'Value' Judgments

Way before we had “reality” shows where we could watch people make fools of themselves in prime time, there was “Let’s Make a Deal.” The concept was simple – get contestants to show up in odd costumes, and give them a chance to trade in something (of no value) that they brought with them for something of undetermined value that was hidden in a box, or behind a curtain. That first trade was easy – where things got more interesting was once the contestant had obtained something of value – and was then given a chance to trade it for something that might be of higher value – or not. Sometimes it worked out – and, of course – sometimes the contestant got “zonked.”

IMHO, there’s something of that going on in the current debate over workplace benefits. I think you’d be hard-pressed to find anyone who doesn’t think that Americans should have access to basic needs such as health care, or a secure (if not comfortable) retirement. Certainly we’re all striving to help ensure the latter, and we all know that the former (or, more precisely, the lack thereof) can have a huge impact on those efforts.

The question that, IMHO, is looming just over the horizon is—how much are you willing to give up to make that happen?

Let’s start with health care. On the campaign trail, then-candidate Barack Obama said repeatedly that, if you liked the health care you currently had, you’d get to keep it—oh, and it would cost less. Moreover, he was harshly critical of then-candidate John McCain’s proposal that health-care benefits be taxed, albeit offset by a tax credit.

However, in recent days, President Obama has been willing to reconsider the notion of taxing those workplace benefits (not his preference, but keeping his options open) in the interest of securing health-care reform. Now, with several competing notions of health-care reform emerging, we don’t yet know what the final result will be, but I think that workers who currently enjoy those workplace benefits tax-free could see some—or all—of that benefit disappear—albeit ostensibly for the greater good of ensuring that everyone has access to health care. How will workers feel about that? Will they feel that the value of broadening coverage is worth giving up that benefit? What if they have to pay more—and they get “less”?

Retirement Plans

Now, on retirement plans, the current Administration proposal—the automatic workplace IRA—purports to leave our current private-sector solutions in place. Indeed, officials go out of their way to emphasize that intent, and with more than half the nation’s workers currently without a workplace retirement plan, we clearly need something to fill that gap. On the other hand, the drumbeat that workers can’t (or won’t) save enough to provide an adequate retirement continues loud and strong. Some voices have already taken to task the “disproportionate” benefits of the 401(k) (that is, a plan that allows you to defer taxes is most prized by workers who actually pay taxes)-—while others are, for the moment, anyway, content to simply challenge its vitality.

The stridency of these arguments has, IMHO, strengthened in the aftermath of the extraordinary market decline, and I’m reasonably sure that the spotlight being cast on target-date offerings (which had, until recently, been a remarkably strong counter-point to the claim that participants were incapable of, and/or unwilling to, make solid investment choices) will do nothing to quell
those concerns. Meanwhile, the widely publicized announcements about 401(k) match suspensions are, for some, a reminder of just how tenuous that commitment can be.

Indeed, once you take away the promise of a defined benefit pension (admittedly an elusive fantasy at best for most in the private sector) and undermine the viability of the 401(k) as an effective retirement income generator, those looking to ensure broad-based retirement income coverage are left with little in the way of resources beyond Social Security and personal savings to fund those retirement paychecks. The former has well-documented fiscal challenges of its own, of course, and the latter—well, let’s just say that if you aren’t saving in a 401(k) or like vehicle these days, you probably aren’t saving.

All of which is leading what seems to be a growing number to suggest that the best solution to the challenge of ensuring adequate retirement income for all lies in a system that doesn’t depend on the responsibility and prudence of individuals, but rather one that, like Social Security, is the result of a government mandate. One that is based on a premise where the financial resources of the nation’s workers are “pooled” and ultimately redistributed, ostensibly in a way that provides a more certain result for all, but one that may well be distributed disproportionately to one’s individual contribution. Said another way, like Social Security, one in which what you put in and what you eventually get back are, shall we say, “unrelated.”

Now, as I said earlier, I think many—perhaps most—would agree with the proposition that we should look for solutions that provide the means for adequate retirement income for all. The question in my mind is—how much would you be willing to give up to provide that? Would you be willing to pay higher FICA taxes to prop up the current system, to give up the tax benefits of your 401(k) to help fund a broader initiative? Indeed, would you be willing to give up your 401(k)? Would you be willing to “make a deal?”

