Access "Able"

Though I’ve now spent more than three decades working with employment-based benefit plans, I’ve also worked for some very different employers, ranging from organizations that employed tens of thousands of workers to those that were a fraction of that size. Those organizations were all very different, of course, but they all had at least one thing in common: All offered a workplace retirement savings program.

That’s apparently not as common as one might think, certainly among smaller employers. In fact, a new study from the Employee Benefit Research Institute (EBRI) notes that the probability of a worker participating in an employment-based retirement plan increased significantly along with the size of his or her employer.

How significantly? Well, the EBRI report notes that for wage and salary workers ages 21‒64 who worked for employers with fewer than 10 employees, just 13.2% participated in a plan, compared with 57.0% of those working for employers with 1,000 or more employees. Filtering for those workers who are full-time, full-year, at employers with 1,000 or more workers, two-thirds (66.5%) participate, compared with just 16.9% at employers with fewer than 10 workers.

One is inclined to look for other explanations than employer size alone. Perhaps smaller employers pay less, or hire younger workers (who might also be paid less) — and those factors might play some role. However, the EBRI analysis found that, even controlling for age, workers at smaller employers still had persistently lower levels of participation across the age groups.

Moreover, across various earnings levels, workers at small employers (less than 100 employees) were less likely to participate in an employment-based retirement plan. Indeed, even among workers making $75,000 or more, a considerable disparity was found — just 27% of those in that income category working for the smallest employers participated in a plan, compared with 81% of those working for employers with 1,000 or more employees.

But when you adjust for access to a plan — the percentage participating divided by the percentage working for employers that sponsor a plan — you find that those differences largely disappear. For example, while just 16.9% of those full-time, full-year employees who work at workers participate in a plan. That’s about 86% of the 19.5% of workers in that category whose employer sponsors a plan — which is nearly identical to the participation of private-sector employers with 1,000 or more employees.

A few years back the Maryland Lottery had a simple slogan: “You gotta play to win.” That’s a motto that those saving for retirement should take to heart.

However, when it comes to retirement plan participation, it looks like a lot of those who work for small employers aren’t yet getting a chance to “play.”

- Nevin E. Adams, JD

"Half" Measures

People are often grouped into one of two camps: the optimists, who generally see the glass as half-full, and the pessimists, and who are said to view the glass as half-empty.

One of the most commonly cited data points about retirement is that “only about half of working Americans are covered by a workplace retirement plan.” Drawn from the U.S. Census Bureau’s Current Population Survey (CPS), it’s cited by both those who see the current system as inadequate (or worse), as well as its most ardent champions—in other words, both by those who see the glass as half-full, and those who are inclined to see it as half-empty.

This is a data point that we’ve written about before, and one that was acknowledged in a recent EBRI Issue Brief[1] that explored various demographic and economic factors that affect retirement plan participation. The data point is relatively simple math: the number of workers who say they participated in a workplace retirement plan divided by the total number of workers. But when you take a closer look at the numbers, it’s not really that straightforward—especially since there are various types of workers, and that makes a huge difference in retirement coverage.

Consider that, according to that CPS data, in 2012, a total of 80.5 million workers worked for an employer/union that did not sponsor a retirement plan. However, the EBRI analysis reveals that of the wage and salary workers in this group:

• 8.9 million were self-employed—and thus ostensibly could have started a plan on their own without the action of an employer.
• 6.4 million were under age 21—below ERISA’s minimum-age coverage limit.
• 4.3 million were age 65 or older—beyond what many (and most retirement plans) still consider ”normal” retirement age.
• 32.6 million were not full-time, full-year workers—also not required to be covered by a workplace retirement plan under ERISA.
• 17.0 million had annual earnings of less than $10,000.

Now, many of these workers fell into several of these categories simultaneously, such as being under age 21, having less than $10,000 in annual earnings, and not being full-time, full-year workers. So, as the EBRI analysis explains, once you apply certain commonsense filters for age, annual earnings, work status, and/or employer size, you can get a more realistic perspective.

If you consider the population of wage and salary workers ages 21–64 who work full-year, make $5,000 or more in annual earnings, and work for employers with 10 or more employees, 32.5 million—or 36.4 percent of this population—worked for an employer that did not sponsor a retirement plan in 2012.

Said another way, nearly two-thirds of workers with those characteristics worked for an employer that DID sponsor a retirement plan in 2012. Either way, the population of workers who don’t have access to a workplace retirement plan who might reasonably be expected to participate is considerably different than the simplistic assessment offered by the commonly cited “less than half” data point.

Different people can look at the same data and draw different conclusions: some are inclined to see the glass as “half full,” others look at the same results and say it’s “half empty.”

But none of that matters if you’re looking at the wrong size glass.

Nevin E. Adams, JD

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[1] The November EBRI Issue Brief, “Employment-Based Retirement Plan Participation: Geographic Differences and Trends, 2012” is available online here.

"Staying" Power

When we moved into our last home―an old house, and one in which the prior family had lived for quite some time―we found a set of markings on a doorframe.  Markings that appeared to indicate the height―and growth patterns over time―of the children of the former owners.  We took note of this at the time, but those markings didn’t last long after we moved in.  After all, while our kids were still growing, and they were now going to live in the same house, there was little point in assessing their progress against that of the former residents.

We’ve noted before the shortcomings of metrics such as an “average” 401(k) balance (see “Above” Average, online here ), which generally aggregate the balances of participants in widely different circumstances of age and tenure―everything from those just entering the workforce who have relatively negligible 401(k) balances with those who may have been saving for decades.  While these averages can, over time, provide a sense of the general direction in which things are moving, they’re not generally a very accurate barometer when it comes to assessing actual retirement accumulations. That’s one reason why the annual updates of the EBRI/ICI 401(k) database also report average balances by age and tenure.

That said, people change jobs, employers change 401(k) providers, and so, even in a repository as comprehensive and long-standing as the 24-million-participant EBRI/ICI 401(k) database, those “averages,” of necessity, include the experience of different individuals over time.  In order to accurately assess the impact of participation in 401(k) plans over time, and to understand how 401(k) plan participants have fared over an extended period, it is important to analyze a group of consistent participants―a longitudinal sample.

A recent EBRI Issue Brief (jointly published with the Investment Company Institute), “401(k) Participants in the Wake of the Financial Crisis: Changes in Account Balances, 2007–2011,” did just that. Drawing on the actual activity of 8.6 million participant accounts, it found that at year-end 2011, the average 401(k) account balance of the consistent group of participants during 2007‒2011 was $94,482, or 60 percent larger than the average account balance of $58,991 among participants in the entire EBRI/ICI 401(k) database. The median (mid-point) 401(k) account balance among the consistent participants was $42,082 at year-end 2011, about two-and-a-half times the median account balance of $16,649 of participants in the entire EBRI/ICI 401(k) database.

Now, in any given year the change in a participant’s account balance is the sum of several factors: new contributions; total investment return on account balances; and withdrawals, borrowing, and loan repayments.  The influence of each of those factors on individual account balances varied according to individual circumstances; participants who were younger or had fewer years of tenure experienced the largest percentage increases in average account balance between year-end 2007 and year-end 2011, and, for those younger, smaller account balance participants, contributions were responsible for a significant percentage of the growth in their account balances (consistent participants in their 20s saw their accounts nearly triple between 2007 and 2011).  Older participants experienced smaller percentage gains, and most of that was from investment returns.  Moreover, some of those balances were doubtless affected by the initiation of retirement-related withdrawals.

Still, and as the EBRI Issue Brief outlines, the trends in the consistent group’s account balances highlight the accumulation effect―the staying power―of ongoing 401(k) participation.

