'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.

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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

 

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[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. 

Thanks, Giving

While it’s the celebration following a successful harvest held by the Pilgrims and members of the Wampanoag tribe in 1621 that provides most of the imagery around the holiday, Thanksgiving didn’t become a national observance until much later.

Incredibly, it wasn’t marked as a national observance until 1863—right in the middle of this nation’s Civil War, and at a time when, arguably, there was little for which to be thankful. Indeed, President Abraham Lincoln, in his proclamation regarding the observance, called on all Americans to ask God to “commend to his tender care all those who have become widows, orphans, mourners or sufferers in the lamentable civil strife” and to “heal the wounds of the nation.” 

We could surely stand to have some of that these days.   

Thanksgiving has been called a “uniquely American” holiday—and so, even in a year in which there has been what seems to be an unprecedented amount of disruption, frustration, stress, discomfort and loss—there remains so much for which to be thankful. And as we approach the holiday season, it seems appropriate to once again take a moment to reflect upon, and acknowledge—to give thanks, if you will.

I’m once again thankful that so many employers (still) voluntarily choose to offer a workplace retirement plan—and, particularly in these extraordinary times, that so many have remained committed to that promise. I’m hopeful that the encouragements of prospective legislation, if not the requirements of same, will continue to spur more to provide that opportunity. 

I’m thankful that amidst all the turmoil and strife in our political system, we’ve seen near-unanimous bipartisan support for legislation that stands to enhance the retirement of tens of millions of Americans.

I’m thankful that so many workers, given an opportunity to participate in these programs, (still) do.

I’m thankful that the vast majority of workers defaulted into retirement savings programs tend to remain there—and that there are mechanisms (automatic enrollment, contribution acceleration and qualified default investment alternatives) in place to help them save and invest better than they might otherwise.

I’m thankful for the dozen or so state IRAs for private sector workers that, despite relatively high opt-out rates, are providing millions of Americans an opportunity to save through payroll deduction.  I’m even more thankful that the employer mandates associated with these programs are encouraging employers to consider more robust workplace retirement savings programs, like 401(k)s.

I’m thankful for new and expanded contribution limits for these workplace retirement programs—and even though it was spurred by dramatic increases in inflation and the prospect for higher costs in retirement, I’m hopeful that that will encourage more workers to take full advantage of those opportunities.

I’m thankful for the Roth savings option that provides workers with a choice on how and when they’ll pay taxes on their retirement savings.

I continue to be thankful that participants, by and large, continue to hang in there with their commitment to retirement savings, despite lingering economic uncertainty, volatile markets, rising inflation, and competing financial priorities—and that their employers continue to see—and support—the merit of such programs.

I’m thankful for qualified default investment alternatives that make it easy for participants to benefit from well diversified and regularly rebalanced investment portfolios—and for the thoughtful and ongoing review of those options by prudent plan fiduciaries. I’m hopeful (if somewhat skeptical) that the nuances of those glidepaths have been adequately explained to those who invest in them, and that those nearing retirement will be better served by those devices than many were a decade ago.

I’m thankful that our industry continues to explore and develop fresh alternatives to the challenge of decumulation—helping those who have been successful at accumulating retirement savings find prudent ways to effectively draw them down and provide a financially sustainable retirement.   

I’m thankful that the ongoing “plot” to kill the 401(k)… (still) hasn’t. Yet.

I’m thankful for the opportunity to acknowledge so many outstanding professionals in our industry through our Top Women Advisors, Top Young Retirement Plan Advisors (“Aces”), Top DC Wholesaler (Advisor Allies), and Top DC Advisor Team lists. I am thankful for the blue-ribbon panels of judges that volunteer their time, perspective and expertise to those evaluations.

I’m thankful for the opportunity to give advisors a voice in acknowledging the best recordkeepers in the industry via our new Advisors’ Choice accolade.

I’m thankful that those who regulate our industry continue to seek the input of those in the industry—and that so many, particularly those among our membership, take the time and energy to provide that input.

I’m thankful to be part of a team that champions retirement savings—and to be a part of helping improve and enhance that system.

I’m thankful for those who have supported—and I trust benefited from—our various conferences, education programs and communications throughout the year—particularly at a time like this, when it remains difficult—and complicated—to undertake, and participate in, those activities. 

I’m thankful for the involvement, engagement, and commitment of our various member committees that magnify and enhance the quality and impact of our events, education, and advocacy efforts. 

I’m also thankful for the development of professional education and credentials that allow the professionals in our industry to expand and advance their knowledge, as well as the services they provide in support of Americans’ retirement. 

I’m thankful for the constant—and enthusiastic—support of our event sponsors and advertisers—again, particularly during a period when so many adjustments have had to be made.

I’m thankful for the warmth, engagement and encouragement with which readers and members, both old and new, continue to embrace the work we do here.

I’m thankful for the team here at NAPA, ASPPA, NTSA, ASEA, PSCA (and the American Retirement Association, generally), and for the strength, commitment and diversity of the membership. I’m thankful to be part of a growing organization in an important industry at a critical time. I’m thankful to be able, in some small way, to make a difference.

I’m particularly thankful for the education, support, and availability of programs in our private retirement system that have allowed me to contemplate my own “retirement” in just a few more months.

But most of all, I’m once again thankful for the unconditional love and patience of my family, the camaraderie of an expanding circle of dear friends and colleagues, the opportunity to write and share these thoughts—and for the ongoing support and appreciation of readers… like you.

Wishing you and yours a very happy Thanksgiving!

- Nevin E. Adams, JD

After the Fall

I’ve just passed the fifth anniversary of a small fall that took a big chunk out of my life.

It was one of those little things – carrying that last box of Christmas ornaments to the basement for storage – when, just three steps from the bottom, I missed one. All I could think about in the 2 seconds it took me to tumble to the ground was trying not to fall on the ornaments (it was the last box, but who knew what precious memories were in that one?) – though that focus completely disappeared once I hit the floor.

The ornaments, as it turned out, were safe. My left ankle, not so much.

The next several weeks were discouragingly inconvenient when it came to navigating stairs, opening doors (even the ones that are ostensibly designed to accommodate such things), and – worst of all – showering. But perhaps the most frustrating was my rehab stint. I would not have thought it was possible in the space of just 8 weeks to forget how to walk – and yet, I found myself struggling (mind you, I was in a boot). To this day, I don’t descend a flight of stairs without a shudder running up my spine.

The fall, as falls often are, was fast and unexpected – the recovery long and painful.

