date funds offered by their provider were the most appropriate (that was, however, down from the 35% that expressed that opinion a year earlier—BEFORE the market plunge).

Without question, the past 12 months have brought much in the way of change to our industry—and much of that not change for the better. And yet, all in all, it is, IMHO, amazing how resilient employers and their plan designs have proven to be. We have perhaps not made much forward progress in the past year—but there’s something to be said for being able to hold the line.


—Nevin E. Adams, JD

"Thanks" Giving

Thanksgiving has been called a “uniquely American” holiday, and while that is perhaps something of an overstatement, it is unquestionably a special holiday, and one on which it seems a reflection on all we have to be thankful for is fitting.

Here's my list for 2009:

First off, I’m thankful that the financial markets have stepped back from the precipice we were surely standing at a year ago. I’m thankful that the investment markets have recovered from the worst of the losses of 2008, even if we still have a long way to go. I’m thankful that so many Americans seem to be concerned about the nation’s fiscal health—and hopeful that those concerns will resonate with those who make decisions that affect it.

I’m thankful that relatively few employers felt the need (or took the opportunity) to cut matching contributions this year—and even more thankful to see so many of those who did cut the match restore it.

I’m thankful that so many employers have remained committed to their defined benefit plans and—often despite media reporting to the contrary—continue to make serious, consistent efforts to meet funding requirements that are quite different than when most initially decided to offer these programs. I’m thankful that a core group of lawmakers in Washington continues to be attentive to the very real challenges imposed by those rules, and continue to be proactive in responding to rational relief measures during this difficult economic period.

I’m thankful that so many participants now seem to have a greater appreciation for the importance of prudent, diversified investing—and thankful, though it was a painful lesson for some, that the deep differences in philosophy that underlie target-date investments are being better communicated and understood. I’m thankful that so many participants took it upon themselves to increase their contribution levels during the downturn, and that so few dipped into those retirement plan accounts to tide them through the rough patches.

I’m thankful that plan sponsors will soon have access to more information about the expenses paid by their plans—and optimistic that it won’t be as bad as they fear. I’m thankful that we’re no longer talking about whether fees should be disclosed to participants, but are now trying to figure out how to do it.

I’m thankful for the intelligence, experience, and professionalism of the folks that regulate our industry—and who do so consistently, despite the occasional changes in “the guard.”

I’m thankful to be part of a growing company in an important industry at a critical time. I’m thankful to be able to, in some small way, make a difference on a daily basis.

And, of course, I’m thankful that so many good and capable advisers were available to participants during the worst of the downturn.

I'm thankful for the home I have found at PLANSPONSOR and then with PLANADVISER, and the warmth with which its loyal readers have embraced me, as well as the many who have "discovered" us during the past 10 years. I'm thankful for all of you who have supported—and I hope benefited from—our various conferences, designation program, and communications throughout the year. I’m thankful for the constant—and enthusiastic—support of our advertisers, even in a year that has been tough for so many.

But most of all, I’m once again thankful for the unconditional love and patience of my family, the camaraderie of dear friends and colleagues, the opportunity to write and share these thoughts—and for the ongoing support and appreciation of readers like you.

Thank YOU!

Nevin E. Adams, JD

The Way We Were

As a parent (or even a mentor), sooner or later, you’ll wind up sharing tales of the way things “used to be.” Whether it’s a tale of the proverbial five-mile walk to school in the snow (“uphill, both ways”), the challenges of adjusting a tinfoil-laden TV antenna to obtain a decent black-and-white picture on one of four channels, or the days of laboring to get a quarterly valuation completed by six weeks AFTER the valuation cycle, the story-telling traditions of humankind are part of what makes us – well, human. By sharing a sense of where we have been, we all gain a better sense of the importance of where we are – and an appreciation (hopefully) for the progress that we’ve made.

Now, according to a recent survey, it seems that we may well be on our way to a day when participant direction of their investment accounts seems as quaint a notion as a quarterly transfer.

The aptly, if somewhat inelegantly, titled “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2007” by the Employee Benefit Research Institute (EBRI) indicates that lifecycle funds, a.k.a. target-date funds, were available in two-thirds of 401(k) plans in the year-end 2007 database the firm maintains with the Investment Company Institute (ICI), up from 57% in the prior year’s report. That means that two-thirds of the EBRI/ICI database, some 14.7 million participants, had an opportunity to choose those investment options. And, in fact, EBRI reports that, among participants offered lifecycle funds, 37% held them at year-end 2007 (see More than a Quarter of 401(k) Participants Hold Lifecycle Funds.