- Nevin E. Adams, JD

“401(k) Participants in the Wake of the Financial Crisis: Changes in Account Balances, 2007–2011” is available online here.

The "Big" Picture

A recent EBRI Issue Brief examined trends in employment-based retirement plan participation, noting that in 2011, the percentage of all workers participating in an employment-based retirement plan was essentially unchanged from the year before. More specifically, the percentage of all workers (including part-time and self-employed) participating in an employment-based retirement plan¹ stood at 39.7 percent in 2011, compared with 39.8 percent in 2010.² At the same time, the percentage of full-time, full-year wage and salary workers ages 21–64 (those most likely to be offered a retirement plan at work) saw a slight decline, slipping from 54.5 percent in 2010 to 53.7 percent in 2011.

While those movements were very small, the increase in the number of workers participating in 2011 halted a three-year decline. Moreover, it’s not as though this gauge has shown a steady trend, even in recent history. When you take into account all workers, the percentage participating in an employment-based retirement plan reached 44.4 percent in 2000, but declined to 39.7 percent in 2006, before increasing to 41.5 percent in 2007—the highest level since 2004, before then slipping back to 39.6 percent in 2009.³

When you look inside the overall numbers, we find that some categories examined had increases in the probability of workers participating and others showed decreases. Not only does the status as a full-time or part-time worker have a major impact on participation rates, the report notes, so does the demographic characteristics of the individual worker, the type and size of their employer, and even their physical location (workers in the South and West were less likely to participate in a plan than those in other regions of the country, for example).

Looking at the overall percentage of females participating in a plan, you might notice that it was lower than that of males—but when you control for aspects such as work status or earnings, the female participation level actually surpasses that of males. If you look only at the participation rate of Hispanics as a group, they appear to lag other groups significantly in terms of retirement plan participation. However, it turns out that only the nonnative Hispanics actually have participation levels substantially below those of all other workers. In fact, nonnative-born Hispanics had substantially lower participation levels than native-born Hispanics, even when controlling for age and earnings.

In responding to big issues, it’s sometimes tempting to look at data only in the aggregate, and in the press of time, to draw broad conclusions from trend lines over remarkably recent history, trying to get a sense of the “big picture.” But as the data above suggest, a “better” picture is often drawn from an analysis of the component parts that make up that big picture, balanced with an appreciation for longer-term trends.

Nevin E. Adams, JD

¹ The number of workers participating in an employment-based retirement plan increased from 60.7 million in 2010 to 61.0 million in 2011, returning to the 2009 level, the second lowest since 1997 and well below the 67.1 million workers who participated in a plan in 2000, the peak year for the number of workers participating in a plan from 1987–2011.

² “All workers” is the broadest work force population group, including those not covered by a retirement plan. A more restrictive definition of the work force, which more closely resembles the types of workers who generally must be covered by a retirement plan in accordance with the Employee Retirement Income Security Act of 1974 (ERISA), is the work force of full-time, full-year wage and salary workers ages 21–64. Under this definition, 60.8 percent of these workers worked for an employer sponsoring a plan, and 53.7 percent of them participated in a retirement plan.

³ An important public-policy topic associated with an analysis of employment-based retirement plan participation is the number of workers who are not participants, as well as the number of those who work for employers/unions that do not sponsor a plan. For example, when taking into account only workers who work full-time, full-year, make $10,000 or more in annual earnings, and work for an employer with 100 or more employees, 15.1 million (or 25.2 percent of the defined population) would be included among those working for an employer that did not sponsor a plan. Another way to look at this last number is that 74.8 percent of workers with those characteristics worked for an employer that did sponsor a retirement plan in 2011. This is explained in more detail on page 30 of the November 2012 EBRI Issue Brief, “Employment-Based Retirement Plan Participation: Geographic Differences and Trends, 2011,” online here. See also “’Under’ Covered,” online here.

'Under' Covered?

One of the more pervasive statistics bandied around about the voluntary retirement system is that only about half of working Americans are covered by a workplace retirement plan.

It’s a data point that is widely and openly presented as fact—not only by those inclined to dismiss the current system as inadequate, but even by some of its most ardent champions, who see that result as a call to action for expanded access to these programs.

There’s only one problem: It doesn’t tell the whole story.

A 2011 EBRI report found that in 2010, 77.6 million workers worked for an employer/union that did not sponsor a retirement plan and 91.0 million workers did not participate in a plan. However, focusing in on employees who did not work for an employer that sponsored a plan, 9.0 million were self‐employed.

Of the remaining 68.5 million:

• 6.2 million were under the age of 21, and
• 3.7 million were age 65 or older.
• 32.0 million (approximately) were not full‐time, full‐year workers, and
• 17.2 million had annual earnings of less than $10,000.

Now, admittedly, many of these workers would fall into several of these categories simultaneously (they might, for instance be under age 21, make less than $10,000 in annual earnings, and not be a full‐time, full‐year worker).

But if you adjust these numbers so that only workers who work full-time, full‐year, make $10,000 or more in annual earnings, and work for an employer with 50 or more employees, only 17.4 million workers (or 26.7 percent) would be included among those working for an employer that did not sponsor a plan.

Of course, another way to look at this last number is that 73.3 percent of these workers with those characteristics worked for an employer that DID sponsor a retirement plan in 2010.

And that’s a lot more than 50 percent.

- Nevin E. Adams, JD

Naughty? Or Nice?

Editor’s Note: There’s so much going on in the world of retirement saving and investing that I never feel the need (or feel like I have the opportunity) to recycle old columns – but this one has a certain “evergreen” consistency of message that always seems appropriate – particularly at this time of year.

A few years back—when my kids still believed in the reality of Santa Claus—we discovered an ingenious Web site.

This was a Web site that purported to offer a real-time assessment of your "naughty or nice" status.

Now, as Christmas approached, it was not uncommon for us to caution our occasionally misbehaving brood that they had best be attentive to how those actions might be viewed by the big guy at the North Pole. But nothing ever had the impact of that Web site - if not on their behaviors (they're kids, after all), then certainly on the level of their concern about the consequences. In fact, in one of his final years as a "believer," my son (who, it must be acknowledged, had been PARTICULARLY naughty) was on the verge of tears, worried that he'd find nothing under the Christmas tree but the coal and bundle of switches he surely deserved.

Naughty Behaviors?

One might plausibly argue that many participants act as though some kind of benevolent elf will drop down their chimney with a bag full of cold cash from the North Pole. They behave as though, somehow, their bad savings behaviors throughout the year(s) notwithstanding, they'll be able to pull the wool over the eyes of a myopic, portly gentleman in a red snow suit.

Not that they actually believe in a retirement version of St. Nick, but that's essentially how they behave, even though, like my son, a growing number evidence concern about the consequences of their "naughty" behaviors. Also, like my son, they tend to worry about it too late to influence the outcome—and don't change their behaviors in any meaningful way.

Ultimately, the volume of presents under our Christmas tree never really had anything to do with our kids' behavior, of course. As parents, we nurtured their belief in Santa Claus as long as we thought we could (without subjecting them to the ridicule of their classmates), not because we expected it to modify their behavior (though we hoped, from time to time), but because, IMHO, kids should have a chance to believe, if only for a little while, in those kinds of possibilities.

We all live in a world of possibilities, of course. But as adults we realize—or should realize—that those possibilities are frequently bounded in by the reality of our behaviors. This is a season of giving, of coming together, of sharing with others. However, it is also a time of year when we should all be making a list and checking it twice—taking note, and making changes to what is naughty and nice about our savings behaviors.

Yes, Virginia, there is a Santa Claus—but he looks a lot like you, assisted by "helpers" like the employer match, your financial adviser, investment markets, and tax incentives.

Happy Holidays!