At a time when the markets continue to stake out new highs on weekly, it is perhaps unseemly to recall that they can, and do, move in the opposite direction. While participants, generally speaking, appear to ride out such storms, those who sell low and buy high inevitably seem to outnumber those who view the downturns as buying opportunities. That said, in 2019 the S&P 500 rose more than 28% – and the average 401(k) balance – buttressed not only by the markets, but by contributions – ended the year 44.9% higher for those workers aged 25-34 with less than 4 years of tenure, while workers with more than 20 years of tenure, aged 55-64, registered a 24.6% increase, according to estimates by the Employee Benefit Research Institute (EBRI).

Indeed, just last week I read that a major target-date fund provider was boosting the equity allocation in its glide paths… explicitly to help deliver improved outcomes. Nor is it the only one to have done so (see Missing the Target). Those moves, ostensibly informed by economic insights and research, are perhaps tempted by the long-running bull market (and doubtless aware that, despite all the cautions to the contrary, that investors – and plan fiduciaries – are often drawn by past performance like moths to a flame).

Now, our industry has long cautioned savers that you can’t invest your way out of a savings shortfall, though surely improving outcomes is a shared goal. Not that it isn’t a tempting recourse – certainly for those who are awakening to financial realities late in their working years. These days the trend is to embrace glidepaths that sail “through” the stated age of retirement (“through” rather than “to”[i]), though one can’t help but wonder if those defaulted onto those paths are cognizant of the difference. Or if, as was the case a bit more than a decade ago, those on the brink of retirement will discover that there can be a significant gap between a glidepath that is “more” conservative, and one that truly lives up to that description.

Because, after all, falls are often unexpected. The recovery slow and painful.

- Nevin E. Adams, JD

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[i] Though the 62^nd Annual Survey of Profit-Sharing and 401(k) Plans from the Plan Sponsor Council of America found a rough 50-50 split among respondents between those relying on target-date fund glidepaths that are “to” versus “through” retirement.

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Moving Targets

Before target-date funds were “cool” (or widely available), I had steered my mother toward an asset-allocation fund as a good place to invest her retirement plan rollover balance.

The logic was, I thought, impeccable: A professional money manager would be keeping an eye on and rebalancing those investments on a regular basis. The fee was reasonable, and the portfolio was split about 60/40 between stocks and bonds, which also seemed reasonable in view of her investment horizon. From time to time Mom would call and ask if we needed to rebalance that investment — and I confidently assured her that there was no need to do so, that the fund’s design took that into account.

Then at some point (though definitely between 2006 and 2008) that professional manager decided that a “better” allocation was to shift the asset allocation to be invested nearly entirely in stocks. Now, knowing how such things work, I can’t imagine that a shift that dramatic wasn’t clearly and concisely communicated to holders on a timely basis — or at least in a manner that the legal profession deemed sufficient. But by the time we realized what had happened — well, that reasonably priced professional fund management wound up feeling more like someone had decided to bet it all on “red.”

With that experience under my belt, and a wary eye on recent market movements, I couldn’t help but notice a Reuters report this week which noted that within the last year, several large target-date fund providers had increased the equity allocations of their TDFs. Now, honestly, I don’t know what their previous allocations were, much less where they currently stand, nor am I privy to the rationale behind these moves. I don't know if it's a broad-based shift across their entire family, or specifically focused on those with longer time horizons.

The Reuters piece is cautionary in tone — basically intimating that these moves might be underway at a time when the markets have peaked, with an undertow of concern that the timing could be problematic. Doubtless the headline will draw clicks, if not concern — after all, you don’t have to be very old or in this business very long, to remember that just prior to the onset of the 2008 financial crisis, several performance-lagging TDF managers made what seemed, at least in hindsight, to be a badly timed equity shift in their portfolios. Nor was it that long ago that we heard concerns expressed by participants, particularly older ones (and subsequently regulators on their behalf) who were, in the aftermath of that crisis, surprised to find just how much exposure their TDF investments had to those equity markets.  

Despite these concerns, TDFs have continued to gain prominence in retirement plans, and in retirement plan participant balances. Consider that nearly three-quarters (72%) of 401(k) plans in the EBRI/ICI 401(k) database included TDFs in their investment lineup at year-end 2012, and 41% of the roughly 24 million 401(k) participants in that database held TDFs. Consider as well that at year-end 2012, 43% of the account balances of recently hired participants in their 20s were invested in TDFs. Older workers have not been as inclined to invest in those options, though it may simply be that, as older workers, they aren’t as likely to have been defaulted there.

Whether or not this time will be different in result, only time will tell. But we can all hope that the communications about such shifts are understood and appreciated by plan participants and plan sponsors before the results make it too late to do so.

Nevin E. Adams, JD

"Freedom" From Choice?

You may remember little else about the 1989 film “Field of Dreams,” but odds are you have invoked a version of what is likely its most famous quote, “If you build it, they will come.”

Unfortunately, for many, building retirement savings is more complicated than constructing a baseball diamond in the middle of an Iowa cornfield. Most experts will tell you that the most important decision in retirement saving is deciding how much to save, not how those savings will be invested―and yet, for years, much of the education and discussion about retirement saving has been focused on investing.

Enter the target-date fund (TDF), a type of investment fund apportioned according to what investment professionals deem to be an appropriate age-based blend of stocks, bonds, and other asset classes for an individual within a particular target-date of his or her retirement. Perhaps more importantly, that apportioning is automatically rebalanced over time, as the target date approaches, becoming less focused on growth and more focused on income over time. It’s an approach to which individuals and plan sponsors alike have come to embrace with little of the reluctance that often accompanies new retirement plan designs; one that runs counter to decades of expanding retirement plan menus and education designed to help participants make better use of those choices.

Consider that 72 percent of the more than 64,000 401(k) plans in the EBRI/401(k) database, included target-date funds in their investment lineup at year-end 2011,¹ and that nearly 4 in 10 of the nearly 24 million participants in that database held target-date funds.² That’s sharply higher than 2006, the year that the Pension Protection Act of 2006 included target-date funds in its definition of qualified default investment alternatives (QDIA), when about 57 percent of plans included those offerings on their menus, and fewer than 1 in 5 participants held them in their account(s). Perhaps more significantly, at year-end 2011, 51 percent of participants in their 20s held target-date funds, compared with 32 percent of participants in their 60s.

Recently hired participants―those more likely to be automatically enrolled in their employment-based 401(k), and to have their savings automatically invested in a QDIA (frequently a target-date fund), were, not surprisingly, more likely to hold target-date funds than those with more years on the job: At year-end 2011, 51 percent of participants with two or fewer years of tenure held target-date funds, compared with 37 percent of participants with more than five to 10 years.

In fact, an August 2011 EBRI Issue Brief noted that, among consistent participants in the EBRI/ICI database who were identified as auto-enrollees in 2007, 97.2 percent were still using TDFs in 2008, and 95.7 percent used them in 2008 and 2009. Even among those not identified as auto-enrollees, just over 90 percent continued to use them from 2007‒2009 (see “Target-Date Fund Use in 401(k) Plans and the Persistence of Their Use, 2007‒2009,” online here).

