Match vs. Defaults

Which is more powerful—a generous match, or a high savings rate default? 

As it turns out, Christmas Eve brought us a new white paper with the fairly innocuous title, “The Impact of Employer Defaults and Match Rates on Retirement Saving.” Indeed, there have been plenty of surveys (and tons of data) that speak to this issue (many of which are cited as references in the paper)—but underneath that bland title the authors take on an intriguing question, specifically how, and how differently, the deployment of specific plan design features—the employer match, or default enrollment—impact retirement savings.

With regard to the former, there’s been plenty of real data to buttress the notion that the employer match acts as a virtual target for retirement savings—with employee contributions clustering around those like moths to a flame, regardless of the savings needs or income wherewithal of the participant. Similarly, we’ve long—but even more so since the advent of the Pension Protection Act of 2006– seen the dynamic impact that default savings rates—making individuals “opt out” rather than sign up—for retirement savings routinely produce participation rates north of 90%. 

Now, these plan designs have long been seen by employers (and those who support them) as positive forces to encourage workers to avail themselves of these critical benefits. On the other hand (and somewhat cynically), both can be seen as devices to produce retirement deferral rates sufficiently high to permit retirement plans to pass the muster of the various nondiscrimination tests to which they are subjected. And let’s face it, both carry costs for the employer(s) sponsoring the program. Indeed, if there is a shortcoming to these mechanisms at all it is that employees have seemed to assume they represent an answer to the “how much should I save” question, rather than simply being a function of how much the employer chooses to spend on benefits.

‘Better’ Idea?

As it turns out, the researchers (David Blanchett of PGIM DC Solutions, Michael Finke of the American College of Financial Services & Empower’s Zhikun Liu) have an answer to the question as to which is “better”—well “better” meaning the plan design that results in the highest employee savings rates, highest acceptance of the default investment, and lowest disparities in savings rates by income—that would be the one that uses a high default rate and a lower employee match.

 More specifically, based on a review of the activities of approximately 157,000 participants[i] who recently enrolled in an employer-matched 401(k) plan, they conclude that “a higher default rate has the largest impact on employee savings rates.”

Not only that, they caution that “plans with low default rates (say 3% or 4%) that match a high percentage of employee earnings induce higher-income participants to actively move away from the low default savings rate, resulting in a wider savings gap between higher- and lower-income employees.” On the other hand, setting a high default means that “fewer move away from the default savings rate resulting in higher and more equal savings rates among employees.” 

Other Considerations

There are some other considerations. They note that low default rates and high match rates also result in significantly fewer employees remaining in the default investment, and that while “raising the default savings level should increase savings rates for new participants, it won’t necessarily help existing participants.” As a consequence, the researchers comment that “plan sponsors may also consider different kinds of reenrollment or plan-reset options to utilize the positive impact of default savings rate increase. Additionally, plan sponsors should also consider including provisions for automatic savings rate increases to further boost participant savings levels”—because the one thing we know about most retirement savers is that—like Newton’s 1st Law of Motion—an object at rest remains at rest. And that’s what happens to most participants defaulted at a specific saving rate and in a specific investment—they stay there.

They also note that a high match appears to motivate workers to make an active decision to save more only when placed in a low initial default rate. Moreover, they found that a higher match motivates higher-income workers to save more, but only motivates lower-income workers who are defaulted (at the aforementioned 3% or 4% savings rate). They found that, when defaulted at a higher savings rate, the match rate only motivates high earners to increase their savings rate.

All in all, the match seems to matter to those who are more actively involved with the decision to join the plan—and those who are defaulted into the plan, in general, don’t seem to be those. There’s also a sense that more highly compensated individuals are more aware of, and active in, maximizing the match—though that may create nondiscrimination testing issues since less highly compensated workers seem to be more inclined to simply stay with the default rate.

Ultimately, of course, what matters is the default rate and the terms of the match; and with any luck at all, it’s not either or, but both!

- Nevin E. Adams, JD

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[i] Not that it matters, but the paper specifically cites “the second largest recordkeeper for retirement plans in the United States, which services over 12.8 million DC plan participants across approximately 67,000 retirement plans as of the third quarter of 2021”—Empower.

A Pension Protection Perspective

It’s hard to believe, but the Pension Protection Act of 2006 will be a decade old next month. And it’s probably done more good for the nation’s retirement security than most realize.

The PPA drew its name from the portions targeted at shoring up defined benefit plans (and PBGC funding, I suppose), though at the time I remember most people thinking it was an ironic name, in that it may have been intended to secure the pensions that were already in existence, but might well accelerate the demise of some on the cusp, and in any event was unlikely to help spur any new growth in that area. Some went so far as to call it the Pension Destruction Act.

Indeed, at a recent panel session featuring the perspectives of a number of the Hill staffers who shepherded the at times controversial legislation through its passage, the emphasis was largely on the DB aspects that, though well-intentioned, had been overwhelmed (if not undermined) by the onset of the 2008 financial crisis and the “historically low” interest rate environment that continues to pressure pension funding to this day.

DC Developments

In contrast, the aftermath of the PPA on the defined contribution side has been nothing short of extraordinary. Sure it was all voluntary – the use of carrots like safe harbors for automatic enrollment, rather than the sticks that accompanied the DB provisions. And yet, seemingly overnight, and without a government mandate or regulatory imperative, the decades-old concept of “negative election” (now “rebranded” as automatic enrollment) became part of every credible retirement plan advisor’s toolkit.

Without relying on a mandate to impose its will, nearly overnight the paradigm on automatic enrollment shifted. Sure, it’s still far more common among larger employers than those downstream – and yet, those larger plans are where most participants are. And if the adoption of contribution acceleration has lagged behind automatic enrollment, it is nonetheless far more advanced than it would have been in the absence of the PPA.

For my money, the biggest long-term positive impact of all may have been the rapid expansion of the qualified default investment alternative (QDIA) as the plan default investment option. One need look no further than the millions of dollars in retirement savings that have been channeled into a range of professionally managed asset allocation solutions to appreciate the impact that change has had. All have significantly and positively moved the needle in helping enhance the ultimate financial security of thousands, if not millions, of American workers.

‘Staying’ Power

However, perhaps the most-overlooked, if not underappreciated, aspect of the PPA was that it made permanent the retirement savings incentives enacted under the Economic Growth And Tax Relief Reconciliation Act of 2001 (EGTRRA), including annual contribution limits for IRAs, Roth 401(k) plans, enhanced portability of retirement benefits, and reduced administrative burdens on plan sponsors. Without that support, all the gains made on those provisions would have fallen back. The PPA also made the Saver’s Credit permanent, as well as resolving legal uncertainty surrounding cash balance plans, and requiring DC plans to permit employees to diversify out of investments in employer securities if the securities are publicly traded.

The work is not done, of course. Innovative retirement income offerings continue to be introduced, but can’t seem to find traction, the focus on outcomes (these days generally under the banner of financial wellness) is still nascent, and the challenges of compliance with the DOL’s new fiduciary regulation lie ahead.

With so much progress made – and yet so much yet to be achieved – it may seem naïve in this exceedingly unusual election year to hold out hope that the nation’s legislative bodies could put their heads together and work together as constructively as they did just a decade ago.

