Things That Make Me ‘Mad as Hell’ — Part 2

 Last week, I shared a list of things that make me “mad as hell” — things that those in our industry generate, promote and often share as fact without any application of common sense, and no apparent appreciation for the damage done by their complicity in sharing such nonsense. 

Here’s the rest of the list: 

Reporting on average — well, anything (see Why an Average 401(k) Balance Doesn't 'Mean' Much).

You name it, if it involves numbers from widely varied sources, individuals, or different time periods, somebody in this industry will report it as an arithmetic average. This industry continues to insist on reporting average 401(k) balances, average fees, average estimates on retirement needs, and more recently “forgotten” average account balances. I get it. Averages are widely considered to be a middle of the pack assessment of reality.

But that’s only true when you are averaging things that are similar, and more importantly real. If you take numbers from completely different time periods, from individuals with a wide disparity of existence, or — worse yet — take completely made-up numbers compounded by wild exaggerations — and average them … well, you get mush. And that’s a kind assessment.

Surveys that show an average or median account balance — with no delineation for age or tenure. See 4 Things That Make Me Go ‘Huh?’

So, if you take the average balance of a 24-year old who has just started contributing, and add it to that of a 55-year-old who has been saving for a career — and then average those together … on what planet would that tell you ANYTHING about the real state of retirement plan saving or preparation? 

And yet, that “average 401(k) balance” is routinely referred to in the press, and “dutifully” reported even by the trade press as though its some kind of magic barometer on the actual state of retirement security.

Worse, every year that number is presented against the average (of averages) from the prior year as though that change tells us anything about the actual progress of anything beyond the ability of folks to do simple math, and with no acknowledgement as to just how silly it is to blend together the cumulated savings of individuals who are paid a wide range of salaries, who defer at widely different rates, who live in completely different parts of the country, and who range in age (and participation) from “yesterday” to decades. 

Yes, I’d say that your average 401(k) balance is, generally speaking, mathematically accurate — and, at least in terms of ascertaining the nation’s retirement readiness, nearly completely useless.

A single provider survey that shows an average or median account balance. See Why an Average 401(k) Balance Doesn't 'Mean' Much.

Most of these average account balance surveys are, in fact, the average of account balances of those whose balances are maintained by a single firm. Aside from the obvious disparities noted above (age, tenure) that distort the result into meaningless mush, we all know that people change jobs — and that employers change recordkeeping providers — all the time.

So, if my 401(k) balance is part of Recordkeeper A’s portfolio this year, but my employer changes recordkeepers so that my balance (and that of my co-workers) is part of Recordkeeper B’s portfolio the following year — imagine how that might (and should) impact the so-called “average” 401(k) balance that Recordkeeper A reports — suddenly several hundred million dollars “disappear” — particularly when it chooses to apply some percentage change to those two different years.[i] 

Tell me again why anybody thinks that number — much less the variance — tells me anything relevant about the state of retirement savings/security.

Surveys that claim participants want things they can’t possibly understand. See Talking Points: (Just Because) Survey Says?

In recent days, we’ve been assured that participants are clamoring to have access to private market investments. Before that, it was cryptocurrency — and for what seems like months now it’s all been about retirement income. Apparently vast majorities of participants are eager to have access through their 401(k) to an array of complex financial instruments to which they have, thus far, been largely (or totally) barred — or so surveys say.

Indeed, I’ve always been amazed that organizations are able to find so many ostensibly knowledgeable participants to weigh in on these complex topics — particularly since there is an abundance of (other) surveys that suggest that when it comes to financial matters, participants are, largely, clueless.

Not that that seems to dampen their collective interest in these new options — though when given a chance to put their money where their mouth is, participants seem to be about as cautious as you’d expect (want?) largely financially clueless individuals to be. Doubtless the questions posed in those surveys are less complex than the actual decision points turn out to be.

That said, and not to be TOO cynical — the vast majority of these surveys are sponsored by, and in many cases, conducted by the very firms that are manufacturing the very products that their surveys say participants want.

I’m not saying they couldn’t have found individuals that do, or that they weren’t able to pose the questions (or present the responses) in a way that supports those conclusions.

But it does make you wonder…

Data “analysis” that takes real stuff, combines it with fake stuff, makes up a new scary-sounding name for it, and then claiming that vast majorities of all the retirement plans in existence are in “violation.” See Talking Points: A Red Flag for a ‘Red Flag’ Report.

As you can tell from the above, there are plenty of mis- or exaggerated positionings of data (real and imagined) to take issue with. But the most egregious example of this in recent memory was a report that claimed — based on an “analysis” of Form 5500 filings — that 84% of all (that’s right ALL) retirement plans in the United States have “at least one likely Employee Retirement Income Security Act (ERISA) red flag from a regulatory and/or fiduciary violation.”