Now, one can find fault with the target-date design: There are different views on what is an “appropriate” asset allocation at a particular point in time; discrete perspectives as to what asset classes belong in the mix; notions that individuals aren’t well-served by a mix that disregards individual risk tolerances; arguments over the definition of a TDF “glide path” as the investments automatically rebalance over time; and even disagreement as to whether the fund’s target-date is an end-point, or simply a milepost along the investment cycle. That said, and as the EBRI/ICI data show, target-date funds, as well as their older counterparts, the lifecycle (risk-based) and balanced fund(s), have become fixtures on the defined contribution investment menu. For a large and growing number of individuals, these “all-in-one” target-date funds, monitored by plan fiduciaries and those that guide them, are likely to be an important aspect of building their retirement future.

Of course, the future they’ll build will likely be better if those investments are properly used, carefully monitored, better understood―and funded by the appropriate amount of savings.


Nevin E. Adams, JD

¹ See “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2011,” online here.

² In addition, 20 percent of the participants in the EBRI/ICI 401(k) database held non–target-date balanced funds, and 3 percent held both target-date and non-target-date balanced funds at year-end 2011.

London "Bridges"

I was in London for a few days last week, and while it afforded a good opportunity to visit with a number of providers in the European retirement plan market, the primary purpose of my trip was to acknowledge the fund manager and consultant standouts recognized by PLANSPONSOR Europe (which has just celebrated its one-year anniversary).

The luncheon itself was fascinating: As is often the case with such gatherings here, many of the attendees were well-acquainted with each other, a number had common employment histories and, as in the U.S., even those who worked for competing firms at the moment seemed to sense that it could change at any time.

Once we got past the potential impact of the latest Icelandic volcanic ash cloud, the traffic disruptions attendant with President Obama’s visit (which, of course, had been impacted by the latest Icelandic volcanic ash cloud), and the beautiful weather (which, fortunately, was apparently completely unaffected by the latest Icelandic volcanic ash cloud), the discussion turned to “shop.”


The group had some interesting questions for me:

Why are American pensions so heavily invested in stocks?

For the record, this audience apparently felt that a 60/40 allocation to stocks/bonds was the mirror image of a prudent allocation. Of course, every fund is different, and every fund’s allocation is different. I mentioned that I thought that, certainly over the long haul, American pensions have likely benefited more than they have suffered from their exposure to equities. However, regardless of the realities, I know that those who make those decisions believe that. One of the consultants at my table asked a corollary to the first question: why more American pensions haven’t adopted a stronger LDI (liability-driven investment) focus.

To that, I offered three observations: First, I think most American plan sponsors still believe they can, in fact, do “better” by pursuing alpha. Second, while I think most American plan sponsors who have given some thought to LDI are intrigued with the concept, they aren’t quite convinced that the “theory” will work in reality. But finally, I sense that more have embraced the concept than is probably appreciated, albeit in baby steps (purists will, of course, argue that incremental adoption can actually serve to undermine the effectiveness, but…).

Are target-date funds now totally discredited?

The question was actually posed in a way that suggested that, whether they were or not, they should be. That said, my short answer here was, absolutely not; that while 2008 had certainly shaken some, the rebound in the markets seemed to have taken much of the edge from that issue. I noted that while I’ve seen data that suggest some are more interested in something other than a pure “date-based” allocation approach, and that, while there is more discussion around the whole “to versus through” retirement date design, my sense was that most providers hadn’t made significant shifts to their approach (or assumptions), and that few plan sponsors (and no participants) had made any changes in their target-date fund, or allocations to that suite.

In sum, I told this audience that I thought that the market rebound had given our industry a second chance on target-date designs—but that I wasn’t sure anyone was taking advantage of that, sadly.

Why are Americans so opposed to annuities?

I told the audience that I have, on more than one occasion, noted that if we could figure out how we taught participants that annuities were “bad,” and could deploy that to teach them how retirement savings were good, we’d be on to something. That said, I still think that there is a behavioral issue here—one that makes individuals reluctant to hand over a large pot of money today to someone else (particularly a large, faceless institution) so that they can have little pieces of that returned to them over a long period of time. That the annuity ostensibly is expensive, that the individual may lack trust in the institution to which they are expected to hand over a life’s savings, that they can’t access those funds in an emergency—those are also legitimate issues.

All that notwithstanding, I think things could change—and perhaps change dramatically—if American plan sponsors were, in any credible way, encouraged to connect this post-employment investment decision to their workplace retirement plans. The reality today is that most plan sponsors see this as an extension, rather than a reduction, of liability (and with reason, IMHO); there is a palpable sense that product development is still ongoing (and that the best model isn’t yet on the market); and beyond that, we all know that the Labor Department is evaluating alternatives/approaches as well.

In sum, employers have no compelling reason to jump in here, alongside several key indicators that suggest doing so could be expensive and/or premature. Consequently, they are inclined to wait—and until that dynamic changes, it seems unlikely that participants will be overcoming their current reluctance, either.

Lessons Learned

Asked to share insights on “lessons learned” by the American pension system, I noted a couple. First off, I noted that I thought we had never helped workers appreciate the value of a pension, and that, certainly from a financial standpoint, employers had probably never fully appreciated what it would take to fulfill that promise. Moreover, that we were only just beginning to focus on helping workers appreciate what it would take to provide a lifetime of post-retirement income—and that, for some, that message would come too late to be of value. That whereas workers once blithely assumed that the market would “fix” their savings shortfalls, today’s most common unrealistic assumption was that they would simply be able to work longer (this, by the way, is a problem of a different ilk for employers in the UK, who might actually have to provide that employment).

One lesson that I thought we were only recently beginning to “get” was that, if retirement security is going to rely on a defined contribution system—particularly one where “defaults” are driving utilization—you can’t be coy about what it’s going to take. And defaulting people into these programs at contribution levels that don’t even maximize the match, much less come close to what needs to be saved to achieve financial security in retirement—well, that is literally setting people up…to fail.

—Nevin E. Adams, JD

Underlying Assumptions

Last week the Government Accountability Office (GAO) issued two reports focused on 401(k) plans: one on target-date funds, the other on potential conflicts of interest. As seems to be its custom in such reports, the GAO communicates its conclusion in the titles: “Key Information on Target Date Funds as Default Investments Should Be Provided to Plan Sponsors and Participants” and “Improved Regulation Could Better Protect Participants from Conflicts of Interest”—and, IMHO, there’s little controversy in those statements.