Doubtless, the Labor Department’s embrace of the qualified default investment alternative (QDIA) design (among which target-date offerings loom large) accounts for much of the increase in availability. Still, at year-end 2007, more than one-third of recently hired 401(k) participants held lifecycle funds, while at year-end 2006, 28% of recently hired 401(k) participants did so.

The EBRI study noted that younger participants were, in fact, more likely to hold lifecycle funds than older participants: 29% of participants in their 20s held lifecycle funds, compared with 19% of those in their 60s. And more-recently hired participants were more likely to hold lifecycle funds than participants with more years on the job; 34% of those with two or fewer years of tenure held lifecycle funds, compared with 23% of those with five to 10 years of tenure – and just 14% for those who had been in the workforce for more than 30 years.

That augers well for the future, of course. And consider that, at year-end 2007, nearly half (48%) of recently hired participants holding balanced funds had more than 90% of their account balance invested in balanced funds, compared with a mere 7% in 1998. On the other hand, note also that “less than half” of those with an investment in what is ostensibly an already-balanced fund did NOT have more than 90% of their account in that option. Indeed, one of the issues with asset allocation solutions is that participants often still seem to view them as one more choice on the menu, rather than THE choice from the menu (see ). It remains to be seen how the current generation of target-date funds – many of which still have fee structures, glide paths, and underlying asset classes that are wildly varied – will hold up amid the current market turmoil.

Still, one can’t help but wonder if – a decade or so from now – we’ll find ourselves trying to explain to a new generation of retirement plan advisers how much time, energy, and effort we used to spend trying to help participants make their own investment decisions.

And if they’ll wonder why we did.

- 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

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.

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

Beta "Test"

After months of research, informal talks with vendors, and not a few inquiries to a few “trusted advisers,” just before Christmas, we finally made our decision.

We bought a Blu-Ray DVD.

Now, that may not mean much to many of you. However, even the most casual renter of DVDs these days is frequently subjected to a commercial for that “next level” of viewing experience. The problem, of course, is that there are two levels: HD and Blu-Ray. The former has been around longer and, at this writing, that means that there are more movies in that format. The latter, if one is to believe the research, is “better” technology (you can put five times as much content/material on a Blu-Ray as on regular DVD versus just two times as much on an HD)—but your movie selection in that format (today) is smaller (none of this matters unless you also have a high-definition TV capable of displaying all this grandeur, by the way).

The other problem, of course, is HD and Blu-Ray are not compatible. You can’t play HD on Blu-Ray or vice versa (you can play regular DVDs on both HD and Blu-Ray players—fortunately, for those of us who have invested a small fortune in the current DVD format). Now, I’m not altogether sure that my aging eyes can discern the difference in quality between the two formats (there IS a noticeable difference between high-definition and regular), and I don’t now care, and never have cared, a bit about those DVD “extras.”

But you see, I used to own—and loved—a Betamax. If you’ve been around long enough to remember cassette music tapes, you may remember that there used to be two videotape formats—Betamax and VHS. Betamax tapes were physically smaller than VHS, but held as much recording time and with superior quality. But being “better” obviously wasn’t enough. Sony was the only firm that made “Betas”—while everybody else made recorders in the VHS format. When my beloved Beta finally died—and with it my ability to enjoy my collection of recorded movies—well, let’s just say it was an expensive lesson in the travails of being an “early adopter.”

Personalized advice has been around ever since participants have been asked to make their own investment decisions. Granted, some of that advice came from Joe in the lunchroom, but it’s been there, nonetheless. There’s little question that personalized advice is “better” than less-focused solutions like target-date funds (when provided by a trained professional, that is). Even the most casual observer will generally acknowledge the short-sightedness of an approach that dictates that every single person who is thinking about retiring within five years of the year 2040 should have an identical asset allocation.