These are questions that we may be asked to answer in the coming months, though they may not be presented that plainly. But, IMHO, the answers – the decision to keep what you already have, or to take a chance on “what's behind door #2” - will determine not only the future of the 401(k), but that of the American retiree as well.

- Nevin E. Adams, JD

Executive "Order"

Those who had been waiting anxiously (or nervously) for that final wave of regulations from the Department of Labor will have (get?) to wait a bit longer, it appears.

Just hours after the inauguration of President Barack Obama, White House Chief of Staff Rahm Emanuel issued a memorandum ordering a temporary moratorium on any regulations set to be published in the Federal Register “until it has been reviewed and approved by a department or agency head appointed or designated by the President after noon on January 20, 2009.” (see White House Executive Order Snares Fee Disclosure, Advice Regs ).

That “snared” pending DoL proposed directives requiring service providers to disclose “fees, compensation, and conflicts of interest” to fiduciaries of 401(k) and other benefit plans (see “EBSA Puts Out Provider Fee Disclosure Proposal” ), as well as a fee disclosure regulation for participant-directed individual account plans, which Labor had published in proposed form last July (see “EBSA Finishes Regulatory Package with Participant Disclosure Proposal”). Not directly impacted perhaps, but a near certainty to be influenced by the shift in control will be the recent finalization of rules regarding participant advice under the Pension Protection Act (see DoL Finalizes Rules on Investment Advice).

Now, it’s not unusual for an incoming administration to issue this kind of directive, and, frankly, it’s common sense. After all, if it’s waited until the final weeks of a presidential term to be put into law, why wouldn’t an incoming administration want at least a chance to make sure it fits with their agenda (more ominously, it’s not as though outgoing administrations haven’t been known to create problems/mischief for the next set via the implementation of last-minute regulations).

Having said that, there are some important issues and policies behind these rules – fee disclosure and participant advice – and a period of extended uncertainty likely won’t serve anyone’s interests. On the other hand, it’s not like these issues – and potential solutions – won’t be a focus for the new Congress and Administration. It is, however, unlikely, IMHO, that they will present the same solutions contemplated in the still nascent regulations.

“Safe” to Say?

I think it’s safe to say that we can expect a push for even more fee disclosure – and not just to plan sponsors. Plan sponsors certainly need more information about the fees and expenses associated with their programs, and they could use some help in getting those answers more readily than they do at present. On the other hand, the proposed regulations were hardly a panacea for the problem. IMHO, they were at best a practical response to the realities of the marketplace as DoL understood them at the time. Anyone who thought those were going to provide a completely consistent, transparent, and readily readable presentation of that information simply wasn’t paying attention. But it was a start.

Ditto participant fee disclosure. Setting aside for a moment the issue of whether participants want or will use that much information, IMHO, the regulations proposed would, in all likelihood, probably serve to obfuscate, not clarify the situation – and they would do so at an enormous cost to the system (and to the participants who pay for much of that system). Should participants be able to figure out what their 401(k) accounts cost? Absolutely. Would the proposed solution accomplish that? Probably not - but don’t blame the regulators. Trying to unravel the web of offsets, breakpoints, and revenue-sharing challenges the best of us. Let’s face it: It is a system designed to make it easy to get paid, not to make it easy to understand what is being paid. Still, however onerous the proposed solution was, the clear sense at the time from those in the party now in power was that it didn’t go far enough. Let’s hope the medicine isn’t worse than the disease.

As for participant advice – well, IMHO, it’s something of a miracle that the fiduciary adviser concept made it into the Pension Protection Act in the first place, much less into law. But it did, and Congress – including some members who now so adamantly oppose the concept – had a hand in its passage. You can hardly fault Labor for doing what the PPA mandated it to do (craft regulations regarding how that process was to take place and be overseen) – but you have to understand that there are powerful forces in Congress now who want very much to nip that “mistake” in the bud. I would be surprised if they were not successful in doing so, one way or the other.

Elections matter, after all – and matter they should – though sometimes they matter in unanticipated ways. Ironically, it is easier now to anticipate how the solutions of the new Administration will manifest themselves than it is to estimate when they will emerge, or when their accommodation will be required.