The reports themselves offer a great informational primer on target-date fund designs and issues (you’d be surprised how many plan sponsors still don’t quite grasp the concept of “glide path”) as well as the fee structures and revenue-sharing components that underlie the 401(k) retirement savings system. Both reports acknowledge that efforts are already under way to remedy the shortfalls the reports identified in both, while at the same time promoting solutions to those shortfalls that may not be cost/impact-justified.

As you peruse the target-date fund report (see “GAO Urges More Help with TDFs for Plan Sponsors”), you’re struck once again by the wide variety of answers to the question, “What is an appropriate asset allocation for participants at retirement age?” much less the assumptions that underpin it. One might well expect to find different assumptions regarding the markets, investment classes, and how the latter will respond to the former over the course of decades—and, in fact, these assumptions lie at the core of the target-date fund glide path and design. One might well expect (though many apparently didn’t) that those differences of opinion would translate into very real differences in asset allocation, even at retirement age.


There are, however, assumptions imbedded in these TDF approaches that, IMHO, are not nearly as well-communicated and/or understood by plan sponsors; assumptions that are predicated on certain participant behaviors that, in the words of the GAO report, “may not match what many participants actually do.” There is the assumption about what participants will do at the target date—either transfer those assets to another vehicle or retain their investment in the TDF.

This, of course, is the essence of the “to versus through” debate that has, since the 2008 financial crisis, drawn increasing scrutiny, if only because, IMHO, most plan sponsors (and plan participants) assumed that their target-date fund investment was designed to take them TO that date, not beyond it. Of course, that assumption bears within it another assumption: that the participant has managed to achieve a certain level of savings accumulation. Many haven’t, of course, and this knowledge underlies the assumption of those who employ the “through” approach to TDF designs, assuming that a longer equity exposure will serve to shore up that shortfall. Which, by the way, is another assumption imbedded in the “through” designs—that the participant will leave the money invested in that TDF (if not the plan itself) past their projected date of retirement.

Moreover, even the “to” TDF camp tends to assume that participants will buy an annuity at retirement, though they frequently don’t.

The GAO report noted that each of the eight TDF managers it contacted “considered contribution rates in establishing its asset allocation strategy,” noting that “some explicitly noted that these assumptions did not match the general pattern of contribution rates.” It will surprise few to learn that their assumptions were generally higher, but that they “hoped that rates will increase as workers adjust to DC plans serving as the sole employer-based retirement account,” according to the GAO report.

And, of course, since a growing number of participants were defaulted into TDFs to begin with, nobody has any real idea if they will behave the way participants have historically or not.

That said, the GAO has recommended that the Employee Benefits Security Administration (EBSA) (1) amend the QDIA regulations such that fiduciaries are required to document whether factors beyond age or retirement date are relevant, (2) provide guidance to plan fiduciaries on the limitations of benchmarks on those funds, and (3) expand participant TDF disclosures to provide information regarding the assumptions concerning participant contribution and withdrawal intentions. EBSA was at least open to the first two (though not commenting directly, since they are currently in the process of recrafting those regulations), though it resisted the last as being a “very complicated and subjective undertaking which could affect a plan sponsor’s decision to offer any target date fund option(s),” according to EBSA’s response to the GAO report.

But, IMHO, if that gives a plan sponsor pause in offering a particular option—well, perhaps it should.


—Nevin E, Adams, JD

See also “IMHO: When You Assume…”

The GAO target-date fund report is at http://www.gao.gov/new.items/d11118.pdf

Warning “Labels”

Litigation—or more accurately, the fear of litigation—frequently serves to put us on notice. It’s why we find labels on hair dryers cautioning against bathtub use, why hemorrhoid cream comes with an admonition that it is not to be taken internally, why that fast food coffee cup is emblazoned with a note that the contents are, in fact, “hot.” And yet, we know that as silly as these warnings seem, somewhere along the line either someone actually engaged in the activity in question, or some corporate attorney was afraid that they might.

There’s something of that concern still lingering around the target-date fund concept. Many participant-investors (and not a few plan sponsor fiduciaries) were caught unawares in 2008 when the hugely popular 401(k) investment option turned out to be as varied and unique in approach and assumptions as its marketing materials doubtless claimed it would be. Regardless, many plan sponsors—and probably most retirement plan participants—glossed over those differences, doubtless focusing instead on the message that this was an investment option managed by professionals who not only knew what they were doing, but could be trusted to keep an eye on things while we went about our daily lives.

Having learned the hard way that those structural differences exist, our industry—and those who regulate it—has spent the past two years trying to figure out how best to avoid a recurrence of the surprise, if not the result, from those designs. After a lot of discussion and several regulatory and legislative hearings, last November the Employee Benefits Security Administration (EBSA) issued a proposal to enhance the disclosure of these offerings (see “EBSA Unveils Target-Date Disclosure Proposal”), shortly after the Securities and Exchange Commission (SEC) issued its own ideas. IMHO, the latter was a pretty modest effort; the former—well, let’s just say it struck me as a lot of information to share with a participant who, in all likelihood, probably didn’t actively make the investment choice in the first place.1


I’ve always found the issue of participant disclosure to be a tough one. Participants clearly need all the help they can get in terms of better understanding and preparing for their retirement. On the other hand, it seems that the more paper we present to them, the less inclined they are to pay any attention to it.

However extraordinary the events that culminated in the target-date “surprise,” and however complicit participants (and plan sponsors) may have been in ignoring the information they may have had access to, it would be unconscionable not to try and prevent a recurrence. That said, IMHO, the situation won’t be resolved by a lot of legalese, even if offset by colorful charts—and I’d advise caution in trying to squeeze too many complicated concepts into the disclosure, however well-intentioned or valid. I’ve no objection to providing that information (and more) to participants who request it, nor do I mind them being told such things are available as part of a general communication. But it seems to me that imposing such materials en masse will only serve to deter a better understanding—and doesn’t that defeat the purpose?

Asset allocation funds generally, and target-date funds in particular, have, IMHO, been a godsend for participants who know they ought to save but lack the knowledge, interest, or time to make sound investment decisions. That said, most of the investors who seem to have been blind-sided appear to have been caught off guard by one simple factor: How much of the fund was invested in stocks at the projected retirement date, a date that, in most cases was part of the name of the fund? What people tell you (at least with 20/20 hindsight) is that if they had only known that their 2010 fund had so much money invested in stocks, they would have made a different, and ostensibly better, choice.

Consequently, I wonder if we couldn’t just give the vast majority all the “heads up” they need by a simple notation as to the allocation to stocks, bonds, and cash at the projected retirement date. It’s a solution that surely lacks “nuance,” but I suspect that participants inclined to pay attention to such things would glean what they need to know to avoid being caught off guard again; and those who don’t will almost certainly not read the types of disclosures currently under contemplation. It’s a recommendation already encompassed in the proposals, but one that IMHO is quickly being obscured by the “kitchen sink” approach so often attendant with legal disclosures.