And yet, those prepackaged asset-allocation solutions are clearly taking the retirement industry by storm. The vast majority of 5,000+ respondents to PLANSPONSOR’s annual DC Survey already have those choices on their menu, and those asset allocation options are drawing a growing percentage of assets—and that’s before the final qualified default investment alternative (QDIA) regulations take hold. Participants seem to “get” them, plan sponsors like them, and providers can’t bring their version(s) to market soon enough. Moreover, the vast majority of advisers have embraced them as well—viewing them, rightly IMHO, as a valuable tool in the arsenal to help workers start saving and investing prudently. The assumption, of course, is that when those balances get big enough to warrant a more customized solution, the participant investor will be equally ready to embrace it, rather than simply remaining comfortable with the “easy” approach that doesn’t require thought or involvement—and has worked out well for the past 20 years. Perhaps even at the recommendation of a financial adviser.

When that time comes, participants may well agree that they now need a more personalized solution. But advisers that take that eventuality for granted would be well advised, IMHO, to remember that “better” doesn’t always “win.”

- Nevin E. Adams, JD

Window of "Opportunity"

The past year has brought with it an extraordinary amount of change to our industry. And yet, I have yet to meet an adviser—in any setting—who isn’t brimming (some are even bubbling) with enthusiasm for the opportunities they see for their business in all this change.

That’s a very different perspective than I hear from their plan sponsor clients. Not that plan sponsors aren’t appreciative of positive change. It’s just that, as a general rule, my experience has been that plan sponsors are significantly more likely to associate change with work, rather than opportunity—and with some justification.

Consider the recent finalization of regulations on the qualified default investment alternatives (QDIAs). Plan sponsors finally have some reasonably clear definition of what constitutes an appropriate default investment choice (at least according to the Department of Labor), one that provides a fair amount of flexibility for the sizeable number of plans that previously relied on a stable value option as a default to effect a reasonable transition—and those that adopt the new QDIA approach will, in turn, receive protection from participant lawsuits that is identical to the ERISA 404c that so many have found so elusive (whether they know it or not). And they get that protection without all the work attendant with acquiring that elusive ERISA 404c shield. All this for, in many cases, doing nothing more than embracing as a plan default investment option the asset-allocation solutions that so many have already adopted over the past couple of years. A huge opportunity, right? Easy, right?

Second Thoughts?

Well, sort of. What they also have to do is put out a notice that lets participants that are to be defaulted into that QDIA know that they are being defaulted, and that they have the option not to be defaulted. Oh—and for purposes of previously defaulted monies they have to let those participants know as well…assuming, of course, that their current recordkeeper could tell the difference between someone who was defaulted and someone who simply managed to direct their monies to the default option (and I understand that many/most can’t). Oh, and to take advantage of the protections at the earliest possible date—12/24/07 (yes, that’s right, Christmas Eve)—they would have to have had that notice out to participants 30 days ahead of the effective date (Thanksgiving Week). Assuming, of course, that their recordkeeper was in a position to facilitate that communication—and we’ll ignore, for a second, the possibility/likelihood that their recordkeeper will assess a fee for their support of this effort. Oh, and what if the plan’s current default option doesn’t seem to meet the QDIA criteria (say a conservative risk-based fund that doesn’t take into account the plan’s age demographics)?

Of course, there’s no need for plan sponsors (or advisers) to jumble up an already hectic holiday season with an “everybody on deck” scramble to obtain those new QDIA protections on day one, and there’s an argument to be made that those who do may well regret their haste (at leisure, as they say). Furthermore, additional questions are already emerging as we all begin to work through actually implementing these regulations/requirements—and more are sure to follow.

Creating a Real Opportunity

The best advisers are working right now to understand those implications, and to assess the capabilities of providers in supporting the notice requirements. They’re evaluating the QDIA-applicability of current plan defaults (and doubtless gearing up to recommend new ones, where necessary)—and they’re providing a valuable sounding board for their plan sponsor clients in helping them evaluate a reasonable timeframe for taking advantage of these new protections without pressing them to take hasty actions that might turn out to be imprudent in result or application.

They’re realizing that there’s opportunity, sure. But they’re also realizing that there’s potentially a lot of work for their plan sponsor clients, between where they are – and where they want to be.

- Nevin E. Adams, JD

It's About Time

It may have lacked the hoopla of a midnight Harry Potter release, but in retirement industry circles, last week’s publication of the Department of Labor’s final regulations on qualified default investment alternatives (QDIAs) was nearly as eagerly anticipated.