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The Naughty or Nice site is STILL online (at http://www.claus.com/naughtyornice/index.php.htm ). An improved site and much better internet connection speeds produce a lightning fast response – more’s the pity. I used to like the sense that someone was actually going to the list, and having to check it twice!

The IKEA “Experience”

We spent some time this past weekend getting my eldest daughter squared away in her new apartment. It’s her first, and as with nearly all first apartments, there is a lot you need to get that you never needed in your room at home or in your dorm away at college. So we headed out to IKEA.

Those who have never had occasion to visit an IKEA store should check it out at least once. They are mammoth stores—big on the outside and seemingly even more massive on the inside. It’s the kind of store you can easily get lost in (not to worry, they have their own food court inside), and yet it’s very hard to simply get from point A to point B, even if you know what you want to buy. About the only way to get through the store is to wander along the winding path the IKEA folks have constructed that takes you—literally—through every display imaginable.1

But the really interesting thing about the IKEA shopping process is that you not only have to find what you want, you must write down the part number(s), and—at the end of your journey through this mammoth store—you must assemble the requisite pieces/boxes in the warehouse.2 You not only have to make sure that you have each of your purchases, you frequently have to make sure that you have all the (separate) boxes into which your purchase has been divided. Ironically, the consummation of that IKEA shopping experience is that you get to go home and put your purchases together.


Now, I’ve never met anyone who didn’t like the IKEA “experience.” Oh, some might not care for the quality of the furniture, or the selection—and surely I’m not the only one who wonders why I have to do all the work (I understand that it’s supposed to be cheaper, but I haven’t found it to be cheap). But it’s not for those in a hurry, and at the end of the night, I kept feeling like I should be able to present someone else with the bill!

As I was loading up the family van with our purchases, I wondered if this is how participants feel about the current structure of our voluntary savings system: one (still) fraught with a mind-numbing array of choices that have to be assembled at the point of enrollment by participants who want to do the right thing(s), but who find themselves stuck trying to follow an instruction manual they don’t quite understand, surrounded by people who seem to get it (but probably don’t, either), only to find themselves at the checkout counter wondering if they do, in fact, have everything they need—only to then have to go home and put it together themselves.

And I wonder if, when they tally up that bill, they too will observe that it’s probably supposed to be cheaper that way—but find that it’s not exactly cheap.

—Nevin E. Adams, JD

1 This turns out to be an interesting way to create the kind of “impulse” purchasing that most retail stores only have positioned at the checkout counter, as one continually wanders past interesting things that you hadn’t even thought you needed. On the other hand, the maps posted along the way that purport to show you where you are were not exactly reassuring to those in a hurry.

2 A place reminiscent of that last scene in “Raiders of the Lost Ark” (albeit with numbered shelves and aisles).

“Nigh” Five

A few weeks back, I offered some notions about what the next five years will bring in terms of industry trends (see “IMHO: Fifth ‘Avenues’”). However, in preparing for our recent PLANADVISER National Conference, I came up with five more.

Everybody isn’t going to do automatic enrollment.

Without question, automatic enrollment has done much to shore up the retirement savings rates of American workers. For plan sponsors and participants alike, the efficacy of an approach that doesn’t require participants to complete an enrollment form, deliberate over investment choices, set upon a desired rate of savings, or even darken the door of an education meeting has done much to get tens of thousands of workers off on the right retirement savings foot. And, for the vast majority of workers, the ability to do the right thing without doing anything at all has not only been well-received, but much appreciated as well.

Not that automatic enrollment as outlined by the Pension Protection Act (PPA) doesn’t have its shortcomings. Arguably, the 3% starting deferral rate outlined in the PPA—and still adopted by the vast majority of plans—is better suited to avoid creating a financial burden on workers than to ensuring an adequate level of retirement savings; and some workers, in taking the “easy” path cleared by automatic enrollment, wind up saving at lower rates than they would likely choose for themselves had they only taken the time to actually fill out an enrollment form (see “IMHO: ‘Starting’ Points”).

But at some level, automatic enrollment requires that the plan sponsor “impose” a savings decision on a participant, and even though workers can choose to opt out, many plan sponsors are simply disinclined to set aside the purely voluntary approach. Many smaller programs that might once have been willing to go down that route as a means of avoiding trouble with the nondiscrimination tests have since found the solace required in adopting a safe harbor design. But for many, perhaps most these days, it’s all about economics; simply said, the more participants, the more matching dollars—and considering the potential number of additional participants, those matching dollars could be significant, or significant “enough” in the current economic environment.

PLANSPONSOR’s annual Defined Contribution Survey has, for the past several years, shown a flat or flattening adoption rate for automatic enrollment. There’s no reason to think this will change in the short term.

Everybody who does automatic enrollment isn’t going to do it for everybody.

Among the PPA’s provisions is a safe harbor for those adopting automatic enrolment—a safe harbor that effectively provides plan sponsors with protection identical to that afforded under ERISA 404(c ), so long as certain conditions are met. Among those conditions is that all eligible participants be automatically enrolled and/or given the chance to opt out.

And yet, PLANSPONSOR’s annual Defined Contribution Survey has found, for several years running, that two-thirds of plan sponsors that have embraced automatic enrollment have done so only for newer hires (see “IMHO: A Prospective Perspective”). Anecdotally, plan sponsors are reluctant to “disturb” workers who, at least in theory, have previously been afforded the opportunity to participate and decided not to. Some are hesitant to “insult their intelligence” by doing so, and for others, it’s just the economic dilemma posed above. The PPA doesn’t mandate going back to older workers, of course—but plan sponsors desirous of those safe harbor protections either have to, or have to be able to establish that they have. There is also, of course, the issue of a plan design that, at least on the surface, is more attentive to the financial security of shorter-tenured workers.

Still, the current—and apparently persistent trend—is to adopt this feature prospectively, and it will likely take an improved economy—or perhaps litigation—to change that dynamic.

Roth 401(k)s are going to continue to gain ground.


The advantages of tax-deferred savings have long been part-and-parcel of the pitch behind 401(k) plans. The notion is simple: defer paying taxes on your savings now, and they’ll add up faster, further fueled by the tax-deferred accumulation of earnings on those balances. And then, the logic goes, you pay taxes on those monies as you withdraw them—years from now—and at rates that, post-retirement, will be lower.

Plan sponsors have long been reluctant to push Roth 401(k)s; their pay-it-now concept on taxes at odds with the traditional tax deferral mantra, and their benefits often seen as skewed toward more highly compensated workers.

However, these days, it’s hard to find someone willing to predict lower taxes in the future, even post-retirement. Moreover, today’s younger (and not-so-highly compensated) workers may very well be paying the lowest tax rates they will ever experience.

To date, most surveys indicate that the participant take-up rate on Roth 401(k)s remains modest, something on the order of what self-directed brokerage accounts have garnered (and in many cases, appealing to the same audience). However, the preliminary results of PLANSPONSOR’s annual Defined Contribution Survey suggest that Roth 401(k)s are cropping up on a surprising number of plan menus. It’s a trend that, IMHO, bears watching.

Plan sponsors will (continue to) measure plan success on things (they think) they can control.

Plan sponsors have long measured the success of their defined contribution plans by the rate of participation in the plan. More than just providing a sense of interest and/or the success of inspiring enrollment meetings, the rate of participation, certainly by non-highly compensated workers, has a significant impact on the plan’s ability not only to pass nondiscrimination tests, but to allow highly compensated workers to defer at meaningful rates. However, in an era of automatic enrollment and safe harbor plan designs, the value of this metric has been muted or, in many cases, eliminated.