But change is coming, make no mistake – change that will be different, and perhaps “harsher,” than the change previously anticipated. Change that, even then, IMHO, might serve to make things better. Or not.

We’ll see.

- Nevin E. Adams, JD

Lest one think that my trepidations are limited to the future proposals, see:

IMHO: Irreconcilable Differences

IMHO: No One (Else) To Blame

IMHO: “Know” Way

“Focus” Group

A couple of weeks back, I got an e-mail from Robert Powell, who writes on personal finance for MarketWatch, and he asked an interesting question: specifically, what, in my opinion, were the top five retirement priorities that the Obama Administration should focus on?

Now, that’s a more complicated question than you might think at first glance. For instance, if you were to ask me what ONE thing should be dealt with, I could probably pull something hugely critical out of the air. Not that it wouldn’t be hard to come up with just one thing—but there’s a certain clarity to that process. However, once you get going, it’s harder than one might think to keep the list to five. Furthermore, there are LOTS of little things that you know would make the system better, but if you can only come up with five—and five for presidential-level involvement, no less—well, you also tend to focus on the big picture.

In any event, here’s my list:

(1) Focus on expanding coverage with the ACTIVE involvement of employers.
Everybody realizes that it is a problem that only about half of working Americans have access to a workplace retirement savings plan, and candidate Obama has talked about a mandatory payroll IRA. However, in my experience, while that may make it easier for more workers to save (they would be auto-enrolled, but could opt out), it still will be problematic for the employer to set that up for all workers, only to dump them in a retail-priced IRA. That's better than a poke in the eye with a sharp stick, but they'd be MUCH better served, IMHO, by getting the benefits of institutional pricing/fiduciary oversight that come with an employer-sponsored program.

Additionally, I think the creation of these alternatives to workplace programs will encourage employers that currently offer these plans to "step aside"—and let the government-sanctioned approach take over.

By the way—getting employers involved will mean that the government will need to spend some time understanding why more employers don't offer these programs, and it will mean that they have to understand that there is a difference between making it easIER to offer these plans, and making it truly EASY to do so. How about an “auto-enrollment” program that also makes it easy for plan sponsors to do the right thing?

(2) Shore up Social Security.

It's not only the third leg of that vaunted three-legged stool, it now represents about half of most retirees’ income (the shocking thing is how little income it is for that percentage). The future solution, whatever it is, needs to be based on a solid foundation. This is the place to start.

(3) Establish some kind of national retirement policy.

Pensions were never as widely available, or as "lucrative," as people sometimes mythologize them, certainly not in the private sector. As for 401(k)s, they were never designed to provide a single—or even a primary—source of retirement income. Social Security has "morphed" well beyond its original design and no longer accurately reflects the demographic realities of the nation. Let’s admit it: The “three-legged stool” is a rationalization, not a reality.

We need a plan—a blueprint, a roadmap—rather than the "necessity is the mother of invention" approach we have stumbled along with these past 50 years. I find it ironic that we regularly disparage participants for not developing a plan for retirement financing—when we, as a society, suffer from the same “it will work out somehow” perspective.

That plan needs to articulate what we as a nation expect our obligations—both personally, and as a society—to be. But, whatever plan we develop may—and should, IMHO—need to consider different solutions for varying generations of our society. Social Security may well have to be the primary solution for those over 55, but why should we limit ourselves to that for someone who has just entered the workforce?

(4) Help the free market fix health-care costs.

Several studies have documented the impact of health-care costs on retirement savings. Personally, I don't think a government-based solution fixes the “cost” problem, and it may well "break" the access those with health insurance currently enjoy. But you don't want people to have to drain their retirement savings for one extended stay in the hospital.

(5) Imbed financial education in the elementary school curriculum—and further.

As the father of three, I can tell you that, if kids were exposed to even half as much education about finances and the markets as they are classes on drugs and sex education, we'd all be much better served—and much better prepared to take responsibility for our financial futures, both pre- and post-retirement.

And, ultimately, isn’t that the soundest solution of all?

—Nevin E. Adams, JD

The MarketWatch column (I wasn't the only expert to contribute) is online HERE