I’ve often thought (and said) that many of the disclosures in our lives are written “by the lawyers, for the lawyers.” This time, wouldn’t it be nice if we had one that was designed to be read and understood by the rest of us?

—Nevin E. Adams, JD

1 In fact, in a recent letter to the Employee Benefits Security Administration (EBSA) commenting on the proposal, the SPARK Institute expressed concern that some of the proposed target-date fund disclosures would be over participants’ heads (see “SPARK Calls for Simplification of Target-Date Disclosure Rules”), and ERIC President Mark Ugoretz cautioned that “[i]nundating participants with excessive information has serious consequences; too often it results in participants simply ignoring critical information that is overcome by excessive data” (see “ERIC Calls for Balance in TDF Disclosures”).

In contrast, in its comments on proposed target-date fund disclosure regulations, the American Society of Pension Professionals and Actuaries (ASPPA) and the National Association of Independent Retirement Plan Advisors (NAIRPA) suggested additional disclosures—including a focus on the impact of taking a lump-sum distribution, and a statement as to the potential impact of disparate ages between spouses (see “ASPPA Suggests Additional Target-Date Fund Disclosures”).

"Sure" Things

In a very real sense, this has been a “rebuilding” year for many plan sponsors and participants: a time spent rebuilding account balances, resurrecting and/or reviving employer matching contributions, a time for shoring up participation rates, and—in some cases—restoring trust. The markets, overall, have been sympathetic to those causes, but in many respects, the still-soft economic trends doubtless weighed on the kinds of dramatic trend shifts that we have seen in recent years.

That said, only a quarter (24.9%) of some 6,000 plan sponsor respondents said that “all or nearly all” of their participants were deferring enough to take full advantage of the employer match, a reading that declines sharply with plan size. Additionally, participation rates were roughly flat with a year ago; with responding plans reporting a combined participation rate of 71.5%, compared with 72.3% a year ago. The median participation rate was also lower; 75.0% in 2010, compared with 78% in last year’s survey.

As for automatic enrollment, the 2010 trend line was mixed. While the overall adoption rate was slightly lower this year, there was a discernable uptick in adoption at the largest programs (62.7% in 2010, compared with 52.3% a year ago) and about a 10% increase in the number of mid-size and large programs—but small and micro plans showed no change at all. The overall pace of contribution acceleration—that process of providing for annual increases in the rate of deferral—slipped from a 15.5% adoption rate in 2009 to just one in 10 plans this year (though most of that decline came from the smallest plans). However, even the adoption rate at the largest plans was effectively flat from a year ago.


The number of plans not offering some form of financial/investment advice continued to shrink. In this year’s survey, fewer than one in four plan sponsors did not offer that support, though larger programs were more likely to eschew the option. Relying on a financial adviser outside the plan was the preference for 37.5% of this year’s respondents, though that option was significantly more appealing to micro and smaller employers. While there continued to be different trend lines in different market segments, there was a distinct and noticeable trend across market segments toward offering—and accepting—“help.”

But as I sorted through the results of our annual Defined Contribution Survey, the one thing that emerged as something of a theme across multiple categories was—a lack of clarity. Plan sponsor respondents—and I maintain that those who respond to our survey are some of the most knowledgeable and actively engaged in their responsibilities—expressed what I thought were relatively high levels of uncertainty around several key plan-design elements: fees, target-date glide paths, retirement-income offerings, the focus of their investment policy statements, and even the “best” option for a qualified default investment alternative (QDIA).

Now, that may simply be a reflection of the wide array of choices available, the pace of new product development, and the unsettling effects of volatile markets. In fact, it might even reflect a certain level of prudent humility on the part of serious plan fiduciaries, who are aware of just how much they don’t know in the midst of that change and turbulence and are willing to own up to that reality.

After all, as Mark Twain once said, “It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so.”

—Nevin E. Adams, JD

Scale "Model"

I’ve long had an issue with weight scales, for the perhaps obvious reason that, these days, they frequently deliver a message I’d just as soon not receive. See, even when I’m feeling pretty good about the way I look and feel, those scales generally remind me that is at a weight that I know is not “appropriate” for my height.

Over the years, I have rationalized that gap in any number of ways; that those scales are frequently inaccurate, that the definitions of “appropriate” are skewed, even that I’m wearing clothes (or shoes) at the moment that are throwing things off (hey, I’ve got pretty big feet). But since I know, deep down, that those are, after all, mere rationalizations for avoiding the truth, these days I pretty much just treat stepping on scales as I would stepping on a rusty nail—which is to say, I avoid them at all costs…at least until I manage to get back on a regular exercise regimen.

My sense has long been that that is how participants approach the issue of figuring out how much they need to save for retirement. It’s not that they don’t know they should know that number, and not always that they just don’t have time to deal with it. Mostly, they have a sense that the number will be larger than they would like it to be, and that, coupled with a sense that the savings they have accumulated will be smaller than it is “supposed” to be—well, let’s just say they don’t want to be reminded that their retirement plan health isn’t good.

There was some of that in the “National 401(k) Evaluation” published by Financial Engines (see Report Highlights Savings Gaps, Ways To Close Them). The report was, in fact, replete with signs that most participants in the sampling are not in very good shape when it comes to retirement, with roughly three-fourths not on track to replace 70% of their pre-retirement income at age 65. When you consider that about a third have badly allocated portfolios (the report somewhat euphemistically terms these “inefficient”), and that nearly 40% are not contributing enough to receive the full match—well, let’s just say that there are some obvious reasons for the gap.

IMHO, it’s more than a bit ironic that studies routinely show that participants who take the time to make that retirement assessment feel better—and are more confident—about their retirement preparations than those who don’t. Of course, it could be that the only ones taking the time to check things out are those who are already reasonably confident that they’ll get a good result; unfortunately, I don’t recall ever seeing a connection between pre-assessment confidence and post-assessment (nor, for that matter, do these confidence assessments typically correlate confidence with savings that justify that sentiment).

Still, I like to think that those who take the time to do the assessment find out that things are perhaps not as hopeless as they had thought—and that, following the assessment, they walk away with a specific action plan for either staying on track, or closing the gap between needs and reality.

Inside the Financial Engines report there are a couple of examples that illustrate the point. One is a 45-year-old participant making $50,000/year who currently has a $50,000 account balance and who is deferring 4% in a portfolio that is overly risky—a combination that the report says will leave him 27% below his idea goal (if the market performs “typically”). But the report notes that if this participant reallocates at an “appropriate” risk level, they can narrow the gap to 23%; if they do that AND save 2% more per year, they can cut the gap to 14%; and if they do both AND delay retirement two years—well, they’re on track. Or, this participant could simply save 8% more a year to achieve the same gap-closing result.