But one can (still) hope.

- Nevin E. Adams, JD 

The Deification of DB-ification

I recently stumbled across another of those “DC plans are becoming like DB plans” articles — you know, the so-called “DB-ification” of 401(k)s? This is all supposed to be a good thing, of course, but is it?

We are, of course, routinely told that defined benefit plans do (or did) a better job of providing adequate income in retirement than defined contribution plans — though we aren’t generally reminded that that assumes that workers have actually managed to accumulate service credits sufficient to vest in those benefits, and that those programs are properly funded.

However, this interest in emulation of DB plans by DC plans is a relatively recent focus, fueled in no small part by the success of Pension Protection Act-engendered trends, primarily auto-enrollment (after all, nobody asks people to fill out a form to be covered by their DB plan) and asset allocation fund defaults (ditto on asking participants to choose the investments in the DB plan). But while it’s said that imitation is the sincerest form of flattery, it’s not like those auto-designs were actually copied from DB plans.¹

Don’t get me wrong — anything that turns employees into participants (and automatic enrollment surely does that) and helps them make better investment decisions (and, generally speaking, asset allocation solutions fulfill that need) has to be a good thing. But to suggest — as many of these reports do — that these trends are essentially helping DC programs mature into their more “responsible” DB counterparts seems a gross misinterpretation of what is going on.

If we’re really looking to bring the best of the DB approach to DC plans, we need look no further than the definition of a defined benefit. Defined benefit plans are funded — at least, they are supposed to be — with an eye toward the benefit that will be paid out. As the name suggests, the benefit is defined — and the decisions that are made about how much to contribute to the plan and how those contributions will be invested are also done with that in mind.

Defined contribution plans, on the other hand — even the “automatic,” DB-ified ones — have an entirely different focus. They are (still) mostly focused on how much participants can afford to put into them (or can be forced to put into them without them opting out), not how much you need to get out of them. Oh, sure, the PPA’s safe harbor automatic enrollment — and a growing number of DC plans — includes a provision to increase those contributions on an annual basis. But is it any replacement for the kind of true funding discipline that a defined benefit focus represents? More importantly, will it be enough to provide the same kind of retirement security that the DB system promised?

Let’s not kid ourselves — when they worked (and they didn’t always), DB designs were “better” not because they made decisions for individuals (though that helped), but because somebody else was generally doing the funding,² but more importantly doing so based on specifically targeted outcomes.

We’re not likely to shift the funding paradigm — but there’s nothing to keep us from emphasizing the focus on the ultimate benefit, the outcome that we hope to achieve — and the discipline to fund those DC accounts so that they can provide it.

- Nevin E. Adams, JD


Footnotes

1. Another DB “innovation” – the annuitization of the benefit — is certainly talked about (though not yet widely adopted) in the context of DC plans. Ironically, the trend in DB plans seems to be to replace that with the lump sum option so prevalent in DC plans.
2. Another significant DB/DC difference — and one that tends to get glossed over — is that DB plans not only don’t ask employees to sign up or make investment decisions — they — at least the ones in the private sector — generally don’t ask participants to fund them. Oh, sure, that DC plan frequently comes with a match, but the primary source of funding for most of these programs lies with the participant.

Why Doesn’t Every Plan Have Automatic Enrollment?

For all the good press and positive results that automatic enrollment gets, one might well expect that every plan would embrace it. And yet today, nearly a decade after the passage of the Pension Protection Act, many still don’t.

So, why don’t all plans use automatic enrollment — and what can you do about it? Here are the primary objections that I have heard from plan sponsors — and some possible responses.

Cost.

The simple reality is that automatic enrollment “works,” which is to say that overnight, it has the very real potential of transforming a long-standing plan participation rate of 67% or 75% to 95% or greater.

The other simple reality is that when you take that likely increase in participation rate (generally from 70% to 95% or so), and then figure out the increase in matching dollars that would result — well, it can be a sudden budget jolt, particularly when you think about it applying to an employee population that is likely more tenured and highly compensated.

Personally, I’ve never seen much response to the threat that plan sponsors who aren’t attentive to the outcomes of the plans they provide will find themselves accounting for that decision in a court of law (remember when they were all going to get sued for not offering advice?). Nor have I seen the cost possibilities of adopting a stretch match offset the PR realities of imposing it.

For years, employers have struggled with the rising (and often annually rising) costs of benefits like health care. A number of larger employers have embraced the so-called “de-risking” of their pension obligations, in many cases trading the uncertain future obligations on their bottom line of their defined benefit pension in favor of a defined contribution alternative. But that has also had the effect of transferring a greater uncertainty about retirement to their workers.

RESPONSE: Today there is plenty of evidence to suggest that workers are increasingly concerned about retirement finances, and that those concerns are not only cutting into their productivity at work, but that, in a growing number of situations, their solution to those concerns (real or imagined) is simply to extend their working careers. And a growing number of CFOs recognize that those costs are real and growing — and can be mitigated by better retirement preparations by their workforce.

Some (still) view it as too paternalistic.

Like it or not, 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.

Indeed, inklings of this can be seen in the varied industry surveys that continue to find that, even when plans adopt automatic enrollment, they tend — by a margin of 2:1 — to apply it only to new hires, rather than 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.

While plan sponsors are understandably reluctant to rouse those “sleeping dogs,” it’s hard to imagine that they aren’t just as concerned about their retirement well being as those recent hires. Moreover, while the PPA doesn’t mandate going back to older workers, plan sponsors desirous of those safe harbor protections either have to, or have to be able to establish that they have.

RESPONSE: The ultimate solution, of course, lies in understanding that the reasons some newly eligible workers chose not to participate — or more likely made no choice at all — are the same reasons the not-so-newly eligible are still on the sidelines. For employers — particularly those who have already embraced the design on behalf of their new hires — the question remains: Shouldn’t you be just as invested in the retirement security of those who have made a longer-term commitment to you?

Safe harbor plans already have it covered.

Many smaller programs that might once have been willing to go down that route as a means of avoiding trouble with the nondiscrimination and top-heavy tests have since found the solace required in adopting a safe harbor design.

RESPONSE: Maybe nothing. If a safe harbor plan is already in place, well arguably, that’s just a different kind of automatic enrollment, though it doesn’t tend to show up in the adoption statistics.

Some fear it will reduce deferrals.

More accurately, it may reduce average deferrals. Indeed, the simple math of automatic enrollment is that you get more people participating, albeit at lower rates (at least until design features like automatic contribution acceleration kick in). Put another way, participation rates go up, and average deferral rates dip — at least initially. That might mean that some individuals do, in fact, save less by default than if they had taken the time to actually complete that enrollment form, or if they fail to take advantage of the option to increase that initial default. This is a line of thinking that gets picked up every so often by the financial press, generally by some writer looking to find a contrarian angle on automatic enrollment. And sure enough, the conclusion seems so striking that many seem to feel compelled to share those articles, rather than simply dismissing it as ill informed, if not uninformed.

RESPONSE. Remind them that those articles ignore the reality — borne out by the data — that many workers, and generally younger, less tenured workers, will be saving more because that initial savings choice was automatic. Those most likely to be short-changed by automatic enrollment are higher income individuals — who arguably ought to know better.