Now, we all know that at any given moment, there are plans with issues. That said, and as with the “analysis” on “forgotten” accounts, this one is just silly on its face. Not that that kept even the trade press from dutifully (almost breathlessly) sharing that headline. And then they proceeded to detail — without comment/context — the basis for that “assessment.”

See, they made up categories; Regulatory Infraction Red Flags (RIRF) and Egregious Plan Mismanagement Red Flags (EPMRF). Nothing illegal about that — and to their credit, they at least detailed the “red flags” that would cause a plan to be tagged in one (or both) of those categories.

Regarding the former, those 1) had loss from fraud or dishonesty; 2) not offering qualified default investment alternatives (QDIA); 3) an insufficient fidelity bond; and 4) not 404(c) compliant. With a straight face, the firm claimed that at least 328,833 retirement plans had at least one of these RIRFs, representing approximately 43% of the total plans. And with an equally (and much more disappointing) straight face, the trade press glossed over the reality that neither offering a QDIA nor being 404(c) compliant were requirements under ERISA.

As for the latter, those “infractions” (their word choice, not mine) were detailed as “1) Not including automatic enrollment; 2) No corrective distribution of excessive contributions; 3) No 404(c) with participant-directed accounts; and 4) Failure to transmit payments on time.” Once again, we don’t have a breakdown of how many in which category, but they claim that at least 584,113 retirement plans had at least one EPMRF, representing approximately 76% of the total plans. And, once again, they just ignored the reality that neither automatic enrollment nor 404(c) compliance is legally required (unless it’s a plan adopted after Dec. 29, 2022, and those won’t yet have shown up in the Form 5500 data). And, once again, the trade press just reported these categories and criteria “straight.”

Look, an advisory firm can set out whatever standards it deems appropriate, affix clever (if arguably misleading) names (and acronyms) to practices that fall short of those individual standards, and even issue a press release proclaiming that it has found the vast majority of plans in existence are found “wanting” based on those standards — doubtless in hopes that it will be picked up and shared uncritically by the media (and read by potential clients). 

But is that the kind of firm you’d be wanting to help ensure legal compliance?

What to Do

One would like to think that with the readership here, all it would take is for yours truly to hold this kind of stuff up to the light, and we’d self-correct, or disappear altogether. Worst case, you’d hope that the trade press would at least apply a context filter to their reporting. Sadly, several of the things on this year’s list continue to be reported and carried — with no context or caveat — year after year.

And let’s face it, every time someone writes about them — even critically — it generates both the awareness, “clicks” and impressions that feed and fuel the impact metrics that PR firms used to benchmark success. Like Howard Beale on Network, the crazier and more outrageous the commentary, the more likely it will get picked up. I’ve even tried ignoring the nonsense — but with expanded access to social media, I find that a growing number of “us” are uncritically sharing and forwarding, perhaps on the assumption that you can’t put out a press release with made up stuff in it.

I’ve tried to comment on that stuff — included links to my analysis, where applicable — and hoped to encourage caution, if not responsibility, in those actions. Trust me, folks who don’t like the 401(k) or the private retirement system are looking for this kind of commentary to undermine confidence and support in those systems.

Today I would quite simply ask each of you to pause when you see the types of things I’ve noted here — if you see merit in sharing them, please consider providing context to go with that share.

And if it’s clearly nonsense on its face, please join me in calling it out for what it is — “BS.”

Maybe if enough of “us” hold them to account (and remember that some of “us” are “us”), we’ll all be better informed and better able to help folks build a financially successful retirement.

• Nevin E. Adams, JD

 

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[i] This can, of course, also happen at the individual participant level for someone who changes jobs and takes his/her balance either with them to a different provider, or perhaps takes it out altogether to an IRA.

 

(Just Because) Survey Says?

 We’re often told (via surveys) of any number of retirement plan options that plan participants want. Should it matter?

Most recently, we’re assured that participants are clamoring to have access to private market investments. Before that, it was cryptocurrency — and for what seems like months now it’s all been about retirement income. Apparently vast majorities of participants are eager to have access through their 401(k) to an array of complex financial instruments to which they have, thus far, been largely (or totally) barred — or so surveys say.

Indeed, I’ve always been amazed that organizations are able to find so many ostensibly knowledgeable participants to weigh in on these complex topics — particularly since there is an abundance of (other) surveys that suggest that when it comes to financial matters, participants are, largely, clueless.

Not that that seems to dampen their collective interest in these new options — though when given a chance to put their money where their mouth is, participants seem to be about as cautious as you’d expect (want?) largely financially clueless individuals to be.  Doubtless the questions posed in these survey instruments are less complex than the actual decision points turn out to be.   