Now, like with my bathroom scale, you can quibble with the assumptions, but the important thing, IMHO, isn’t taking the time to figure out you have a gap—most of us probably have that sense before we ever sit down with our retirement plan statement. Rather, it’s the plan that comes out of that process—the plan that helps us get back where we need to be—that not only helps us feel better, but gives us a reason for that feeling. And, like that bathroom scale model, the longer you put that off, the longer that “recovery” will take – and the harder it will be.

—Nevin E. Adams, JD

QDIA Essentials

PLANSPONSOR’s National Conference last week featured a series of panels titled “Five Things You Need to Know About…” focused on a series of topics.

One of those was qualified default investment arrangements (1), or QDIAs—and while the “five things” that follow are somewhat different from the list presented by that panel, what follows was certainly inspired by the discussion.

Here’s my list:


(1) You don’t need to have a QDIA to get 404(c) protection.

IMHO, one of the most marvellous things about the Pension Protection Act’s defined contribution provisions was that they weren’t imposed on plan sponsors. They provided clarity, structure, guidance, and, yes, protection on things like automatic enrollment, contribution acceleration, and default fund choices—but didn’t require that you embrace these concepts, unless, of course, you hoped to benefit from the protections associated with adhering to those structures. Sure, IMHO, it’s a lot easier to obtain 404(c) protection under the umbrella of the PPA’s qualified default investment alternative (QDIA) provisions—but plan sponsors who had those protections in place before the PPA can still have them by still continuing to doing the things required to retain them today.

(2) You need to pay attention to participant notices.

Among all the fuss over what a QDIA is, and the applicable structures for automatically enrolling participants in those options, it has been easy to gloss over the requirement to notify those defaulting workers that they are being defaulted, and that they have a right to opt out—both upon enrollment and annually thereafter. Failure to provide the proper notices at the proper times has long been an impediment to fulfilling 404(c)’s conditions—and, if you’re not careful, perhaps enough to thwart QDIA’s shield as well.

(3) A QDIA doesn’t have to be a target-date fund.

Admittedly, target-date funds are the low-hanging fruit of QDIA options. While balanced funds, managed accounts, or even target-risk funds are explicitly acknowledged in the regulations, it is also clear that in order to be “qualified,” the QDIA must be structured in such a way as to take into account the age of the participant and/or the workforce (see “IMHO: It’s About Time” at http://www.plansponsor.com/IMHO___It’s_About_Time.aspx). New adoptions seem to be embracing the target-date approach, but, at least anecdotally, it seems that plan sponsors who previously had a balanced-fund default are finding ways to make it work.

(4) The fiduciary requirements to prudently monitor and select a QDIA are no less than for any other plan investment option—and they are fiduciary requirements.

Plan fiduciaries can reap significant benefits from the adoption of a QDIA, and participants even more so—if the option is prudently selected and monitored. Now, personally, I think you could make a case that the selection of an investment fund in lieu of any participant direction whatsoever (much less one that studies consistently indicate will likely never be reallocated) should, if anything, be held to a higher standard than that imposed on the “regular” investment options on the retirement plan menu.

But, at a minimum, in the QDIA regulations, the Labor Department made it abundantly clear that “selection of a particular qualified default investment alternative… is a fiduciary act and, therefore, ERISA obligates fiduciaries to act prudently and solely in the interest of the plan’s participants and beneficiaries.”

Moreover, that, “[a]s with other investment alternatives made available under the plan, fiduciaries must carefully consider investment fees and expenses when choosing a qualified default investment alternative.”

(5) Just because a default fund isn’t a QDIA doesn’t mean it isn’t a prudent default choice.

While target-date vehicles are certainly convenient for plan sponsors and well-received by participants—and explicitly acknowledged as QDIA-eligible—they aren’t the exclusive prudent choice for a default option. Of course, choosing something else—a target-risk fund with no age orientation, a balanced offering, or even a stable value fund—won’t afford you the same protections that a QDIA will. On the other hand, a well-chosen, thoughtfully monitored investment default might not require them.

—Nevin E. Adams, JD

(1) Default investments are investment options chosen by plan fiduciaries in situations where participants fail to provide investment instructions, either through some kind of administrative oversight, or in cases such as automatic enrollment. The Pension Protection Act of 2006 (PPA) provided certain specific conditions under which plan fiduciaries would be afforded special protections when certain specific qualified default investment alternatives were provided for that purpose.

Cynic’s “Cull”

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

- Nevin E. Adams, JD

Goals Oriented

As the New Year begins, we are often of a mind to think about making a fresh start. Working with your plan sponsor clients, you may well have established new goals for your retirement plans this year—a new threshold for participation, perhaps—or maybe you’ve just rolled out a new fund menu for your participants.

But whether those programs have undergone change or not, it seems like a good time of year to help participants reexamine their savings goals—and perhaps even some of their “bad” retirement savings habits. Here’s a short list of “resolutions” that you can share with your plan sponsor clients—and discuss with their participants.

___ Resolve to participate in your workplace retirement savings plan.

If you are not already saving for your retirement in your workplace program, you are missing out on one of the most important—and easiest—ways of making sure that you are on track for a financially secure retirement. Unless, of course, you have a rich (old) uncle.

___ Resolve not to miss out on the company match.

Odds are your employer matches your contributions to your retirement savings account up to a certain level, say 5% of 6% of your pay. Whatever that level is, if you do not contribute up to that point, you are letting “free” money slip through your fingers.

___ Resolve to increase your savings rate in your workplace retirement savings plan by at least 1%.

If you are already saving, are you saving enough? Have you ever made an attempt—with some kind of planning tool or the assistance of a financial adviser—to figure out how much you will need? Even if you have, it is remarkably easy to increase your current rate of savings by as little 1%--and you might be surprised just how much difference that will make!

___ Resolve to consider rebalancing investments at least once this year.

Your retirement savings account is being rebalanced all the time—by the investment markets. You can start out the year with half of your account balance in stocks and the rest in bonds, and a month later find that 70% is now in stocks and just 30% in bonds, or the reverse. How much and how fast depends on how your balance is allocated, and what is happening in the market. The bottom line: Once you have taken the time to put together a thoughtful allocation, you need to keep an eye on things. Once a month is good, once a quarter is probably enough, and once a year—well, that’s a minimum. Try picking a day that you won’t forget—your birthday, an anniversary…. Or any three-day weekend.