Concerns about administrative issues.

Even in this age of automation, it can be complicated to unwind payroll elections, and while the PPA outlined a series of provisions to make it easier to give workers the ability to opt out (an extended grandfathering period for them, and the ability for their employer to temporarily invest those monies in vehicles that wouldn’t lose value during that temporary period), it can still be a tedious, painful process (depending on whom you rely on for payroll and recordkeeping services).

RESPONSE. Sure it can be a hassle if it should come up — and we’re talking about somebody’s paycheck. On the other hand, so few opt out, the hassle might be more illusion than reality.

Some employers — especially smaller ones — know why employees aren’t contributing.

When you look at the survey data on automatic enrollment adoption, there is a wide gap between the largest employers (where automatic enrollment is relatively common) and the smallest employers. Of course, most industry surveys do a better job of capturing the activity among the former (those being the clients of the providers who produce those surveys) than the latter, so it’s easy to think that automatic enrollment is more prevalent than it actually is.

However, when you talk with smaller employers about the concept, it’s not unusual to encounter a very personalized resistance, because they: (a) have likely approached their workers individually on the topic; and/or (b) have heard directly the reason(s) why they are not participating. To them automatic enrollment is a particularly harsh approach, since it basically requires that they ignore or discount the reason(s) they have already been given.

RESPONSE: First, it’s worth confirming that they have, in fact, actually made those inquiries directly. Second, see how long it has been since that conversation. Circumstances change, after all — and that trusted worker who told them several years back why they couldn’t contribute, may now be embarrassed to change course. Finally, of course, automatic enrollment, particularly with the help of today’s default investments, makes it a lot easier to start saving — right.

What's Next?

The reality is that automatic enrollment won’t be appealing to every plan sponsor’s benefits philosophy or budget. But unless your plan participation rate is in the upper 90% range, the reality is that whatever you are doing to encourage participation isn’t as effective as automatic enrollment could be. And once you get people in the plan, just think what else you could be helping them with…

- Nevin E. Adams, JD

5 Things You Should Know About Target-Date Funds

In a remarkably short period of time, target-date funds have become an integral component of the typical 401(k) menu, and a growing share of 401(k) plan assets — particularly those of newly hired 401(k) plan participants — are being directed to TDFs.

Whether you are a plan fiduciary evaluating the TDF option(s) on your plan menu — or a 401(k) plan participant being defaulted into a TDF option — here are five questions to which you should know the answers about your TDF investment.

1. What is the ‘appropriate’ asset allocation?

This is the million-dollar question for target-date funds. At a high level, this is no more complicated than deciding what is the right mix of stocks and bonds, international and domestic, alternative investments and/or cash for investors at every stage of their investing life — or than picking the firm(s) that you trust to know what that right mix is.

2. How much of what is on your glide path?

The “glide path” sounds like a complicated concept, but it is actually nothing more than how the shifts in asset allocation take place over time. It is the path that these investments take your money on throughout your investing life. Still, for some funds — particularly newer, smaller funds — the asset-allocation strategies outlined in the fund prospectus or fact sheet may still be “aspirational,” may not yet incorporate all the specific strategies that the fund manager has in mind for that time in the future when the funds achieve a certain critical mass. You need to know what the targets are — and know if those targets are part of the current strategy.

3. Are the funds composed of proprietary offerings, or are they ‘open architecture’?

The “debate” over the relative advantages of open architecture versus proprietary offerings has long been part of retirement plan administration choices, and it is part of the target-date decision as well.

Those advocating the benefits of open architecture generally tout the ability to pick “best of breed” investment solutions (while readily being able to dump those that fall short), backed by the notion that no one firm can possibly be that best choice across every asset class. Those pushing proprietary choices take issue with that latter point, while pointing to the benefits of their intimate knowledge of their own product set — not to mention the relative cost efficiencies of a proprietary product. There is no one single right answer, but the determination should be part of your evaluation.

4. How much does it cost?

Target-date funds are often constructed as a fund comprised of other funds, and — particularly when a provider incorporates other funds in their offerings, they frequently charge some kind of fee for their expertise in putting together those other funds. This is a fee generally applied as some kind of basis-point charge in addition to the other, regular fees charged by the underlying funds. You will want to know what this charge is, if any, and consider it as part of the total cost of your selection. This fee is generally smaller (sometimes there is no extra charge) for proprietary-only offerings.

Beyond the aforementioned “wrapper” fee, TDFs — particularly mutual fund TDFs — will generally have all the same kinds of fees typically associated with retirement plan investments. Bear in mind that some of the fund allocations may include some relatively exotic asset classes — and those may carry higher expenses than you are accustomed to seeing. Additionally, you may find some retail share class funds included, even in institutional share class offerings. The bottom line: Keep an eye on the bottom line.

5. How should I measure ‘success’?

It wasn’t all that long ago that there were no benchmarks to speak of in this space (other than those constructed by the firms managing those funds). These days the passage of time, and the expansion of the market, have produced several credible benchmarks against which the performance of the funds can be evaluated.

But take note: The benchmarks can be as varied in their underlying philosophy and construction as are the funds themselves. That’s why it is important to first know what you believe about the approach, glide paths, and/or asset allocation before you pick the benchmark.

- Nevin E. Adams, JD

You may also want to check out the Employee Benefits Security Administration’s (EBSA) “Target Date Retirement Funds — Tips for ERISA Plan Fiduciaries” at http://www.dol.gov/ebsa/newsroom/fsTDF.html.

3 Things You Should Know About Automatic Enrollment

One of the most celebrated plan design features of the 401(k) era is automatic enrollment. Nearly as old as the 401(k) itself, once upon a time it was called a “negative election.” But regardless of the name, the concept has been extraordinarily effective at not only getting, but keeping, workers saving via their workplace retirement plans.

However, adoption of the design, after a surge in the wake of the passage of the Pension Protection Act of 2006, now seems to have plateaued. Moreover, current data suggests that, while automatic enrollment adoption has certainly had a positive impact on retirement outcomes, we’re not getting as much mileage from it as we might.

So, here are three things that plan sponsors — and others — should know about automatic enrollment.

1. You don’t have to default contributions at 3%.

Three percent was the standard default contribution rate for automatic enrollment plans long before the Pension Protection Act of 2006 incorporated it as part of its auto-enroll safe harbor. Originally cited in a now-obscure IRS regulation years before the advent of the PPA, in the years to follow, it was largely embraced because it was seen as little enough that it wouldn’t spur massive opt-outs by automatically enrolled participants.

With more than a couple of decades of experience under our belts (a third of that under the auspices of the PPA), we know a couple of things. First, that 3% is indeed too small an amount to spur most auto-enrollees to opt out. In fact, there have been any number of studies — and some real-world experience — suggesting that a defaulted contribution rate twice as high would produce very nearly the same result.

What many plan sponsors may not know is that while that the auto-enrollment safe harbor of the PPA calls for a minimum starting deferral of 3%, it is a floor, not a ceiling.

But another, and more important, thing that we’ve all known from the very beginning is that a 3% rate of deferral is not enough.