And, like the speculation as to which Potter character would survive the latest saga, the early betting had been that stable value would not make the QDIA cut—and, in large part, that turned out to be the case. Instead, stable-value (or more precisely, capital preservation) vehicle proponents had to content themselves with a sanction as a short-term repository for contributions (up to 120 days—long enough to accommodate the 90-day period that defaulted participants have to opt out), and the assurances from the DoL that they were sure that those vehicles would find a home alongside other options in the time-focused asset-allocation products that were accorded QDIA status (ironically, IMHO, in that regard, capital preservation vehicles seemed to fare better than did pure risked-based allocation fund alternatives).

There was, however, at least one significant victory for capital preservation vehicles: the DoL’s final regulation extends the same QDIA status protections to defaulted contributions made to those vehicles prior to December 24, 2007, the effective date of the new regulations. To some, that decision smacked of a “sellout” by the DoL—and it certainly seems a striking inconsistency considering the clear preference accorded diversified, age-based funds in the regulations. As one adviser remarked to me last week, “What was the DoL thinking?”

Frankly, while the decision initially surprised me as well, the longer I consider it, the better I like it.

Considering the inertia associated with the choice of these selections, there is every possibility that plan sponsors permitted the flexibility to leave those existing default options in place will do exactly that—a result that certainly has to be a concern for those who question the prudence of those investments over the long term.

Consider the Alternatives

But consider what the result might have been had the DoL not provided that flexibility. We could well have had to absorb millions, if not billions, of defaulted investment liquidations—movement that could have had severe financial consequences for the market(s), and potentially for the plans that would be presented with huge surrender charges. Spared those charges, it is still possible that that massive shift of money could have occurred – departing their current positions—and entering new ones—at an unpropitious moment.

Even if plan sponsors had decided to simply stay the course on their own (the final regulations cautioned fiduciaries that the exclusive purpose rule precluded the imposition of fees on participant balances just to achieve fiduciary protection), that decision would almost certainly—and sooner rather than later—have drawn the focus of litigators who would cite the DoL’s pronouncements as a proof statement that the investments defaulted in good faith were, in fact, imprudent.

Is this a “victory” for capital preservation proponents? Well, perhaps in the short term, but there’s no mistaking the DoL’s clear intent. The grandfather clause extends only to the balances so invested as of the effective date—not for contributions defaulted after that. Frankly, much as some plan sponsors still prefer the stable-value option (and many do)—and even though the DoL didn’t say that a capital preservation default was inherently imprudent—I think it’s reasonable to expect that these monies will begin to shift toward QDIA-sanctioned alternatives in the months ahead, as they already are. But thanks to the reasoned approach made possible by the final regulations, they will be able to do so in a measured, prudent fashion.

It was a long time coming, but, IMHO, it was worth the wait.

- Nevin E. Adams, JD

Question Marks

Without question, asset-allocation solutions—particularly target-date fund solutions—are well on their way to becoming a dominating force on retirement plan menus. More than three-quarters of the roughly 5,000 respondents to last year’s Defined Contribution Services Survey already had one of these options on their menu.

Moreover, the popularity of these offerings has resulted in a burgeoning number of choices, with what seems like a new introduction every other week, and by some of the most well-known and highly regarded names in the asset management business.

Having said that, the notions of what constitutes an “appropriate” asset allocation, much less an appropriate asset-allocation fund—or fund family—are varied, to say the least. Almost as varied as the number of choices, in fact—and it appears that those notions are shifting as well. These “moving” targets (see “Moving Targets”) will keep us all on our toes for the foreseeable future—and I suspect that we will all bring to that evaluation process certain grounding biases as we evaluate the alternatives, whether we admit to them or not.

Here are some of mine:

Stock up. Longer life spans suggest (to me, anyway) a need for more equities, longer, than traditional asset-allocation models seem to call for. At the moment, the primary battle for the “hearts and minds” of target-date design seems to focus on the amount—and motivations for the amount—of equities in the portfolios, particularly the further one goes out on the time horizon. The equity markets have been kind of late (to say the least) to those who have leaned heavily on them. Some target-date offerings have beefed up their equity allocations; others have grown increasingly critical of those decisions. The bottom line: I find that many of the more “conservative” asset-allocation strategies look very much like the traditional asset allocations of 40 years ago. That was then….

"Go long" in matching matching participants with target-dates. Although participants are already talking more about working past age 65, the current logic associated with picking a target-date fund still largely focuses on when you will attain 65. Even though most of the literature speaks to “retirement date” as the target, I think it’s a good idea to round “up” when it comes to picking the right choice.