___ Resolve to use target-date investments properly.

Target-date funds are a pre-mixed investment solution—and most are designed in such a way that they assume that you are investing all of your retirement savings in that one investment. If you mix and match that with other funds on your retirement savings menu—or split your savings between two (or more) target-date funds—you will probably wind up with a mess. Just pick one. It’s the basket you SHOULD put all your eggs into.

- Nevin E. Adams, JD

'Holding' Patterns

In one of the more challenging economic years in memory, it is not surprising that the pace of change set in motion in defined contribution plans by the Pension Protection Act slackened. If anything, IMHO, it is remarkable that the adoption of devices such as automatic enrollment and contribution acceleration did not decline.

That said, among a record number of respondents to PLANSPONSOR’s annual Defined Contribution Survey, the pace of automatic enrollment basically flatlined—just 30.8% of plan sponsor respondents said they now employ that approach (though more than half of the largest plans now do), compared with 29.8% a year ago. And, even after the encouragement afforded by the PPA, among those that have adopted automatic enrollment, only about four in 10 extended that to all workers (the rest applied it to newly hired workers only). Perhaps as a result, the average participation rate declined—slightly—to 72.3% this year from 73.8% a year ago, but was nearly unchanged from the 72.7% in the 2007 results.

Despite all the headlines about a variety of firms’ 401(k) match suspension, only about 5% of this year’s respondents had reduced the company match/contribution, with a like number saying that they had eliminated it. Another 5% each were contemplating either cutting or suspending the match. The most encouraging news was that nearly eight of 10 had no plans to reduce, suspend, or eliminate the match, and that, even among those that had, nearly one in four planned to restore it for 2010, while roughly 60% said they planned to remain at the cut or suspended level next year.

Is change in the air? Some, apparently—and for the very most part, it is about “more,” not less: 15.5% have already added investment funds, and 17% have increased the frequency of their participant education. Roughly 9% had changed their qualified default investment alternative or QDIA (likely to a target-date fund), and nearly as many had increased their investment manager due diligence, slightly more than the 7% that had hired, fired, or changed their investment consultant. As for plans for change in the remaining months of this year (the survey was taken over the summer), the trends were much the same—though IMHO not surprisingly, in view of the recent attention focused on target-date funds, an intention to increase due diligence on their target-date option’s glide path registered much higher on the “to do” list.

Speaking of target-date funds, historical performance may not be a guarantee of future results, but for plan sponsors, that was nonetheless the highest-ranked criterion (6.07 on a 7.0 scale). However, advisers can take heart from the finding that the second-most valued criterion was the recommendation of a financial adviser (trumping fund-family reputation, risk profile, glide path, and fees).

Interestingly enough, the lowest-ranked criterion was the recommendation of their DC provider. That doubt showed up in another telling statistic: Nearly 28% of this year’s respondents said they were “not sure” if the target-date funds offered by their provider were the most appropriate (that was, however, down from the 35% that expressed that opinion a year earlier—BEFORE the market plunge).

Without question, the past 12 months have brought much in the way of change to our industry—and much of that not change for the better. And yet, all in all, it is, IMHO, amazing how resilient employers and their plan designs have proven to be. We have perhaps not made much forward progress in the past year—but there’s something to be said for being able to hold the line.


—Nevin E. Adams, JD

"Thanks" Giving

Thanksgiving has been called a “uniquely American” holiday, and while that is perhaps something of an overstatement, it is unquestionably a special holiday, and one on which it seems a reflection on all we have to be thankful for is fitting.

Here's my list for 2009:

First off, I’m thankful that the financial markets have stepped back from the precipice we were surely standing at a year ago. I’m thankful that the investment markets have recovered from the worst of the losses of 2008, even if we still have a long way to go. I’m thankful that so many Americans seem to be concerned about the nation’s fiscal health—and hopeful that those concerns will resonate with those who make decisions that affect it.

I’m thankful that relatively few employers felt the need (or took the opportunity) to cut matching contributions this year—and even more thankful to see so many of those who did cut the match restore it.

I’m thankful that so many employers have remained committed to their defined benefit plans and—often despite media reporting to the contrary—continue to make serious, consistent efforts to meet funding requirements that are quite different than when most initially decided to offer these programs. I’m thankful that a core group of lawmakers in Washington continues to be attentive to the very real challenges imposed by those rules, and continue to be proactive in responding to rational relief measures during this difficult economic period.

I’m thankful that so many participants now seem to have a greater appreciation for the importance of prudent, diversified investing—and thankful, though it was a painful lesson for some, that the deep differences in philosophy that underlie target-date investments are being better communicated and understood. I’m thankful that so many participants took it upon themselves to increase their contribution levels during the downturn, and that so few dipped into those retirement plan accounts to tide them through the rough patches.

I’m thankful that plan sponsors will soon have access to more information about the expenses paid by their plans—and optimistic that it won’t be as bad as they fear. I’m thankful that we’re no longer talking about whether fees should be disclosed to participants, but are now trying to figure out how to do it.

I’m thankful for the intelligence, experience, and professionalism of the folks that regulate our industry—and who do so consistently, despite the occasional changes in “the guard.”

I’m thankful to be part of a growing company in an important industry at a critical time. I’m thankful to be able to, in some small way, make a difference on a daily basis.

And, of course, I’m thankful that so many good and capable advisers were available to participants during the worst of the downturn.

I'm thankful for the home I have found at PLANSPONSOR and then with PLANADVISER, and the warmth with which its loyal readers have embraced me, as well as the many who have "discovered" us during the past 10 years. I'm thankful for all of you who have supported—and I hope benefited from—our various conferences, designation program, and communications throughout the year. I’m thankful for the constant—and enthusiastic—support of our advertisers, even in a year that has been tough for so many.

But most of all, I’m once again thankful for the unconditional love and patience of my family, the camaraderie of dear friends and colleagues, the opportunity to write and share these thoughts—and for the ongoing support and appreciation of readers like you.

Thank YOU!

Nevin E. Adams, JD

Conference 'Calls'

As I was listening to, and participating in, panels at our Future of Asset Allocated Funds conference in California this past week, I was struck again by how much things have changed in the past year.

For example, at this conference a year ago, when we broached the notion of marrying a risk-based approach with a target-date offering, the general feeling seemed to be that that would be tantamount to taking a perfectly good, clean, and simple concept—and ruining it. This year, the room was not only ready for the idea, there was widespread enthusiasm for it.

Similarly, a year ago, when we asked folks about the wisdom of putting a family of risk-based and date-based funds on the same retirement plan menu, well, the consensus would have been that you would be playing with fire in terms of confusing participants. This year, the notion not only seemed to be that it could be managed—but that it would be a real enhancement to the program.