2. If you are going to default at 3%, make sure you accelerate the contribution rate.

Automatic enrollment and contribution acceleration have always been separate things: the former a decision made by the plan sponsor, with the participant having the ability to opt-out; the latter a voluntary decision by the participant, facilitated by the plan sponsor.

These two traditionally separate concepts were wedded in the PPA’s automatic enrollment safe harbor, and for a very sound reason: As noted above, a 3% deferral is not enough.

Current survey data suggests that plan sponsors continue to separate these two design choices, and that tells me two things: 

• most plan sponsors who adopt automatic enrollment designs aren’t doing so with an eye toward taking advantage of the PPA safe harbor; and
• while many plan sponsors are willing to make one monetary decision on behalf of their workers, they apparently aren’t nearly as willing to make two, however integral it might be to retirement security. 

3. Automatic enrollment isn’t just for new hires.

Despite our extended history with automatic enrollment, and the PPA’s safe harbor that contemplates its extension to all eligible workers, to date most plans — roughly two-thirds — that have adopted automatic enrollment have done so only for new hires. Over the years, I have heard a variety of explanations for this trend — anything from a hesitation to “suddenly” take contributions from long-time workers (who have ostensibly declined to take advantage of previous opportunities to join) to a general resistance to running the risk of stirring up trouble with existing workers.

However, to me, the most logical explanation is economic: Just take the likely increase in participation rate (generally from 70% to 95% or so) resulting from automatic enrollment, and then figure out the increase in matching dollars that would result, particularly for an employee population that is likely more tenured and highly compensated.

Little wonder that so many decide to “let sleeping dogs lie.” Though in all my years of experience working with 401(k) plans, I have never heard of even a single participant who objected to being automatically enrolled. On the other hand, I’ve heard dozens of stories of long-tenured workers who had, for a variety of reasons, put off signing up for their 401(k) — but who, when they finally were enrolled, were oh-so-very-grateful for that “start,” however delayed.

And that, perhaps as much as anything else, is something plan sponsors should know.

- Nevin E. Adams, JD

"Choice" Architecture - for Plan Sponsors

In recent years, the notion that the ways in which choices are presented to individuals — known as “choice architecture” — can influence their decisions, has been widely embraced.

Well before the advent of the Pension Protection Act of 2006, the retirement plan industry had acknowledged the positive influences of those behavioral finance techniques on overcoming, or at least countering, certain human behaviors.

Based on the evidence of several decades of adoption, we know that automatic enrollment — even with the ability to opt out — transforms voluntary participation rates of roughly 70% to near-unanimous participation. And yet, even with the structure and sanction of the PPA, today fewer than half of the roughly 7,000 plan sponsor respondents to the 2013 PLANSPONSOR DC Survey have implemented that design (large plans being significantly more likely to do so than smaller programs).

Even plan sponsors that have adopted automatic enrollment tend to do so with a default deferral rate that is almost assuredly too low to assure success for anyone (typically 3%, the rate specified in the PPA safe harbor) — which might not be so bad, but for the lagging implementation of contribution rate acceleration. The PLANSPONSOR survey found that only about a quarter (26.9%) did so. Even among the largest plans (more than $1 billion in assets), only about half (54.2%) “auto accelerate.”

And then there’s the inclination to automatically enroll only new hires. Industry surveys suggest that only about a third of auto-enrolling plans extend that to current workers.

Setting aside for a minute the reality that not every workforce is suited for the administrative rigor of automatic enrollment — and that many smaller employers have in place safe harbor plans that serve to automatically “enroll” workers via that safe harbor contribution — there are real, tangible, and often unacknowledged employer costs to undertaking automatic enrollment.  

Specifically, the transformative participation effects cited earlier frequently carry significant additional costs in terms of the employer match. The math of switching to a so-called “stretch match” — which seeks to ameliorate the cost issue by altering the rate of match (say by matching 25 cents on the dollar up to 12% of pay, rather than 50 cents on the dollar up to 6%) — may work, but workforces that have been accustomed to the latter formula will almost certainly see the former as a reduction in benefits.

Similarly, while PLANSPONSOR’s 2013 DC Survey found that three-quarters of the roughly 7,000 plan sponsor respondents said that it was either very important (41.1%) or important (36.8%) that their plan provide retirement income solutions to participants. Yet most do not offer any income-oriented products/services in their plan. That’s a disconnect, to be sure. But in view of expanding fiduciary concerns in selecting and monitoring those offerings, is it irrational?

Over the years, a lot of thought has gone into plan design features — choice architecture — that can help participants make better decisions (or, in some cases to make better decisions on their behalf). But policymakers and regulators, and the academics who sometimes advise them, tend to forget that the employer’s decision to keep, and to offer these programs in the first place, is also a choice.

A choice that the rules, regulations and limits bounding these programs don’t always encourage.

- Nevin E. Adams, JD

"Churn" Factors

British Statesman and Philosopher Edmund Burke famously commented that “”Those who don’t know history are destined to repeat it.”(1) Indeed, those with experience working with employee benefit plans, can attest to a certain déjà vu-esque quality amidst the recent discussions about tax reform, limiting deductions, and “capping” contributions. These, are, in many ways, old “solutions,”(2) albeit these days arguably applied to a new (or at least different) set of circumstances.

As the 113th Congress begins its work, and the Obama administration readies for a second term, it is perhaps not surprising that the nuances of employee benefit plans and their tax treatment might not be an area of expertise for many on Capitol Hill. However, for all the longevity in tenure frequently assumed regarding those in Congress, a review of the data shows just how much turnover has taken place.

For example, you might not be surprised to learn that no member of the current Senate was in office when Medicare, or even ERISA was signed into law. But, as EBRI President and CEO Dallas Salisbury noted recently for the EBRI Board of Trustees, just three of the current 100 members of the Senate were there when Sec. 401(k) became law, and only 10 were there when the Tax Reform Act of 1986 became a reality. Fewer than half of the Senate were in their current office when the Pension Protection Act of 2006 passed.(3)

The implications for policy making in the midst of that kind of turnover are significant for employers and employees alike. Moreover, in an environment where expanding the transferability of Roth 401(k) balances is positioned as a revenue-generating mechanism to stave off sequestration, it seems increasingly obvious that every item of potential revenue or cost savings will be viewed through a new prism of scrutiny, where the short-term cost of the benefit may well trump the long-term value. And, as the data above suggests, by many who come to these deliberations without the full understanding and appreciation that experience in these complicated matters—a “history”—can provide.

One of EBRI’s founding principles in 1978(4) was the acknowledgement that “an ongoing need exists for objective, unbiased information regarding the employee benefit system, so that decisions affecting the system may be made based on verifiable facts.” And, as EBRI approaches its 35th anniversary, it’s clear that that need for information, and its critical role in making thoughtful decisions, remains undiminished.

- Nevin E. Adams, JD

1) A century later George Santayana would write in his “Reason in Common Sense, The Life of Reason, Vol.1,” that “Those who cannot remember the past are condemned to repeat it.”