So, why bother asking participants what they (think they) want in the first place?

It’s not that there isn’t value to be gleaned in assessing participant sentiment but — as noted above, the actual take-up rate on those products, even when offered by a plan, has traditionally been…disappointing, certainly from the standpoint of the manufacturers of those offerings.

Manufacturers that, it bears noting, inevitably turn out to be the sponsors of these surveys claiming that participants want what they rarely seem to take. That doesn’t make them irrelevant, of course, nor does it mean that the results are hopelessly biased — but it is, I would argue, worth some caution in blindly embracing (or sharing) the results, even when a reputable canvassing body is involved. At a minimum, a visible footnote acknowledging that specific “interest” in the outcome seems warranted.

The reality is that these types of surveys are rarely designed to actually gauge participant interest — savvy product manufacturers have likely already done some of that alongside the inevitable market and profit margin projections. Rather, they are a means to create and/or fuel public awareness, but perhaps more specifically to encourage plan sponsor/fiduciary consideration on the path to the ultimate acceptance of options they might otherwise be disinclined to entertain.

Prudent plan fiduciaries should, of course, take note of such things — but arguably with a grain of salt, certainly as it pertains to their specific workforce. However fervent the interest of a group of unrelated individuals might be, that doesn’t make it relevant for those under your care.

Indeed, ERISA’s standard of care is a high threshold, one that requires that the services engaged not only be reasonable in terms of fees and applicability, but solely in the best interests of plan participants and their beneficiaries.

And, as any parent can attest, sometimes those in our care want things that don’t meet that standard, whatever their opinion may be at the time.

Regardless, plan fiduciaries shouldn’t feel coerced into incorporating options just because a sponsored survey says (some) participants want it — participants who, of course, might not know what they’re asking for. Because, after all, prudent plan fiduciaries are expected to.

- Nevin E. Adams, JD

A Thumb on the Scale(s)?

Years back I remember being part of a Q&A with a group of plan sponsors—the focus was the challenge of not only getting, but keeping their plans in compliance, while also looking for creative ways to engage and encourage participants. Then at one point, a tired looking gentleman, expressing frustration with the pressures of audits and litigation, said: “I wish the DOL would just tell us what to do.” 

I cautioned him at the time that he ought to be careful what he wished for—that he might just get it.

Sure enough, in mid-March the Labor Department issued a “compliance assistance release” which was unique both in format and, arguably, focus. It reminded plan fiduciaries of the significance of their review and assessment of prudence of plan investments—and then said in no uncertain terms that it had concerns about the ability of cryptocurrency to meet those high standards. Indeed, the release plainly stated that those who did include such options could “expect to be questioned about how they can square their actions with their duties of prudence and loyalty…”—not just as standalone options on the menu, but even through a brokerage account. And so, while not an outright prohibition, it seems fair to say that it’s likely to have what lawyers call a “chilling effect” on cryptocurrency as a 401(k) investment option.

In late December the Labor Department issued a statement on the use of private equity in participant-directed plans—stating that, except in a minority of situations, plan-level fiduciaries of small, individual account plans are not likely suited to evaluate the use of PE investments in designated investment alternatives (DIAs) in individual account plans. It represented a step back from a June 2020 information letter that affirmed that PE investments “as a component of a professionally managed multi-asset class vehicle structured as a target date, target risk or balanced fund” can be offered as an investment option for participants in defined contribution plans under ERISA. It seems likely that some private equity firms (or those promoting such investments) had taken the initial guidance as something of a green light to promote those options beyond the limitations of the original letter—leading the Labor Department to clarify its position—and, arguably, to shut down active consideration of those options, at least by “small, individual account plans.” 

And then, of course, there’s the focus on ESG options, which the Trump administration clearly tried to undermine with its proposed and then (slightly muted) final regulation—and which the Biden administration first announced that it would not enforce, and has since then, with its own proposed regulation, sought to swing the pendulum in favor of those options—arguably to the point of not only encouraging, but requiring, consideration of those factors.

The reality is, of course, that times change. And even if the long-standing precepts of prudence and fiduciary responsibility haven’t changed, the environment in which those determinations are made has. Cryptocurrency wasn’t a “thing” until fairly recently (and it didn’t take long to find its way into 401(k) platforms), and those who may have misapplied (accidentally or “on purpose”) the Labor Department’s statement on private equity needed to be reminded. ESG is certainly a relatively recent—though not brand new—focus—but plan fiduciaries can perhaps be forgiven for feeling a bit “whipsawed” by the shifting sentiments between administrations.