Risk evaluation shouldn’t be a one-way street. When it comes to discussions of risk, I find that the risk of outliving money isn’t weighted as strongly as the risk of losing money. Now, this is a tricky thing because people tend to worry hugely about the latter until they get to a point where the former is a reality—and then, of course, it’s too late. This is exactly why participants (and plan sponsors who make default investment choices for participants) lean toward stable value and money market fund choices (see “Other People’s Money”). Now, I’ll admit there’s a big difference between going 100% stable value at age 30, and going 80% fixed income at age 60. But I think some of those conservative allocations don’t contemplate actually having to live on those investments for a quarter century—though once you get to age 65, the odds are pretty good.

Bond funds don’t act like bonds. Consequently, those late-cycle diversifications into bond funds don’t feel like they accomplish the same thing as diversifying into bonds. It’s one thing to pull some gains out of the stock market and invest in a security that stands a reasonable chance of returning your principle at a definite point in the future with scheduled interest payments along the way. Something else altogether, IMHO, to make that same investment in a bond mutual fund. Less volatile than stock funds, perhaps—but also more volatile than bonds, in my experience.


No doubt you have biases of your own, perhaps even some of the above. No doubt at least some of you would take issue with some of mine. I hope so. Clearly, no one person or firm has all the answers, and just as clearly, the ones who think they do—probably don’t. What’s important is that we continue to ask the questions, challenge the assumptions, doubt the “common wisdom.”

Ultimately, the quality of the answers lies in the quality of the questions—and the people asking them.

Nevin E. Adams, JD

Moving Targets

In nearly 30 years working with employer-sponsored retirement plans, I am hard-pressed to call to mind a product innovation that has been adopted with as much vigor as the current generation of target-date funds. In PLANSPONSOR’s 2006 Defined Contribution Survey, more than three in four of the nearly 5,000 responding plans had a risk- or target-date-based option on their menu – compared with “just” 54% in the prior year’s survey.

There’s being on the menu, of course, and there’s being chosen from that menu. Still, in the 2006 survey, roughly 25% of participant balances, on average, were already invested in such options – and, on the median, 15% - and this well ahead of the Department of Labor’s tacit enhancement of these vehicles as the default investment vehicle of choice. All in all, it would appear that participants have more access to such choices and are beginning to wake to the simplicity of an investment choice that requires referencing little more than a birth certificate (many still make the case that a single investment allocation approach cannot possibly be suitable for each and every participant who plans to retire in the year 2040).

Moreover, the investment management industry has responded to the opportunity with enthusiasm. One need consider only the number of new offerings introduced in 2007 alone to appreciate just how much more choice is available than was the case the last time I penned a column on the topic (see “Style Conscious,” PLANSPONSOR, September 2005). That’s a very positive development for the most part – after all, a lack of choice was, in the very recent past, a cautionary note of consideration for plan fiduciaries. Additionally, as the choices have expanded, competition (not to mention a renewed emphasis on fee transparency) seems certain to provide a pricing discipline that surely must be applied by fiduciaries, certainly in a “just pick one” fund alternative.

Philosophical Differences

Our free market also has served to bring to the fore a dazzling array of differences in basic asset allocation philosophy. There are compelling arguments being made for allocations that are heavily laden with equities at retirement, while others embrace a more “traditional” fixed-income bent, and still others seek to mirror the allocations in evidence among large defined benefit programs (which themselves are undergoing some fairly radical shifts). These competing notions – and seemingly everything in between – are still often “cloaked,” certainly in the case of target-date offerings, behind names that are frustratingly similar. All claim to be focused on helping the investor achieve retirement security, while minimizing risk – that of running out of money too soon, or of not having enough to run out of in the first place. They can’t ALL be right, surely.

On the other hand, in the midst of all this burgeoning interest, it also has been interesting to watch some of the industry’s more revered asset allocation fund pioneers reinvent and/or rejigger their strategies, their glide paths, the logic that underpins their asset allocation philosophy.

It’s impossible at this point to say who is “right,” of course (perhaps even harder to say that a single investment allocation approach is suitable for each and every participant who plans to retire in the year 2040). Still, IMHO, the industry’s willingness to continue to contemplate and embrace change in these glide paths bodes well, I think, for the intellectual rigor that surely must attend their emergence as a ubiquitous presence on defined contribution plan menus.

What that also means, of course, is that plan fiduciaries will be similarly challenged to keep pace.

- Nevin A. Adams, JD