(2) In fact, a 1993 EBRI Issue Brief titled “Pension Tax Expenditures: Are They Worth the Cost?” cites a 1991 National Tax Journal article that observed, “Whereas the case for employer-sponsored pensions as an institution is strong, the case for a major tax expenditure is weak…given the demands on the budget, eliminating a tax expenditure that benefits a declining and privileged proportion of the population should be given serious consideration.“ See “Pension Tax Expenditures: Are They Worth the Cost?” online here.

(3) See chart above, which tracks Senate turnover, by party, since 1975.

(4) See Facts about EBRI, online here.

Starting (Over) Points

Earlier this week, an EBRI research report quantified the financial impact of setting a higher starting point for 401(k) default contributions—and it can be significant.

Most private-sector employers that automatically enroll their 401(k) participants do so at a default rate of 3 percent of pay,(1) a level consistent with the starting rate set out in the Pension Protection Act of 2006 as part of its automatic enrollment safe harbor provisions—but it’s a rate that many financial experts acknowledge is far too low to generate sufficient assets for a comfortable retirement.

EBRI has previously modeled the impact of automatic enrollment(2) (see “The Impact of Automatic Enrollment in 401(k) Plans on Future Retirement Accumulations: A Simulation Study Based on Plan Design Modifications of Large Plan Sponsors,” online here). In the most recent research, using EBRI’s proprietary Retirement Security Projection Model® (RSPM), the impact of raising the default contribution rate to 6 percent for younger workers (who might have 31–40 years of simulated 401(k) eligibility) in plans with automatic enrollment and automatic escalation was evaluated to see how many would be likely to achieve a total income real replacement rate of 80 percent at retirement.

As noted earlier, the higher starting default made a significant impact; more than a quarter of those in the lowest-income quartile who had previously NOT been simulated to have reached the initial replacement rate target (under the actual default contribution rates) would reach the target as a result of the increase in raising the starting deferral rate to 6 percent of compensation. Even those in the highest-income quartile would benefit, although not as much.(3)

But what about when those workers change jobs: Would they “start over” at the new employer’s starting default rate, or would they “remember” and carry their higher rate of savings at their prior employer into the new plan? The modeling actually looked at both those scenarios,(4) and found that 15–26 percent of the lowest-income quartile that would otherwise not have reached the target threshold under their existing plan-specific deferral rates would now do so at the 6 percent level, as would 13–22 percent of those in the highest-income quartile.

In life, “starting over” can be a painful, awkward process, as anyone who’s restarted a career or home can attest. But, depending on where you are starting from—and what kind of start you make—it can also be an opportunity.

- Nevin E. Adams, JD

(1) Which, it should be noted, also contemplates an annual 1 percent automatic escalation of that starting rate, up to a designated level. Neither the automatic enrollment nor automatic escalation provisions are mandated by the legislation, unless the plan sponsor wants to take advantage of the PPA safe harbor protections.

(2) One point that had been made clear in previous research was that some workers who were defaulted into a 401(k) auto-enrollment (AE) plan (without auto-escalation provisions) would continue to contribute at the defaulted contribution rate chosen, typically in the range of 3 percent of compensation. Traditionally, and in the absence of these AE provisions, many workers eligible for workplace retirement savings plans have voluntarily elected to start contributing at a 6 percent rate (a point commonly associated with the level of matching contribution incentive provided by employers). However, some participants in AE plans—who otherwise might have voluntarily chosen to participate at a higher contribution level—instead might simply allow their savings to start (and remain) at the default rate. As a result, they were likely contributing at a lower rate than if they had been working for a plan sponsor offering a voluntary enrollment (VE) 401(k) plan AND had made a positive election to participate.

(3) The modeling assumed actual plan-specific default contribution rates with (1) an automatic annual deferral escalation of 1 percent of compensation; (2) that employees opted out of that auto-escalation at the self-reported rates from the 2007 Retirement Confidence Survey findings; (3) that they “started over” at the plan’s default rate when they changed jobs and began participation in a new plan; and (4) that the plan imposed a 15 percent cap on employee contributions.

(4) Among other criteria, the modeling also considered auto escalation rates of 1 percent and 2 percent.

Rest “Room”

It should come as no surprise that the vast majority of plan sponsors who have adopted automatic enrollment have chosen to default that initial deferral at 3% of pay. No, that’s not the level at which most plans match deferrals, and it’s certainly not a level of deferral likely to produce sufficient retirement savings. It is, however, the starting deferral rate attributed to such programs under the auto-enroll safe harbor provisions in the Pension Protection Act (PPA). Coincidence? I think not.

Ironically, that same safe harbor provision requires that employers either go back and automatically enroll all eligible participants (giving them the ability to opt-out), or be able to establish that they did at some point (see “The Pension Protection Act: This Changes Everything”). Most providers, certainly pre-PPA, were unable to provide the requisite proof of those prior enrollments—and thus it would seem that most employers seeking the protections of that auto-enroll safe harbor would have re-enrolled all eligibles; and yet, surveys (including PLANSPONSOR’s own DC Survey) routinely show that only about one in three employers do so. In fact, twice as many choose to implement automatic enrollment only for new hires (see “IMHO: A Prospective Perspective”).

Now, when you look at the former finding and compare it to the latter, you can only draw one of two conclusions: either that most plan sponsor adoptees of automatic enrollment aren’t interested in obtaining the protections afforded by the PPA’s safe harbor, or they don’t understand that their approach doesn’t qualify.


There’s nothing wrong with opting to embrace automatic enrollment at a point in time and only applying that to employees hired after that date. Sure, you won’t garner the benefits of the PPA safe harbor, but most plan sponsors probably don’t “need” that (though they might well want it). Moreover, there are some very real financial consequences associated with automatic enrollment—survey after survey shows that very nearly every employee who is automatically enrolled stays in the plan. Depending on your match and current participation levels, that can add up to a lot of additional contribution dollars.

Oddly, as real as that financial impact is, that’s not the reason I most often hear from plan sponsors. Instead, they are (still) more inclined to suggest that the longer-tenured workers have had—and rebuffed—their opportunity to participate in the plan. Many plan sponsors remain worried that these longer-tenured workers will consider such “un-permissioned” actions to be some kind of personal affront. And yet, five years after the passage of the PPA, all I ever seem to hear are stories about how those more-seasoned employees are appreciative, even thankful, for finally being enrolled in the plan. It’s as though they heard the messages all those years, knew they should be doing something about retirement, but didn’t quite know how to get started.

There’s another interesting finding from PLANSPONSOR’s DC Survey, and it has held true for several years running. Asked about their motivation for adopting automatic enrollment, the vast majority—nearly two-thirds, in fact—say, “Our organization wanted to be more proactive in helping employees save.”

Perhaps it’s now a good time to help the rest of them.

—Nevin E. Adams, JD

"Access" Points

On Friday, the Department of Labor, as part of the White House’s Middle Class Task Force, formally unveiled a couple of initiatives.

The “new” one—and the one likely to capture the attention of the retirement plan community over the next several weeks—deals with investment advice for participants (see “DoL Proposes New Advice Rule”).

At a high level, the DoL has taken a major step back from the position it took in the final regulations on the subject put together—by the DoL—in 2008 before being halted, and then withdrawn last November by the new Administration (see “IMHO: Executive Order”). They also, IMHO, seem to have taken a step back from the admonitions of the Pension Protection Act of 2006 (PPA) to draft regulations that would craft an exemption to ERISA’s prohibited transaction rules that have long barred the ability to be compensated for advice on a basis that might vary according to the recommendations of the adviser1.

