'Inside' Straits

 A recent Wall Street Journal (WSJ) article asked what I view as a rhetorical question; “Do you really know what’s inside your 401(k)?” Rhetorical in that I suspect the answer from most people — certainly if they’re honest — is “no.”

Now there are many aspects to a 401(k) that bear scrutiny, but the article was focused on target-date funds (TDFs) — a mechanism that I think has been a boon for most of the novice investors (and savers) that I suspect most 401(k) participants (still) are.

You check one box (heck, these days that box is checked for you) and tap into the expertise — and ongoing expertise at that — of professional money managers to provide your retirement savings with a diversified portfolio mix. No longer do you have to concern yourself with weightings of stocks and bonds, value versus growth, domestic versus international — just leave it to the experts. 

But the WSJ article’s focus was a cautionary note — mostly concerned at the unexpected things that a collective investment trust (CIT) vehicle (now 52% of all TDF assets, according to the article) might open the door to — specifically alternative investments, notably so-called “private investments.” Which, the article points out, might undermine the cost advantages of the CIT with those alternative holdings that are more expensive, less transparent/readily valued, and illiquid.

Indeed, the author goes so far as to comment, “As far as the managers of private assets are concerned, the ‘target’ in target-date funds is you.” Of course, his concern is that the less rigorous reporting requirements of a CIT (compared to a mutual fund) would allow investors to be taken advantage of — as though they’re actually even skimming that mutual fund prospectus.

Let’s face it — target-date funds with all their simplicity (at least in the choosing) and promise have been pitched as a “do it for you” solution, and tens of millions of (too) busy, preoccupied participants have trusted their retirement savings to these vehicles assuming that the professional investment class — not to mention the plan sponsor fiduciaries that screened them — know what they’re doing.

Unfortunately, in some cases, that trust may have been misplaced.

ad space

Something not mentioned in the WSJ article is that most of the manufacturers of those vehicles several years back embraced a “through” retirement date glide path, rather than the “to” retirement date that was the original “pitch.” The latter meaning that you’d gradually move to a much more conservative asset mix at your projected retirement date. And while there is still certainly a modest shift in that direction, the shift in emphasis means that I suspect there are a lot of folks nearing retirement that have a portfolio mix that is significantly more exposed to stocks than they might expect and/or want.[i]

Some of this shift is, doubtless, a sense that individuals want to stay invested in those funds, irrespective of retirement date.[ii] Some doubtless a desire to report better returns, since I suspect most fiduciaries are (still) paying more attention to the current returns than the conceptual integrity of the glidepath.

Regardless, it is, to my eyes, anyway, a shift from the original premise — and one that I suspect many participants haven’t noticed, and one on which plan fiduciaries may not have focused. The inclusion of alternative investments (particularly when folks are talking about 20% allocations) is one thing — but the structural glide path of these options, particularly when positioned as a default investment, strikes me as even more fundamental.

That said, and as the WSJ article closes, “None of this means you should turn your back on these funds, which can give you a powerful boost toward a sustainable retirement. It does mean you’ll need to know what you own and speak up if you don’t like it. The ultimate hands-off investment is going to require you to be a lot more hands-on.”

I would say that goes double for those responsible for the selection and monitoring of these plan options.

• Nevin E. Adams, JD

 

---

[i] Note — not saying that the shift in glidepath focus isn’t legit, or even beneficial — it just seems that most folks probably missed that “memo.”

[ii] Cynics might even suggest that the shift is a function of TDF managers simply wanting to keep hold of that money all the way through the individual’s retirement, rather than handing it over to a different manager. 

A Red Flag for a ‘Red Flag’ Report

  Did you hear the one about how nearly all U.S. retirement plans have “at least one regulatory or fiduciary ‘red flag’ violation”?

Well, here’s hoping you haven’t. Because this so-called “analysis” of Form 5500 filings claims to have discovered 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, having grabbed your attention, you probably won’t be surprised to find in the fine print of the press release an opportunity to “schedule a cost-free benchmarking audit.” But before you do so, you might want to take a look at the criteria this firm designates as a “red flag.”

From their press release, “Abernathy-Daley defines red flag violations as either ‘infractions, fineable offenses, fiduciary failure, or plan malpractice’ and are separated into two main categories: Regulatory Infraction Red Flags (RIRF) and Egregious Plan Mismanagement Red Flags (EPMRF).” 

As if the industry needed any more acronyms — much less made-up ones. 

With regard to the former, the press release identifies the following “selected RIRF infraction categories”: 1) 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 claims that at least 328,833 retirement plans had at least one of these RIRFs, representing approximately 43% of the total plans. 

We’ve got no numerical breakdown by category, but someone should notify these folks that there’s no legal requirement that a plan be 404(c) compliant nor that they offer a QDIA.  These are safe harbor options available to any plan that desires them and that is willing to take on the conditions that accompany them — but it’s hardly a violation of any kind not to.

As for losses from fraud or dishonesty — well, to the extent such things are actually discoverable on the 5500, it’s likely the plan already knows the issue (and has already resolved the matter). Ditto the allegedly insufficient fidelity bond — and well, considering the categories compiled here, it would be useful to know what they deemed “insufficient.”

And then there’s the “Egregious Plan Mismanagement Red Flags” (EPMRFs). Hope you’re sitting down. Those are defined as “red flags that may not necessarily result in a fine, but represent failure of: The plan administrator in their fiduciary duty to the plan sponsors, and The plan sponsors in their fiduciary duty to their employees.”

More to the point, these “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.

Once again, though — 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 again, if you’re able to find evidence of corrective distributions and/or failure to transmit payments on time on the Form 5500 — well, that’s only because the issue has been found, acknowledged, and likely corrected.

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).

That said, the deliberate choice to position practices that are clearly neither required nor necessary as some kind of “regulatory and/or fiduciary violation” — strikes me as a “red flag” violation of another kind.

• Nevin E. Adams, JD