There is, however, a growing discussion among providers that plan sponsors should begin—and in some cases, are beginning—to consider other metrics: things like rates of deferral, diversity of asset allocation, and even adequacy of retirement income. That they are now able to consider such a shift in focus is a testament to a new and exciting generation of tools now available from the provider community, and they may well foreshadow a time in the not-too-distant future where those perspectives are shared with participants who may, for example, increase their current rate of deferral to ensure a higher level of retirement income, or adjust their asset allocation to preserve portfolio gains as they near retirement.

However, it’s not clear to me that plan sponsors will choose to benchmark their plans on criteria that is so individualized and so far outside their control to influence. Consider that about two-thirds of plan sponsors today still benchmark based on participation, and half that number examine deferral rates within various employee groups. These measures may not provide a picture of what the plan will yield in terms of its ultimate goal, but they are indicative of things a plan sponsor can control or influence with plan design, and—for the foreseeable future, anyway—I’m guessing they will continue to be the measures of choice.

Plan sponsors want good retirement outcomes for participants—but don’t feel it is their responsibility to ensure them.

Under the auspices of “best practices” and armed with some of the aforementioned benchmarking measures, some claim that fulfilling the plan fiduciary’s responsibility to act in the interests of plan participants extends to ensuring a good result. Of course, some plan sponsors are reluctant to know the results of that benchmarking for just that reason: that, once apprised of those results, they will one day be held to account for them.

Unlikely as that seems to me, one should never underestimate the creativity of the plaintiff’s bar. The reality is that a voluntary savings system needs goals, and I think participants would save better if they understood more. It also seems to me that plan sponsors who know more about what is going on in their plan might do a better job as well.

—Nevin E. Adams, JD

“Starting” Points

You may have missed it, but there was a bit of a “dust up” in our industry last week.

It started on July 7 when The Wall Street Journal ran a front-page story titled “401(k) Law Suppresses Saving for Retirement” (a story that is still, as I write on Saturday morning, on WSJ.com’s most popular listing). And, no, that article wasn’t talking about discrimination testing rules, the imposition of annual contribution limits, talk of a mandatory limit on loans, or the imposition of mandatory annuitization of distributions. Rather, it was talking about…automatic enrollment.

The report claimed that “40% of new hires at companies with automatic enrollments are socking away less money than they would if left to enroll voluntarily,” citing data from the Employee Benefit Research Institute (EBRI). The problem, according to the report, was that “[m]ore than two-thirds of companies set contribution rates at 3% of salary or less, unless an employee chooses otherwise.”

Well, duh. That, as they say, is the law.

EBRI quickly took issue with the WSJ’s characterizations, outlining in some detail the non-partisan group’s extensive history in examining these trends, and then noted that “The Wall Street Journal article reported only the most pessimistic set of assumptions,” failing to “cite any of the other 15 combinations of assumptions reported in the study” referenced in the report. More significantly, EBRI’s Jack VanDerhei commented later that same day that the WSJ managed to completely ignore the reality that automatic enrollment is “increasing savings for many more—especially the lowest-income 401(k) participants.”


Now, while EBRI was, IMHO, rightly miffed to see its data and analysis mis-, or perhaps less-than-fully, represented, the authors of the Pension Protection Act were no less maligned. The law was designed to help more employers make it easier for more employees to become participants, and for those participants to become more-effective retirement savers, and it seems to me that, in just about every way, it has been a huge success. Are there those who once might have filled out an enrollment form and opted for a higher rate of deferral (say to the full level of match) that now take the “easy” way and allow themselves to be automatically enrolled at the lower rate called for by the PPA? Absolutely. However, as the EBRI data show—and, for anyone paying attention, have shown for years now—the folks most likely to be disadvantaged by that choice are higher-income workers, most of whom, IMHO, should know better.

The simple math of automatic enrollment is that you get more people participating, albeit at lower rates (until design features like contribution acceleration kick in). Said another way, participation rates go up, and AVERAGE deferral rates dip—initially.1 Then, over time, as contribution-acceleration designs take hold, we’re likely to see those average deferral rates increase2. But for some, it will mean less savings, and for many, perhaps not savings enough.

There are, however, some things plan sponsors can do now to keep things moving in the right direction sooner:

Auto-enroll workers at higher rates, perhaps as high as the level at which they will receive the full company match. Sure, the Pension Protection Act calls for 3% as a minimum to be eligible for its safe harbor—but there’s no law/rule that says you can’t go higher.

Auto-enroll ALL workers, not just new hires. Since the PPA’s introduction, PLANSPONSOR’s DC Survey has consistently shown that two-thirds of employers adopting automatic enrollment do so on a PROSPECTIVE basis (see IMHO: A Prospective Perspective). Do you really care more for the people you just hired than those who have devoted years of loyal service?

Remind ALL participants of the importance of actively saving for retirement. It may be a bit counter-intuitive to try to reach automatically enrolled participants who didn’t even take the time/expend the energy to fill out an enrollment form, but it’s important. By most measures, workers who save only to the level of the company match won’t have saved enough to provide a financially secure retirement. However, a generation of participant behaviors suggests that they assume that saving to the level of the match is the “right” answer, and it’s likely that they will assume that the level of automatic enrollment established is “enough.” We all know better.

IMHO, automatic enrollment designs are, literally, a starting point—for plan sponsors and their soon-to-be participant savers alike (3).

—Nevin E. Adams, JD

The WSJ article is online HERE. EBRI’s response is HERE

1 Complicating the picture is that the PPA took hold just ahead of an economic downturn that led a small, but noticeable, group of employers to reduce and/or suspend their match (and a not-so-small group to lay off lots of workers), while health-care costs continued to rise and, based on previous surveys, likely siphoned some participant contributions from retirement savings.

2 VanDerhei notes on EBRI’s blog that “[t]he other statistic attributed to EBRI dealt with the percentage of AE-eligible workers who would be expected to have larger tenure-specific worker contribution rates had they been VE-eligible instead. The simulation results we provided showed that approximately 60 percent of the AE-eligible workers would immediately be better off in an AE plan than in a VE plan, and that over time (as automatic escalation provisions took effect for some of the workers), that number would increase to 85 percent.”

3 This from a column I wrote about automatic enrollment designs in 2005: “...there is at least one published study that indicates that, over time, the establishment of a default deferral rate seems to lower the overall rate of deferrals in the plan. Mostly, this seems to be a result of an increase in the number of workers who simply leave their choices in the hands of the default option. But it is hardly beyond the realm of reason to imagine a scenario where workers take the establishment of a default rate as being the “right” answer for them as well.

All in all, advisors should remember that the results of automatic deferrals, however encouraging at the outset, should not be left unattended. An “automatic” deferral is a start, perhaps even a good start. It should not, however, be the end of the matter."

Group “Think”

Somewhere over the course of your academic or professional career, I’m sure you’ve been exposed to a group exercise dealing with being stranded in an inhospitable place (the moon, or maybe a deserted island) with a limited amount of supplies, and a limited amount of time to choose from those supplies to ensure your survival.

In these exercises, you’re asked to make those picks as an individual exercise, and then put together with a group to make group choices. Not only are the group choices generally different, they are nearly always “better” (more likely to ensure survival) than those made by individuals. The point of the exercise is, of course, that we make better decisions working together as a team than we do trying to make them on our own—and it generally works out that way.

Sure, that may work in hypothetical situations where none of the group members has any particular expertise. But if I’ve crash-landed on the moon, and there’s a trained astronaut in the group—well, let’s just say you’re probably better off following their lead than putting things up for a vote.

That said, to me, the point of that exercise isn’t necessarily that group decisions are better than individuals’—they frequently aren’t, IMHO—but that groups we are part of make different decisions than we might as individuals.