Withdrawal “Symptoms”

Now, many (including, apparently, some that signed that legislation) have always had an issue (to put it mildly) with this particular provision of the PPA, which they fear opens the door to “conflicted” advice (see “IMHO: Irreconcilable Differences”). Of course, proponents of the PPA’s interpretation have argued that part of the DoL’s charge was to build compliance and disclosure structures that would prevent that result. However, that apparently wasn’t possible—at least for the current DoL, which, after halting the publication of the rules and putting it back out for comment, decided last fall to withdraw its proposal “in response to concerns raised in public comment letters questioning the adequacy of the final class exemption's conditions to mitigate the potential for investment adviser self-dealing2.”

Let me be clear: I’m not faulting the DoL for essentially adopting the position that the solution that they had crafted under the leadership of one Administration was not workable under another. Greed is a corrupting force, and even the most able, honest, and forthright adviser could, on any given day, be tempted to offer advice that better fits his or her own needs than that of a participant (we also know that there are plenty of advisers out there who are neither able, honest, nor forthright). Let’s face it—the folks most in need of investment advice are most assuredly also the least likely to read (or to understand) the disclosures that are supposed to put them on notice that the advice they are about to receive could be tainted (note that, even with those opportunities muted by the new regulations, the proposed disclosure form runs FIVE pages). In large part, IMHO, requiring that compensation for investment advice be “level”—as the newly proposed regulations do—is no more than a return to the status quo.

That, of course, is also its limitation. After all, while the new regulations were touted as a means of “increasing access” to “high quality investment advice,” I think it’s fair to say that the practical result is an emphasis on “high quality” (read “not from a source whose compensation varies according to the advice provided”) rather than “access,” because I’m hard-pressed to see how the new regulations will do much to engender a real expansion of advice offerings3.

Shifting Gears

Mitigating the impact of this shift in position—and, make no mistake, it is a shift—is the reality that there are many more fee-based advisers serving this space today than there were even as recently as 2006. Perhaps some of these were motivated by the ability to offer participant advice, but I see little connection between that movement and these particular regulations. Another reality is that a growing number of participants are simply being defaulted into investment options without the “intervention” of the participant, much less an advised participant.

Additionally, the proposed regulations contain new restrictions on the design and deployment of the computer model (the selection must be made by a plan fiduciary unaffiliated with the adviser), and some intriguing questions about the applicability of specific investment theories4, as well as a determination that it is not only the adviser, but the adviser’s firm whose compensation impact must be considered. However well-intentioned, these new elements will almost certainly impede, rather than accelerate, the availability of these tools.

While the DoL made an effort to estimate the impact advice can have5, we have no such estimates on the impact of potentially conflicted counsel. Presumably, those conflicts could put participants in the clutches of a “Madoff wanna be,” but, frankly, I’m hard-pressed to understand the difference between the recommendations potentially incentivized by the personal interest of an adviser versus those of a plumber, real estate agent, used car salesman, or lawyer (though perhaps a rigid adherence to ERISA’s prohibited transaction rules provides the requisite justification).

No one—certainly not this writer—is in favor of promoting advice that isn’t good for participants. Ultimately, keeping the door closed on potentially conflicted advice may be the safest and most prudent course, though one might be inclined to think that the structures already in place (the selection of an adviser is a fiduciary duty, after all, and providing investment advice for a fee is a fiduciary act) would keep the worst at bay—and that new proposals could be crafted to weed out the rest. Or one might be inclined to insulate the participant from even potentially “good” advice, because that advice might also serve the adviser’s personal interest.

Regardless, the Labor Department has laid out a new course on how participant advice can be offered, and how advisers can be compensated for that service. They have asked for input on that new direction6—and I sincerely hope they get it.

—Nevin E. Adams, JD


1 “A final rule and related class exemption published in January 2009 were withdrawn in November 2010 in response to concerns raised in public comment letters questioning the adequacy of the final class exemption's conditions to mitigate the potential for investment adviser self-dealing.”

2 Not to be cynical about it, but those concerns were expressed by just 28 individuals/institutions (which the DoL has published at http://www.dol.gov/ebsa/regs/cmt-investmentadvicefinalrule.html). More accurately, there weren’t (even) 28 expressions of concern about the regulations themselves. Many, as you might suspect, were simply pointing out areas of needed clarification; several were just pointing out the need for final regulations, noting that the lack of certainty about the rules had created a legislative limbo in which nobody was doing anything, or at least anything different, regarding the provision of investment advice. That said, apparently somewhere in that relatively modest number of comments lay arguments compelling enough to persuade the Labor Department that there was no way to thread that particular needle.

3 The DoL would presumably take issue with my conclusion, since the regulations repeat the assumption associated with the prior—but very different—version that this approach would “extend investment advice to 21 million previously unadvised participants and beneficiaries.”

4 This may well be the “battleground” of commentators over the next several weeks. The DoL solicits comments “on the conditions applicable to investment advice arrangements that use computer models.” This is a far-ranging section of the proposed regulations, ranging everywhere from “what investment theories are generally accepted” and should this regulation not only specify them, but “require their application.” I suspect at some level that some may draw comfort from this apparent effort to bind in not only what process is appropriate for these models, but what inputs. One can’t help but wonder, however, if those findings might at some point be extrapolated (implicitly or explicitly) to other applications.

5 There are some interesting acknowledgements in the proposed regulation: that there is no requirement to “offer, provide, or otherwise make available any investment advice to a participant or beneficiary”; that in scoping the impact of the regulations, the DoL assumed that, on average, participants and beneficiaries who are advised make investment errors at one-half the rate of those who are not.

6 Written comments on the new investment advice proposal should be addressed to the Office of Regulations and Interpretation, Employee Benefits Security Administration, Room N-5665, U.S. Department of Labor, 200 Constitution Ave. NW, Washington, D.C. 20210, Attn: 2010 Investment Advice Proposed Rule. The public also may submit comments electronically by e-mail: e-ORI@dol.gov or through the federal e-rulemaking portal at http://www.regulations.gov.

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.

'Hind" Sighted

A year ago, with the financial world feeling still very much on the precipice, and with the 2008 election results still ringing in our ears, I noted that “the impact on much-improved defined benefit plan funding levels—and on the confidence of retirement savings plan participants—has been severe, and potentially serious. We are all inclined to wonder (hope?) if, like 1987, the market will find its way back to solid footing before year-end—and worried that 1929 will be the better analogy.”

Well, as we head into 2010, it seems fair to say that this is not a repeat of 1987 and—not yet, anyway—a second Great Depression. Here’s a look at the trends that were on our mind this past year – and are just over the horizon.

Doctor Bill? Curing Health Care

Where we are: Aside from the financial crisis and unemployment, health care has been the great issue of the past year and remains so as we go to press. That the current system needs reform is scarcely an issue for debate anymore—but what constitutes “reform,” and whether or not it can (or should) be paid for, is another matter altogether.