A year ago, the importance of understanding and being able to benchmark the glide path of a target-fund family was front and center, and the “debate” was all about how much of that 2010 fund should be in stocks. This year, that allocation discussion had “evolved” - into a vigorous debate around whether those glide paths were—or should be—designed to take participants “to” or “through” the stated target date (see “IMHO: When You Assume…” ).

What Plan Sponsors Want

Considering what has transpired over the past 12 months, it’s hardly surprising, IMHO, that we’ve all got a somewhat different perspective. And, when PLANSPONSOR’s annual Defined Contribution Survey is published next month, you’ll see further evidence—strong majorities (among thousands of plan sponsors) expressing an interest in getting more detailed descriptions of glide path AND end date, a greater explanation of underlying funds and asset classes, and a clearer explanation of fund expenses.

You’ll also see a surprisingly robust minority continuing to express doubt that the target-date option available through their recordkeeper is the “most appropriate.” Despite that, I also found it interesting that very few (at least by show of hands) in last week’s audience were enthusiastic about the prospect of a government/regulator-imposed target-date “standard” for these vehicles.

One thing that wasn’t in evidence at our conference: a sense that plan sponsors were giving up on the asset-allocation solutions, or a sense that participants are any better equipped to deal with those investment decisions now than they have ever been. If anything, the events of the past several months seem to have engendered a sense that professionally managed investment solutions are more important than ever. Indeed, the clear sense of those in attendance was that, while some participants may have been surprised—perhaps shocked—at what the market’s slide did to the “target” investments of those nearing retirement, most were still better off in those “one-size-fits-most” vehicles than if they had been left to their own investment devices.

That said, there was a clear sense among those in attendance that participants needed more than just to be “dumped” in a solution, even if it was one “good enough’ to provide qualified default investment alternative (QDIA) protection.

There was, IMHO, a strong sense that there was benefit in an asset-allocated solution that took the individual into account, one that was willing to provide the participant-investor with the opportunity to understand what they were getting into, and to be able to make a conscientious choice about how, and when—and yes, perhaps even “if”—to get out.


- Nevin E. Adams, JD



See also “End” Points?

12 Things You need to Know about Target Date Funds

12 Things You Should Know About Asset-Allocation Funds

Asset-allocation fund solutions have, to put it mildly, exploded on the retirement plan scene—aided in no small measure by the sanction of the Department of Labor’s final regulations regarding qualified default investment alternatives (QDIA). However, the recent market turmoil has drawn a fresh, heightened scrutiny to the philosophy and structure of these popular defined contribution choices and, certainly for plan sponsors, reminded us all that there are differences—significant differences, in fact—in how these vehicles are constructed, how they are managed, and even the philosophies underpinning those designs.

Now, the “right” answer for your program will, in many respects, be unique to your program. On the other hand, there are certain basic questions that plan sponsors should know the answers to in choosing an asset-allocation solution.

Getting Started

1. Are we talking about lifestyle or lifecycle funds?

The terms are used interchangeably all too often. However, funds that structure their allocation based on an individual’s risk tolerance (risk-based) are generally called lifestyle funds. Those that base that allocation on a specific future date (date-based) are referred to as lifecycle funds or, more broadly, target-date funds. While the latter was more prominently cited in the DoL QDIA regulations, a properly structured risk-based fund could work as well—and has seemed to enjoy a much greater receptivity in the marketplace even before those regulations (see #2 below for at least part of the reason). Some plans have both on their plan menu, but that can complicate plan communications. On the other hand, IMHO, risk is going to loom larger on people’s minds going forward.

2. Is a risk tolerance questionnaire part of the process?

In my experience, no matter how short and “approachable” the process of ascertaining a participant’s tolerance for risk, it is never going to be something that is comfortable for most. Still, if you are employing a risk-based solution, you have to have something to base that tolerance on—and you should make sure how comfortable you are with that process/document. Additionally, today there are several risk-based target-date offerings that combine both approaches. I’ve tended to be skeptical about these—IMHO, many still focus more on the risks of losing money than the risks of not having enough money to live on--but, short of imposing some kind of generic sense of tolerance, you have to have some means of assessing comfort with risk if you are going to employ a risk-based alternative.

3. What kinds of history/benchmarks are available?

Just a couple of years ago, there were no benchmarks to speak of in this space (other than those constructed by the firms managing those funds, and those were often composites). Of course, just a couple of years ago, there were not enough funds in this space with enough history to make for a meaningful evaluation. However, time has provided the history many funds were lacking (granted, many would just as soon not have that fourth quarter 2008 result included)—and a new generation of benchmarks and indexes has emerged along with the explosion in these funds. But take note: The benchmarks today are as varied in their underlying philosophy and construction as are the funds themselves. IMHO, you need to first know what you believe about the approach, glide paths, and/or asset allocation before you pick the benchmark.

Fund Construction

4. 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 right answer, but the determination should be part of your evaluation.

5. What IS an appropriate asset allocation?

This is the million-dollar question for target-date funds these days. 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.

6. 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.

Fees

7. Do the funds have a fee “wrapper” in addition to the underlying fund charges?

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.

8. What are the fees charged by the funds?

Beyond the aforementioned “wrapper” fee, these funds will 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.

Plan Design

9. Does it fit your investment policy statement?

Most (though not all) retirement plans have an investment policy statement—that essential blueprint for monitoring and managing the investments you make available on your plan menu, set alongside the objectives you have established for your program. However, the blueprint you set out for your plan investments before you introduced an asset-allocation solution may not take their unique contributions—or considerations—into account.

10. How many “life” options are available on the recordkeeper’s platform?
For many plan sponsors and advisers today, there is a harsh reality at the end of the due diligence rainbow—a limited number of asset-allocation options available on your recordkeeper’s platform. In fact, it was not that many years ago that most plan sponsors could only pick from a single option. Limited choices may seem to make the decision easier, but these offerings are not identical, and you and your plan will be better served if you are able to evaluate and choose from a variety of options.

11. They can be misused.

No matter how hard we try to make these types of solutions “idiot proof”—well, let’s just say that you should take nothing for granted. Odds are that automatically enrolled participants defaulted into a QDIA will not fall prey to such mistakes. But, after years of being counseled that they should not “put all their eggs in one basket,” well-meaning participants have been known to try and split their investments across more than one asset-allocation solution. Fortunately, many recordkeepers today can apply system edits to prevent (or at least warn about) such missteps—and advisers also can certainly play a role in this education.

12. Should everyone who retires in 2020 (or 2010, or 2030, etc.) have the same asset allocation?

The simple answer to that question is, probably not. On the other hand, as an alternative that can broadly and efficiently address perhaps the most daunting participant savings obstacle, it is hard to think of a better solution. That is not to say, however, that this solution cannot, with the engagement and involvement of plan fiduciaries, be made even better.

—Nevin E. Adams, JD
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