Now, sometimes that inures to our benefit. There is certainly value in a collective experience/perspective, and there is an important collaborative element in just being able to bounce ideas off other people. Moreover, there are times when individual members of the group have knowledge and/or expertise that everyone doesn’t have. And let’s face it—plan sponsors make a lot of individual decisions, but even relatively small employers are inclined to rely on the collective experience of a group when it comes to making plan design and investment decisions. That’s supposed to make for better decisions but, as any retirement plan adviser can attest, not always.

Behavioral finance purports to explain why people make the financial choices they do, choices that are frequently at odds with what “rational” decisionmaking would support. In recent years, a lot of attention and focus have been directed toward behavioral finance, particularly as it applies to participant decisionmaking or the lack thereof (in fact, thus far most of those behavioral finance-oriented solutions – automatic enrollment, contribution acceleration, QDIAs - have been directed not toward helping participants make better choices, but rather toward making better choices for the participants).

In fact, in the cover story of the January issue of PLANSPONSOR, Gary Mottola, Associate Director of Investor Education at the Washington-based Financial Industry Regulatory Authority (FINRA), observes: “Plan sponsors are very aware of the biases that affect individuals, but I do not think a lot of sponsors are aware of these biases” that can affect them. Plan sponsors make most of their decisions in groups and committees, so they are vulnerable to both group and individual biases.”

What kinds of biases? Well, there are things like “shared-information bias,” where groups tend to focus on things of common knowledge/interest, even if it isn’t the most pertinent/critical. My favorite is “group polarization,” which speaks to a group’s tendency to make more-extreme decisions—both in cautious and risky directions—than individuals. In essence, the group tends to reinforce its own prejudices—and then some.

Even the best committees can make bad decisions, not because they aren’t well-intentioned, or even well-equipped to make complex financial decisions, but because they may make decisions based on dynamics of which they aren’t even aware.

What’s ironic, IMHO, is how intertwined the acknowledgement of such behaviors has become in thoughtful plan designs—and yet how infrequently we acknowledge their impact on those who make the complex financial decisions that affect the participant decisions.


- Nevin E. Adams, JD

Check out “Misbehavioral Finance”

The Measure of the Plan

Not so long ago, plan sponsors gauged the success of their defined contribution offerings by a single metric: participation rate. It’s not that they didn’t pay attention to other criteria, but participation rate is objective, easy to calculate, and, certainly for a voluntary savings program, it’s not an inappropriate gauge of the program’s perceived value.

Over the past couple of years, a growing number of plan providers have brought to market a new set of plan diagnostic measures, measures that not only show individual and plan balances, but also project those balances out to an estimate of what those balances will provide in retirement income, or presented as a measure of retirement readiness—compared with an established level of income replacement.

It’s not a new idea, of course. Heck, there has even been legislation introduced to place—on participant statements—a projection as to what the participant’s monthly retirement income would be. Meanwhile, despite long-standing fears that participants, confronted with the stark realities of their savings situation, would abandon the cause, the realities seem to be quite different. One might well expect the providers touting such wares to extol the virtues of the approach (and they do), but I have yet to meet a plan sponsor who had adopted these enhanced gauges of retirement readiness who said it had had a negative impact.

That said, there are still many plan sponsors that have not yet taken that step. At the PLANSPONSOR National Conference this past June, I asked the audience of some 200-plus plan sponsors if they had established any kind of target replacement ratio as part of their program design. While the survey sampling was admittedly unscientific (though I would suspect skewered toward more-active, involved, engaged plan sponsors) a whopping 78% said “no.” Just one in 10 said yes, while the remaining 12% responded “not explicitly, but it’s in the back of our minds.” (1)

Based on that result, I wasn’t too surprised that just 28% said their participants will be able to retire comfortably, while 43% said “maybe” (the polling was anonymous). (2)


Now, most of us have a hard enough time answering that comfortable retirement question for our individual situation, much less an entire employee populationbut I was struck by how many of those in that particular attendance didn’t even seem to have a rough notion in the back of their mind. As I explored that poll result with the audience, a couple of themes emerged: First, plan sponsors only know so much about an individual participant’s lifestyle, sources of income, and/or plans for retirement, and generally don’t have the time or inclination to know any of that, anyway. Second, these are voluntary programs, and while plan sponsors take seriously their responsibility to see that they are well, reasonably, and efficiently run, most don’t see it as their responsibility to make sure that participants are doing what they need to do (in fairness, most plan sponsors have their hands full just trying to make sure that THEY are doing what they need to do).

In casual conversations with plan sponsors about these types of programs and their reluctance to embrace them, it isn’t the cost or complexity that holds them back, nor is it concern about the response of newly enlightened participant-savers. Rather, it’s an underlying concern that, once those retirement replacement goals have been established at a plan committee level, and once those readiness results are presented in black and white (or multi-color) to plan fiduciaries, they could be held accountable for the results and/or shortfalls. Ignorance, to some it seems, is not only bliss, it’s a litigation shield.

Personally, I think plan sponsors already carry burdens and responsibilities beyond what many, perhaps most, are compensated for (and some beyond what they are aware). That said, it seems to me that presenting plan participants with specific information about their retirement savings situation, coupled with the kinds of diagnostic tools that accompany most of these offerings (not to mention the counsel of a trusted adviser) not only serves to help them make better decisions sooner, it effectively undermines their ability to later turn on the plan fiduciaries and try to hold them accountable for the participant’s results.

Now, some might argue that sponsoring these programs with no specific goal in mind is not much better than participants who save with no goal or focus to those efforts. Others would go so far as to suggest that failing to administer these programs with those kinds of specific goals in mind runs afoul of ERISA’s fiduciary charge.

For me, it’s not about measuring your program—it’s about seeing how your program measures up.

—Nevin E. Adams, JD ,

(1) While I don’t have a correlation between the responses and the program designs represented, it seems fair to say that many were in the DC-only camp.
(2) As for the rest of the responses, 16% said “no,” 10% were “not sure,” and 3% said “I’ve no idea.”

Fiscal Therapy?

This week I will undergo one of those “you’re getting older” physicals. This has been scheduled for about six months now (yes, that’s how long it takes to get in for a physical these days)—and I have dreaded it, more or less consistently (and, more recently, constantly) ever since the appointment was made.

I know that I’m eating too much of the wrong things, and not exercising enough (at all?)—and while I sincerely meant to alter some of those behaviors over the past six months, other things have taken priority. What remains to be seen is what my doctor will see/say—and what, if any, lifestyle changes lie ahead.

In random conversations over the past several weeks, it was easy to find people who were supportive of the need to do something about the yawing federal deficit, and even easier to find folks who had problems with one—or more—of the recommendations of the so-called Deficit Commission that were made formal last week. Like my trip to the doctor, we all knew that we had some fiscal behavioral imbalances that needed to be addressed—we just didn’t know how painful the cure might be1.

Retirement Plans

Those in our industry were primarily focused on two things: the reduction of tax-favored treatment for benefits (impacting both workplace retirement and health benefits) and changes to Social Security. The latter drew a lot of focus and angst though, at least as I read them, they seemed relatively modest, certainly compared with the 1983 moves (though, make no mistake—in my reading, a large number of decidedly middle-income workers will pay much more and get less in benefits under the proposal).


My issues with the proposed Social Security reform were that they ultimately seemed to be just one more step down the path of institutionalizing it as a kind of uber-welfare program, rather than one that retains at least a modest cognizance of individual contributions to the system. But the real pushback on Social Security reform seemed mostly of the type that has staved off serious discussion for decades 2; to wit, the program is not REALLY in trouble, because it can keep paying benefits for a long time with no changes at all (clearly Social Security isn’t hemmed in by the accounting rules that have been brought to bear on the funding premises of defined benefit pension programs).