What’s ahead: Even at this stage, it is nearly impossible to guess how this one turns out—and what it will mean for employers. It is still hard to believe that the Senate and House positions on any number of key issues can be reconciled—but then, there was a point in the summer of 2006 when many felt the same way about the Pension Protection Act. But if it does pass—or if it does not—it seems safe to say that the issue is not going away any time soon. What remains to be seen is if the “cure” is worse than what it aims to remedy.

Fee Fie? Revenue-Sharing Litigation

What we said: Deep pockets continue to be the apparent target of revenue-sharing litigation. The early signs have been promising for employers, with most jurisdictions holding that revenue-sharing, per se, was not a problem, and that disclosure of those arrangements to participants was not required.

Where we are: The courts have, by most measures, continued to be willing to give the employers the benefit of the doubt in nearly every case. A recent decision by Caterpillar to settle its litigation might be seen by some to be a crack in that otherwise unspoiled landscape, but that seems unlikely (Caterpillar was an unusual case in that an internal division actually managed money for the 401(k) for a number of years). Though a revenue-sharing case filed in June in a case involved a much smaller plan, the fact pattern seems unusual enough, and the contingent fees so limited, that it seems unlikely to portend a big shift in focus to smaller plans.

What’s ahead: Barring a smoking gun discovery among the cases already filed, it seems likely that the laws—and disclosures—will change before the litigation has any real impact. On the other hand, it is entirely possible that the mere existence of that litigation—and the ever-present litigation threat—will serve to reform the system in a way, and on a schedule, that would not otherwise have been possible.

Auto-Premonition—Doing It for Participants

What we said: It is entirely possible that an Obama administration will, as mentioned during the campaign (see “Political Pairings,” PLANSPONSOR, June 2008), advocate workplace automatic enrollment IRAs. More significantly, there is a growing suggestion that the automatic design—having been successfully deployed for enrollment and investing—might work equally well at distribution, forestalling the tendency of participants to take—and spend—those lump sums. .

Where we are: This has been a tough year for participants and plan sponsors alike, and among some 6,000 plan sponsor respondents to PLANSPONSOR’s annual Defined Contribution Survey, the pace of automatic enrollment basically flatlined, with just under a third having embraced the design (more than half of the largest plans have, however). More significantly, just 16.2% of respondents had embraced it in the past year, roughly half the pace in 2008. Meanwhile, though the appeal of the concept of a more broad-based automatic enrollment retirement savings initiative has been touted, including by those in the Obama Administration, those efforts have taken a back seat to other matters.

What’s Ahead: Automatic enrollment may have taken something of a “holiday,” but it seems unlikely to be “over” as a trend. Look for it to pick up the pace again in 2010—and for the Obama Administration to turn its attention to the issue in the next year (or two).

Default Lines—Targeting Target-Dates

What we said: We ended 2008 with a growing awareness that all date-based solutions are not created equal. In a very real sense, we are in the first year of a new generation of participants who have not only been defaulted “in,” they have been defaulted into these funds—and just in time for the most tumultuous market in memory. It will be interesting to see how participants—and plan sponsors—respond.

Where we are: Congress has held hearings, and the Department of Labor and Securities and Exchange Commission are not only on the case, they are on the case together. The market rebound has served to restore some of the damage, but the scars remain. However, the target-date manufacturers have become more explicit about their glide path designs, and the notion that a fund family is oriented to take you “to” or “through” retirement is now an open dialogue.

What’s ahead: We don’t know yet what regulators may try to do to help ensure that investors—particularly near-retirees—are not misled by the simplicity of a fund title and marketing pitch. Plan sponsors are on notice that there are differences here, and with luck, will continue to ask pointed questions. Because, after all, when you’re selling “you don’t have to worry about it”, somebody has to.

Conflicts of Interests—Advice Regulations

Where we are: One of the last acts of the outgoing Bush Administration was the publishing of a set of final rules governing the provision of investment advice to participants—regulations for which the foundation was laid in the Pension Protection Act (PPA), but whose origins can be found in a series of legislative initiatives championed by Congressman John Boehner (R-Ohio) for more than a decade. Proponents had long said that participants clearly needed (and wanted) the advice, but that there needed to be a way in which advisers could be paid enough to want to take on the task. Opponents were just as concerned that the provision merely seemed to codify the provision of “conflicted” advice by setting out terms by which advisers could receive compensation that varied depending on the funds recommended.

Experts have long expressed amazement that the provisions survived the conference committee’s reconciliation of the PPA—but there they were. However, the controversy swirling around those regulations never subsided—and, thus, it was no huge surprise when the incoming Administration tabled, postponed, postponed again, and then officially withdrew the proposed final regulations, as it announced its intention to publish separately a proposed rule that it believes more closely conforms to the Pension Protection Act statutory exemption relating to investment advice.

What’s ahead: Will we ever get final advice regulations? Almost certainly, though almost certainly regulations very different from the ones put forth a year ago. Or perhaps they will not come until after the concepts embodied in the PPA have been recrafted by legislators, such as Congressman Rob Andrews (D-New Jersey), who has already introduced legislation (the aptly named “The Conflicted Investment Advice Prohibition Act of 2009”) that would do just that. Between now and then, participants will continue to get advice the way they always have—or have not.

Stop Gaps: Closing the Pension Funding Gap

What we said last year: The market’s tumult has taken its toll on pension portfolios and, in remarkably short order, managed to undo what had been a diligent, steady progress toward restoring the funding health of many programs. Of course, it also has served to favorably impact liability calculations, somewhat muting the damage. All in all, those workers covered by the promises represented by those programs must surely appreciate their position vis-à-vis those solely depending on defined contribution plans—but how will employers feel about those promises?

Where we are: Pension portfolios took their lumps from the investment markets last year, to put it mildly. That they were better diversified—and likely more insulated—from those travails than most defined contribution portfolios was surely a matter of some comfort, as has been their steady recovery in 2009. Still, there was a lot of damage to be undone, and for most it is still a work in progress—even as the press of more restrictive accounting and funding rules takes its toll. Fortunately, Congress has been receptive to calls for extensions that have provided some much-needed breathing room for these programs.

What’s ahead: It remains more expensive—and complicated—to walk away from pension commitments than most realize, though many employers remain committed to their pension plans for reasons that transcend those financial considerations. Still, it seems likely that freezes, both hard and soft, will continue to be applied, certainly in the private sector. The public sector’s commitment to pensions remains largely unabated—and yet, a sense remains that it may only be a matter of time before fiscal realities bring about a different result.

Tying Up “Loose” Ends—Full Disclosures

What we said: There’s little question that our industry would benefit from better disclosure about the fees paid for the services rendered to retirement plans and their beneficiaries. The proposal to expand/enhance reporting to plan fiduciaries, if imperfect, still seems to be headed in the right direction. Doubtless, some providers will adopt different business models to “duck” those disclosures just a little bit longer, but it seems clear that plan sponsors will want—and deserve—a full and fair accounting. It is less clear that participants will be as well served by an incomplete, and perhaps unbalanced, reporting of fees paid in their accounts—particularly if, as is currently proposed, the disclosures could add a dozen pages (and millions in expense across the industry) to their annual statements. It is also unclear just how much of this the current Administration will be able and willing to press into service in the short time remaining.