Generally well-intentioned, the perspective of even the most seasoned and expert regulatory professional sometimes fails to appreciate the impact in the “real” world. That’s the value in the access—and influence—that NAPA, armed with the input, insight and perspective of NAPA members, provides to these processes. Insight and influence that allows you to “put a thumb on the scale” in providing a practical and pragmatic perspective on the rules and regulations that guide our industry— now, and in the days ahead. 

- Nevin E. Adams, JD

p.s.: Speaking of which, this would be a great time to get involved via the NAPA DC Fly-In Forum. Check it out—and apply today—at https://napadcflyin.org.

Disclose 'Sure'

There are few things more annoying in my daily existence than those ubiquitous pop-up service agreement acknowledgements.

I say annoying because they are inevitably long and “lawyerly”; there’s no way that they can readily be read (much less absorbed) in the medium in which they are presented; and the alternative to not accepting the conditions presented would seem to be to forego the update that you’ve been encouraged to accept, and that, at some point in the future would seem to have its own dire consequences. And so, probably like many, if not most, if not all, of you, means that I accept the terms, and acknowledge the disclaimers basically sight unseen (or at least unread).

Last week the U.S. Supreme Court weighed in on a case involving participant disclosures, specifically the issue of whether certain plan disclosures were sufficient to establish a participant’s “actual knowledge” of the design of Intel’s custom target-date series, which had been built including an allocation to hedge funds and other alternative investments, including private equity. The participant-plaintiff here alleged that, despite “annual notices, quarterly Fund Fact Sheets, targeted emails, and two separate websites”—and tracking that indicated that he had actually visited the web sites “repeatedly”[i] during his employment, he did not “remember reviewing” the disclosures.

SOL ‘Stance’

The difference is one of timing, because of ERISA’s statute of limitations. Those injured by an ERISA breach have three-years to file suit from when the plaintiff had actual knowledge of the violation. Without that knowledge, an alternative 6-year statute of limitations applies, running from the date of the last action which constituted a part of the violation. The suit, filed in 2015, challenged actions that occurred between 2009 and 2014.

The Intel defendants argued—and the district court agreed—that the notices established knowledge well beyond the 6-year statute of limitations. However, the appellate court disagreed, explaining that if (as claimed) “Sulyma in fact never looked at the documents Intel provided, he cannot have had ‘actual knowledge of the breach.’”

The nation’s highest court—unanimously—agreed with the appellate court, commenting that while “…relevant information disclosed to the plaintiff is no doubt relevant in judging whether he gained knowledge of that information”… to meet the “actual knowledge” criteria imposed by the legislation, “…the plaintiff must in fact have become aware of that information.”

Now, as someone who appreciates a reliance upon the black letter of the law, the decision’s clarity is somewhat reassuring. If, on the other hand, you’ve spent time and money producing and distributing the plethora of disclosures mandated by the law, you could hardly be faulted for wondering… what’s the point?

Foreclosure ‘Notice’

Doubtless anticipating the clamor of plan fiduciary jaws slamming onto desktops across the nation, Justice Alito (who authored the court’s opinion) threw a (small) bone to what seems likely to be a rapidly expanding class of plan fiduciary litigants.

“Nothing in this opinion,” he cautions, “forecloses any of the ‘usual ways’ to prove actual knowledge at any stage in the litigation. … Plaintiffs who recall reading particular disclosures will of course be bound by oath to say so in their depositions. On top of that, actual knowledge can be proved through ‘inference from circumstantial evidence.’ … Evidence of disclosure would no doubt be relevant, as would electronic records showing that a plaintiff viewed the relevant disclosures and evidence suggesting that the plaintiff took action in response to the information contained in them…”. He also noted that, “Today’s opinion also does not preclude defendants from contending that evidence of ‘willful blindness’ supports a finding of ‘actual knowledge.’”

The Impact

There’s little question that the ruling will make it harder for plan fiduciaries to claim that effective notice has been provided by the series of disclosures, mandated and otherwise. Indeed, this particular plaintiff’s ability to basically disclaim awareness despite evidence that he had spent a lot  of time on the site(s) where the disclosures were housed was, to this observer, anyway, a bit of a head scratcher, to say the least.

In response, employers will almost certainly pursue technologies (or be counseled to do so) that provide a more specific acknowledgement by participants that they have seen—and read—specific plan information before proceeding to the information they really want to see (like account balance).

Now if only the lawyers (and regulators) would craft disclosures that, if not more memorable, were at least (more) readable.

- Nevin E. Adams, JD

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[i]In their filing with the Supreme Court, Intel noted that, “during his brief tenure with Intel, respondent regularly accessed the website for those materials,” clicking on more than 1,000 web pages within that site; it was undisputed that respondent “accessed some of th[e] information” that disclosed the disputed investment decisions “on the websites.”

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