Regardless of this proposal’s fate (or its inevitable progeny), sooner or later we all know that the “normal” retirement age will be lifted, the rate of FICA tax withholding imposed will be raised, and more of the benefits paid will be taxed. Like my exercise regimen, the longer we put that off, the bigger the changes will have to be.

The implications for workplace benefit programs that would be sheared of much of their current tax-advantage are more complex. Now, I’ve certainly had in mind the tax preferences accorded my pre-tax contributions when I make them (and the future of tax rates as I begin to slide some into my Roth account)—and, if I’m reading the recommendation correctly (and there’s less than a paragraph of the 66-page report devoted to this3), the individual limitations would still allow most workers to save at the pace they do at present (there’s also a call for an expansion of the Savers’ Credit in the report).

The presumption by some industry advocates was that once the tax preferences for employers sponsoring the programs were removed, employers would no longer sponsor the programs. Also, that the aforementioned change, along with the limitation of tax preferences for individual savings to the lower of $20,000 or 20% of income would, in the words of the American Society of Pension Professionals and Actuaries (ASPPA), “effectively eliminate employer sponsored profit-sharing plans, shifting responsibility for retirement savings to workers.”

Indeed, one has to wonder: If the federal tax incentives for sponsoring workplace retirement (and health care) programs were removed, would employers still sponsor the programs?

The answer to that question is key because, while some of the changes advocated by the proposal might have unforeseen consequences 4, I’m reasonably certain that if employers don’t continue to sponsor these programs, private retirement savings will almost certainly go on a crash diet.

—Nevin E, Adams, JD

1 On an unrelated note, the editor in me was completely perturbed by the Commission report’s misspelling of “Pension Benefit Guarantee Corporation” (it’s “Guaranty”). Perhaps a Freudian slip?

2 Many opponents this time around claimed that, since Social Security doesn’t technically contribute to the deficit, it shouldn’t have been on the table for consideration by this particular commission.

3 You can read the report at http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/TheMomentofTruth12_1_2010.pdf

4 In all likelihood, this effort was doomed from the beginning. The problem it is trying to solve—a $13 TRILLION deficit—is daunting both in its size and scope. Not that the proposal claims to solve the whole problem; rather, it just takes a good “whack” at it (a whack in this case being $4 trillion in savings, through 2020). To get to that result, the proposal cuts a broad swathe through the nation’s tax system and structure; calls for caps, though not cuts, in discretionary spending (albeit at 2011 levels and not until 2012); calls for a near doubling in the federal gasoline tax; and a three-year freeze (though again, no cut) on federal worker pay, among other things.

"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

Decision Decisions

As a parent, you spend a lot of time telling your kids what to do, and perhaps more time than you think you should convincing them that it was their idea. If you’re lucky, you get to watch them make the “right” choices on their own—and to see them turn out well in the end. What you really try to avoid doing, certainly as they enter adulthood, is to make those decisions for them.

With defined contribution plans, over the last three decades or so, mostly we told workers what to do (or at least what people very much like them should do). And, despite a lot of hand-wringing to the contrary, most did. There were, of course, “holdouts”—a stubborn and/or inattentive group that resisted those entreaties, at least up until the point at which we did the right thing “for” them by automatically enrolling them in these programs. One might have thought that their resistance was thoughtful, perhaps principled, and maybe economic—and yet, survey after survey shows that those who were defaulted in stayed there. Were they lazy, afraid to make the wrong decision, unable to make any decision, or merely inattentive? Perhaps all of the above. Regardless, the debate about whether we should “impose” on them our sense of the right thing to do—to make that decision for the “recalcitrant” minority—would seem to be over.

The New Frontier

The new frontier in participant decision-making appears to be retirement income or, more precisely, helping individuals make arrangements for a suitable stream of income post-retirement. There is a general—and perhaps increasingly pervasive—sense that the solution to this challenge is already at hand (or could be with a tweak here and there): the annuity.

That assumption was in evidence last week at a presentation by a panel of behavioral finance academics at an event sponsored by Allianz (1). As part of its response to the Labor Department’s RFI on retirement income, Allianz had worked with the inimitable Schlomo Benartzi to assimilate a wide range of behavioral finance techniques to better understand participants’ reluctance to embrace annuities (at least in large numbers), and to help remedy “the annuity puzzle” (yes, it even has a name, apparently). Certainly from an academic perspective, there is no valid reason why an individual seeking a dependable stream of income in retirement wouldn’t take advantage of a product that purports to do just that. And yet, in the “real” world, individuals continue to defy those expectations.

All of which, to my ears, began to beg the question, Should we be helping participants to do the “right” thing about retirement income, as we did about retirement plan enrollment? Should we be making that decision for them as well?

It is an idea that is already “out there,” and one that seems of interest to the Obama Administration. Certainly there is a concern that many take their multiple defined contribution distributions between “now” and whenever retirement finally occurs in cash and deploy them for purposes other than retirement. This “leakage” from the system almost certainly depletes the accumulative effect of retirement savings for many younger and lower-income workers, leaving them to literally start over at their next place of employment (there is some evidence that larger balances accumulated by older workers are more routinely rolled over into tax-advantaged vehicles such as an IRA).

Which again leads one to ask, what WOULD be the harm in letting a default mechanism make the “right” decision for them, certainly so long as they could opt out? Hasn’t our experience with automatic enrollment shown not only that people are willing to let good decisions be made for them, but that they appreciate it as well?

We once resisted automatic enrollment as a design choice for reasons that seemed just as daunting: We didn’t know the “right” deferral percentage, weren’t sure how it should be invested, worried that it would lose value between the time it was withheld and (potentially) returned, and were bothered by the potential conflicts between state wage law and federal directives. The Pension Protection Act effectively resolved those issues, provided a structure for a valuable safe harbor protection, and yet managed to avoid mandating its approach. As a result, it’s more likely than ever that more savers will have more savings to manage at retirement, perhaps for longer in retirement, than would otherwise be the case.

Now, for most situations at present, the retirement income amounts involved may well be too small, the products available too expensive and/or complicated, the protections for employers and participants alike too vague, the portability and/or access to the funds frustratingly problematic. And, let’s face it: Current annuity designs (2) don’t really come in a convenient “trial size.”

Still, IMHO, we need to focus on creating workable, sound default decisions—because the alternative for many until we do will be making decisions by default.


—Nevin E. Adams, JD

(1)All in all, it was a fascinating presentation, and the report summary that accompanied it is well worth a read (see “Annuities Get a Behavioral Finance Makeover” ). Those reports included notions that workers, and especially older workers, pay too much attention to recent stock market movements, suffer from a “hyper” aversion to risk, and, after their mid-50s supposedly have a particularly tough time making complex financial decisions. All of which purported to explain not only why workers don’t make good investing decisions at retirement, but perhaps even to suggest that they wouldn’t want to (ironically, one study indicated that, given the opportunity to make an active decision to purchase an annuity, a surprisingly robust 49% did).

(2)For the record, I’ve no particular affinity for the annuity concept per se vis-à-vis an alternative that provides the reliable stream of income at retirement for a reasonable price, and no reason to think that an adviser-led participant solution couldn’t compete very effectively with an annuity, much as an adviser-led investment program can do as well (and perhaps better) as a qualified default investment alternative. Of course, every participant doesn’t have access to an adviser, and many don’t have accounts large enough to warrant those attentions—and we need solutions for those participants as well.

Cynic’s “Cull”

I have always taken seriously the notion that news and information should be presented “straight”, and without commentary.

But there are times when it’s hard not to just scratch your head and say “huh?” or laugh out loud at some of the stuff that comes across our news desk.