Where we are: In just a few short months, the 2009 Form 5500 will escort in a whole new level of plan sponsor fee disclosure, though the proposed participant disclosures are not yet on the radar screen.

What’s ahead: It is nearly impossible to argue against the critical importance of full fee disclosure, certainly to plan fiduciaries. Whether the current requirements truly constitute “full” disclosure remains a matter of some debate—but it is a start. On the participant side, the short-term implications are less clear; but then, we have some time—and a new Administration—to work through those issues.


— Nevin E. Adams, JD

The Gift of Time

My eldest has been carrying a heavier than “recommended” class load this semester, and that – combined with her choice of classes – has meant that she’s been trying to get ready for finals and writing several critical papers all at the same time. Now, she’s a gifted student, and more committed to her studies than most (or so she has convinced her father and mother) – but the pressure was certainly mounting. Just when she thought it couldn’t possibly all get done on time, she asked for – and got – an extension on one of the papers.

Not that she did so with enthusiasm. She is very conscientious about her work and deadlines, and on more than one occasion has pulled the infamous “all-nighter” to meet deadlines. This time, however, she was smart enough to acknowledge the need and make the request. And while the extension was modest, it seems likely to give her enough mental “room” to devote the requisite level of attention to the array of competing priorities that the end of a college semester brings with it.

You don’t have to be in school to know that things can get pretty crazy this time of year, even in the best of times – and these are surely not the best of times. Just about everybody I talk to in this business is busier than ever, caught up not only in the usual plethora of year-end duties, but in a whole new set of issues brought on by the roiling markets. Indeed, one need look no further than the provider firms and advisory businesses that have, in recent weeks, expanded their call center hours or capabilities to appreciate the uptick in activity.

In the middle of all this turmoil, it was refreshing, therefore, to get from Uncle Sam one of the rarest of gifts – time.

During the last week alone, we got another year to deal with the document requirements of 403(b), a(nother) reprieve on 409A reporting of deferred compensation, and some breathing room so that the funding requirements of the Pension Protection Act can be more rationally assimilated with the current market realities (though President Bush still has to sign the last, and the initial signals suggest that he’s not yet convinced this is a good idea, despite the unanimous voice vote of both houses of Congress).

There are those, of course, who may take issue with those extensions; let’s face it, those that manage to find a way to comply with the original deadlines might naturally presume that everyone would have made the same effort. Still, IMHO, with the possible exception of the 403(b) extension (and even there, plan sponsors have to conduct plan operations as if the document were in place from the original date, so the “relief” is probably less than it might otherwise seem), the extra time seems fair, reasonable, and timely. In each situation, plan sponsors, their advisers, and advocates took the time to make a compelling case about the need for a little more time (I will say that having to read/assimilate and report on all this activity makes our jobs a bit more complicated). To their credit, those in a position to grant those requests listened – and, IMHO, cautiously and carefully, acquiesced.

And for those of us impacted by such matters, the holidays just got a little bit easier.

- Nevin E. Adams, JD

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

“Diss” Ingenuous

Over the past several years, it has become “fashionable” in some quarters to bash the workplace retirement savings plan; most frequently, the 401(k). Critics have long bemoaned “anemic” participation rates as a sign that the programs aren’t working, faulted what were perceived as inadequate savings rates as an indication that participants didn’t grasp the need, and pointed to less-than-optimal investment allocations as proof that those who did save were not capable of, or not interested in, making those decisions.

In fairness, much of that “criticism” has been of a constructive nature—from professionals who care about retirement savings adequacy, who believe strongly in the support of the employer-sponsored system, and who truly want to see people have the opportunity to do the right thing, and to do the right thing with that opportunity. However, those well-intentioned voices were sometimes employed in contexts that, over time, have hinted (and sometimes done so more overtly) that there were inherent problems with that system that were perhaps beyond remedy. And there are suggestions, from time to time, that the retirement savings crisis is overblown, a concoction of investment providers and advisers who simply want to ensure their own retirement security.

More recently—and more insidiously, IMHO—is a growing voice that 401(k)s are little more than tax dodges for the better-off. That they, like any tax-advantaged program, provide disproportionately higher value to those who actually pay taxes—those who, by definition in our current “progressive” income tax scheme, have higher incomes.

Alternative Courses

Those opposed to the current employer-sponsored system do have alternatives. One is to remove the tax benefits from the 401(k) altogether, either as a “fairness” move (e.g., since everyone doesn’t have a 401(k), no one should), or that put forth by those trying to establish some fiscal responsibility “cred,” is the need to save the federal government money by not deferring taxes on those contributions and/or earnings and by no longer giving employers tax benefits for their contributions on behalf of participants. Some want to replace the current workplace savings program with something else; generally, some grand government-mandated savings program (yes, in addition to Social Security which, let’s tell it like it is, is not a savings program), while those opposed to “Big Government” hold out the notion of a government-sanctioned/mandated payroll IRA, where each worker would have the “opportunity” to set up their own account anywhere they chose to do so.

At the heart of each of these initiatives—yes, even the seemingly innocuous proposal to mandate IRA payroll deductions—is the weakening or outright elimination of the employer-sponsored retirement system.

Those of us who work with these programs in the real world can anticipate where that would leave retirement security. Without the encouragement of an employer match, the convenience of signing up in the workplace, or the incentives of pre-tax deferrals, most would not save at all, or would certainly save at a more modest rate than they do at present. One could, of course, simply mandate savings—but it is hard to imagine that we would be willing to enforce the level of savings necessary to achieve reasonable retirements (short of forcing it into some kind of pooling system like Social Security, and some have recommended just that – see “IMHO: Conspiracy Theories”).

What all too often gets lost in our criticisms of the current system is just how often it works well. Perhaps only three-of-four eligible to participate in such programs choose to do so, but on an employer-by-employer basis, participation rates north of 90% are not impossible to find—and that’s before the adoption of mechanisms like automatic enrollment. Contribution acceleration programs have allowed workers to readily do what was once a cumbersome process. Target-date funds have, in incredibly short order, gained the favor of plan sponsors and participants alike—with as yet incalculable benefits for those retirement investments. Those, and a whole new generation of retirement income alternatives are coming to market—alternatives that, unlike the prior generation, will benefit from the scrutiny of plan fiduciaries trying to make sure that a lifetime of accumulation isn’t decimated in a single moment. These innovations have come to light, and to market, because of the employer-sponsored system. What kinds of innovations have been brought to those disciplined enough to set aside money in a retail IRA?

In the real world, a lucky few know how to save and invest properly; somewhat more have access to the counsel and advice of a trusted adviser. But for most of us, the workplace retirement program is our first and only “investment” account. It is the one place where even those with relatively small balances can have access to professional advice, alongside the opportunity to gain the purchasing power of a group. But they might not have any of that without the involvement of their employer, the funding of that company match, and the tax incentive from the government to do the right thing.

Those that would take all that away have lots of reasons for throwing out the support of the employer-sponsored program—but they would really, IMHO, be throwing the baby out with the bathwater.

- Nevin E. Adams, JD

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See “They’re Baaaack, Again!”

See also “IMHO: Vanishing Points?”

IMHO: “Wonder Land”

IMHO: “Crisis Management”