Here’s a (somewhat cynical) sampling from just the past couple of weeks:

CONFIDENCE MIEN? A nationwide survey by Citi and conducted by Hart Research Associates found that 44% of investors report being confident in their ability to retire in financial security as they had planned (said another way, that’s nearly half who DO feel that confident) . More than a third (36%) said they might need to adjust their plans (so, do two-thirds not see any need to do so?), and (a mere) 16% said they are not confident in their ability to retire in financial security. Must be a lot of rich uncles out there…MORE

“NOTHING” DOING. Throughout one of the most stressful and volatile markets in memory, the vast majority of participants did exactly what they always do – nothing (though admittedly sometimes that’s the best thing to do). MORE

OUTSIDE INFLUENCES? Those with a workplace retirement plan are (also) more likely to be saving OUTSIDE of work (66% versus 57%, according to Transamerica). MORE

AVERAGE SAYS? Morningstar says that the 3.8% average target-maturity fund return in the first quarter was slightly below the 4% return during the fourth quarter of 2009 (what does an average of so many disparate offerings tell you, anyway?). Read MORE

FAMILIAR PHASES? MetLife reports that just over a third of plan sponsors say they are unfamiliar with at least some of the particular mechanics of how stable value works. (So apparently two-thirds are familiar with ALL of the mechanics?). Read MORE

CONTROL GROPE? Controlling benefits costs is now the top benefits objective for employers, edging out employee retention for the first time since 2006, according to MetLife. (Is that because costs are so high, or because these days folks aren’t worried about keeping workers?) MORE

WORK “OUT?” A recent report from Hearts & Wallets suggests a growing number of Americans now think of retirement not as when their portfolio reaches a certain level of assets, but when they are no longer able to find full-time employment (here’s hoping the former doesn’t come up before the latter is able to support that “decision.”). MORE


“FREE” FALL? (Still) leaving money on the table; Hewitt Associates notes that more than quarter of participants did not contribute enough to their 401(k) to receive their full employer match in 2009. MORE

STABLE, VALUED? Who needs diversified; While Hewitt Associates notes that premixed portfolios (including target-date and target-risk funds) now (finally) make up the largest portion of employees’ asset allocations (24.7%). The second-largest allocation was in GIC/stable-value funds (17.1%). MORE

KID "STUFF". More than four in 10 so-called “sandwich generation” parents (41%) continue to provide at least some financial support to their young adult children, according to the 2010 Families & Money Survey by Charles Schwab & Co., Inc. The biggest worries for mid-life parents are not being able to retire (29%), outliving their retirement money (22%) as well as not saving enough (22%). A distant fourth - the worry that their children won’t become financially independent (11%). (Personally, I’d be worried about not being able to retire BECAUSE my kids might not become financially independent). MORE

“UNDER” COVERED. A Centers for Medicare & Medicaid Services (CMS) report on the new health care reform law released Friday estimated that 1.4 million fewer Americans will be enrolled in employer coverage as a result. That’s a net number, by the way. The report goes on to note that about 14 million people may lose employer-provided coverage due to a variety of reasons, including more low-wage workers moving to an expanded Medicaid program and some employers, especially smaller companies and those with low average salaries, being “inclined to terminate” coverage (of course, no one knows exactly how this will play out (I suspect this is a conservative estimate), but IMHO 14 million losing their current employer-based coverage, while (ostensibly other) employers will be picking up (another) 13 million seems like a lot of disruption). MORE

So – what do you think? Did I miss any?

- Nevin E. Adams, JD

Facts In Circumstances

One of the things I have always enjoyed most about this job is the access to information—not only from our own research, but from any number of academic and professional organizations. It’s a lot to keep up with, of course, but it’s a great tapestry from which to construct a sense of where things are going, and what things need to get going.

There are, of course, things to be wary of. For example, surveys conducted on behalf of organizations supportive of a particular view—that suggest that most people agree with that view—are an obvious eyebrow raiser. Studies based on samplings that are limited in size or scope aren’t inherently flawed, but should always be taken with a grain of salt (for example, a survey of large plans isn’t always illustrative or predictive of the behaviors of smaller programs). My personal favorite: “studies” by the purveyor of a particular good or service that indicate that what people really want is—more of that particular good or service.

But there’s another kind of survey that can sneak up on even the most discerning—the survey that confirms what you already believe.

There was an example of that just about a month ago when Urban Institute researchers Mauricio Soto and Barbara A. Butrica, who did the study for the Center for Retirement Research at Boston College, reported that employers with auto-enrollment had match rates about 7% below their non-auto-enrolling counterparts (see “Auto Enrollment Could Lead to Reduced Match”)--and from that finding, drew a not-unreasonable conclusion—that automatic enrollment could lead to situations where employers reduced their matching contributions.

And so it might. Generally speaking, automatic enrollment leads to more participants and, generally speaking, more participants leads to more matching dollars and, particularly for cash-strapped employers, more matching dollars can be a problem—a problem that could certainly result in a reduced (or suspended) match. Moreover, while matching contributions have often served as valuable participation incentives, in an era of automatic enrollment, those incentives might well play a different role, a role at a different level or, in the most extreme case, no role at all(1).

Now, it really doesn’t require a leap of faith to accept the premise of the study. And, if you’re like most people in our business, you probably saw the headline, skimmed over the results, and filed it under unintended plan-design consequences—or maybe even “bad things about auto-enrollment.” However, there’s a problem: Last week, the Employee Benefit Research Institute (EBRI) put out a report that claimed exactly the opposite; that, in fact, automatic enrollment has led to a HIGHER rate of match, at least among large plan sponsors (see “Study Finds Auto-Enrollment/Higher Match Link Among Large Plans”) (2).

In ordinary circumstances, we might be left to draw our own conclusions about two studies from reputable sources that seemed to draw two such widely disparate conclusions. This time, however, the folks at EBRI not only acknowledged the disparity, they offered insights into those differences. According to EBRI, the CRR/Urban Institute data was based on match rates constructed by the researchers, not actual rates of match—and then, this inferred rate was matched (no pun intended) against a separate listing of plans to determine which had, at some point, adopted automatic enrollment—though when that had been adopted vis-à-vis the match changes (if any) was not identified.

The bottom line: The conclusion drawn in the CRR/Urban Institute report (3) wasn’t illogical, but it was apparently based on such an oddly concocted methodology that, IMHO, it wasn’t worth the paper it was printed on. Consequently, when all is said and done, it doesn’t really add much to our insights about matching contributions and employer decisions—but it surely reminds us that we must always be careful not to jump to factual conclusions that, however reasonable, aren’t supported by the facts.

—Nevin E. Adams, JD

(1) See “Miss Match,” PLANSPONSOR Magazine

(2) The plans in the EBRI sampling weren’t exactly just increasing their 401(k) match, of course. They were also making changes to the defined benefit plans, and in some cases freezing their defined benefit plans while increasing their 401(k) match. More information is available HERE

(3) In their defense, the CRR/Urban Institute qualified their conclusion by saying that their study “suggested,” rather than established, a relationship between automatic enrollment and the matching level. That, however, is a nuance that is almost surely lost on most who read the report, including those who write about their conclusions for a broader audience.

“Gold” Mettle

Memories of the 2008 Olympics are fading fast, but looking back I was most struck by the American team’s performance in the 400 freestyle relay.

That’s the one where Jason Lezak, 32, came from out of nowhere in the final leg to win the gold for his team. As incredible as that finish was (that he managed to take it from the team that was “talking trash” ahead of the event was even more satisfying), I was most struck by another statistic from that event; while the top five teams all finished under the previous world record time, two of them (Italy and Sweden) didn't even get a medal.

Watching that event unfold – particularly the top two finishers in the lanes adjacent to each other – you could see how the strong performance of each team – of every team in the race – served to spur each athlete to what may have been their best performance. That it wasn’t enough on that particular night to win a gold medal in no way diminishes their accomplishment – but it says something about how the best can inspire us all to new heights.

That is why, in 2005, we launched our Retirement Plan Adviser of the Year award; to acknowledge "the contributions of the nation's best financial advisers in helping make retirement security a reality for workers across the nation." It has always been our goal to bring to light the very best practices of the nation’s very best advisers (and adviser teams), and in so doing, to set – by your example - new standards for excellence in dealing with workplace retirement plans. One need look no further than the advisers that have been honored with that recognition to appreciate the impact.

Today it is both my honor and privilege to launch the nomination process for our fifth annual campaign to acknowledge the contributions of the very best financial advisers in the nation, both individuals and teams.

Impact Statement

The criteria that underlie the award are simple but meaningful; we want to recognize advisers who make a difference through increasing participation, boosting deferral rates, enhancing asset allocation, and/or providing better programs through expanded service or expense management. However, as we acknowledged a year ago, those criteria also underlie the Pension Protection Act’s designs for defined contribution plans. Consequently, while those objective standards will continue to establish a foundation for excellence, this year we will be placing an even greater emphasis on the evaluations of plan sponsors, the quality of consultative materials, leadership in the industry, and transparency of revenue-sharing practices. This year we hope, for the first time, to highlight specific excellence in working with 403(b) and 457 programs.

Once again this year we will acknowledge the finalists in PLANSPONSOR magazine, as well as PLANADVISER, and profile the winners in early 2009. The finalists also will be recognized at PLANSPONSOR’s Annual Awards for Excellence celebration in New York City.

There is nothing like tumultuous times to highlight the value of, and reinforce the need for, expert help for plan fiduciaries. It is also the kind of challenging environment that tends to separate the chaff from the wheat—that sorts out the committed from the merely intrigued. And, yes, it surely plays to the advantage of a profession dedicated to helping plan sponsors construct the right programs, and participants make the best of them.

While these awards are designed to recognize financial adviser excellence, we trust the standards they embody will continue to provide a source of inspiration for those who make a difference every day. As always I look forward to getting to know you, and your practices, better through this process.

Irreconcilable Differences

Last week, the Department of Labor took another step toward finishing another piece of unfinished business.

It did so by proposing regulations necessary to implement (in confidence, anyway) the provisions of the Pension Protection Act (PPA) dealing with investment advice offered to participants under the auspices of a fiduciary adviser.

For the most part, the proposals (see “EBSA Clarifies Investment Advice Regulations”) seem fairly unobtrusive—if not downright “squishy” (more on that in another column). And, like the recent proposals on fee disclosure (see “IMHO: No One (Else) To Blame”), most of the 129-page document is spent outlining the details of the proposal’s cost/benefit analysis ($10 billion, in case you were wondering—$14 billion in benefits versus $4 billion in implementation/compliance costs). So, if you were having trouble working up the courage to wade through the PDF, take heart—the meat is found in the first 35 pages (with the occasional reference to a glossary at the back).

I was about halfway through the document (yes, the whole thing), when the response from Congressman George Miller (D-California) hit my inbox. Now, I wasn’t surprised to find that Miller, Chairman of the House Education and Labor Committee, took issue with the proposal; it’s an election year, after all. But Miller didn’t just criticize the proposal, or say that it didn’t go far enough, as he has on issues like fee disclosure (see “Miller Fee Bill Cruises through House Committee”). No, he called the proposal “nothing less than a boon for Wall Street and corporate executives” and urged the DoL to “immediately withdraw these harmful proposals.” And then he took a final swipe, noting that, “[i]n its final months in office, this administration has developed a disgraceful pattern of sneaking in last-minute regulatory changes at the behest of special interests” (see “Miller Slams DoL Advice Proposal”).

Setting aside for a moment the contents of the proposal, it’s not like the DoL just rolled out of bed and decided to create some guidelines for investment advice. The PPA set out a lot of new rules and plan design opportunities and then—prudently, IMHO—left fleshing out the details on things like participant notices and, yes, fiduciary adviser investment advice to the ministrations of the Department of Labor. Legislation that, admittedly, is now two years old—but one can hardly argue credibly that the DoL hasn’t been kept busy trying to fulfill the “to do” list created by the PPA.

The reality is that the investment advice provisions of the PPA were among its most controversial —that they even made the final cut was something of a miracle or mistake, depending on your perspective; that the areas of gray left were so abundant perhaps an implicit acknowledgement of the inability to balance two very opposite views. Doubtless there were (are?) those who hoped those provisions would simply atrophy on the vine for want of attention.

Of course, the heart of the controversy lies in the potential, if not inherent, conflicts of interest that arise when advisers offer advice on investments that provide compensation to those same advisers. Some, of course, believe that those conflicts can never be surmounted, or at least that they cannot be surmounted by every adviser every time. Others believe that the problem can be overcome by a combination of process structure, disclosure, and oversight.

Whether or not the PPA’s broad outline—or last week’s DoL proposal—is sufficient to provide the latter will remain a point of debate, IMHO—except for those who will never reconcile themselves to the notion.

- Nevin E. Adams, JD

The End in Mind

Having spent three days immersed in PLANSPONSOR’s second annual DB Summit, I was struck by just how relatively “easy” participant-directed plans—be they 401(k), 403(b), or 457- are.

Now, I hope you picked up on the use of the word “relatively.” I wouldn’t suggest for a minute that participant-directed programs don’t have their challenges. If the concept of saving is simple enough, the science of investing, compounding, and tax-deferral presents daunting intellectual obstacles for many. Even expert practitioners struggle with notions of “reasonable” fees, appropriate glide paths for target-date funds, and the applicability of QDIA regulations in the “real world.”

Over the years, our industry has worked to make participant-directed programs more accessible to participants. More recently, we have accommodated those who don’t want that access (for whatever reason)—or those who prefer to hire experts (or both)—with an assortment of automatic plan design features.

Meanwhile, IMHO, defined benefit designs have gotten more complex. Ironically, alongside the very Pension Protection Act provisions that have yielded such clarity to future defined contribution designs, we have managed, in a number of key areas, to take already convoluted calculations, turn them on their head, and introduce several new variables (several of which are, just weeks ahead of their implementation, still undefined)—all on results that must now sit up high and prominently on corporate accounting statements.

If their design is complicated, there is nonetheless a remarkable clarity of purpose to defined benefit pension plans, IMHO, and one need look no further than their name. The purpose of those traditional pension plans is imbedded in their very name—“defined benefit.” By design, plan sponsors need to project the ultimate benefit to be paid—and then figure out a way to pay for that. They need to consider how long people will live and what their pay will be in the distant future, project potential investment returns, consider the interest rate environment, and how much money has already been put aside for that purpose. Defined contribution plans, on the other hand, define only the amount(s) being contributed, not that ultimate benefit. And yet, by near-unanimous acclamation, the “results” of these programs—the benefits they provide—will define the financial security of our retirement.

Much of the impetus for the enactment of the PPA—and in no small part, many of the potentially draconian funding and reporting requirements contained therein—was the product of concerns that the benefits promised were not being adequately funded, and that, ultimately, those commitments would be “dumped” on the federal government (in the form of the nation’s private pension insurer, the Pension Benefit Guaranty Corporation (PBGC). Those PPA-imposed strictures, in turn, have led a growing number of employers (though by no means as many as the headlines would lead one to believe) to rethink those commitments.

One can only wonder what might happen if we were to impose on individual workers and their defined contribution plans what we have already imposed on those defined benefit programs…a funding requirement sufficient to provide a promised benefit, rather than simply restricting how much money can be contributed to these programs.

What if we began—with the end in mind?

- Nevin E. Adams, JD