Just Another Day?

This week, I’m going to do something I never thought I would do again.

I’m going to fly on September 11.

OK, so, in the overall scheme of things, it’s perhaps not that big a deal. I know that it’s been six years, that part of our not letting the terrorists win is to go on about our normal lives. I don’t even know anyone personally who died in the attacks, though I know people who do. At the time of the attacks, I wasn’t living in the parts of our nation targeted (although we relocated to the Northeast soon afterward). It’s not like I plan to spend some significant part of the day in prayer or contemplation—and it’s certainly not that I believe for one second that there will be a recurrence of those horrific events just because it’s the sixth anniversary.

I was, however, traveling by air on that fateful day, only to be grounded hundreds of miles away from friends and family (see Never Forget). I know that others were stranded farther away from their loved ones—and perhaps for longer. But it was a time when I wanted—more than I could possibly have imagined at the time—to be with my family. It was a time when people who love each other should have been able to comfort and reassure each other.

Somehow, the notion of once again being hundreds of miles away from my family on that day just seems wrong. Not as wrong as missing a birthday or graduation (I’m still batting 1.000 there)—but wrong, nonetheless. Whatever else we try to make of it, for this generation anyway, September 11 will always be “different.”

Like you, I’ll always have my memories of that day. I’ll never approach getting on an airplane the same way again, for one thing. I doubt that I’ll ever feel as “safe” as I once did, but I also appreciate in a very special way, every day, the love of my family, the support of friends, the joy of being alive—and the responsibility to remember always that there are those whose reunion with their loved ones still lies ahead.

I may be traveling this September 11. But it is not—and should never become—“just another day.”

Peace.

Impact Full

In a business notorious for change, it nonetheless seems fair to say that the past twelve months have been extraordinary ones indeed for financial advisers. In short order, we have had to absorb and assimilate the mandates of the Pension Protection Act, grapple with the portents of qualified default investment alternatives, gird ourselves for the impact of final regulations on deferred compensation plans and 403(b)s—and all this at a time when revenue-sharing practices are drawing an unprecedented level of scrutiny from all quarters.

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

That is why, in 2005, we launched our Retirement Plan Adviser of the Year award; to acknowledge "the contributions of the nation's best financial advisers in helping make retirement security a reality for workers across the nation." Today, it is both my honor and privilege to launch the nomination process for our fourth annual campaign to acknowledge the contributions of the very best financial advisers in the nation, both individuals and teams.

Impact Statement

The criteria that underlie the award are simple but impactful; we want to recognize advisers who make a difference through increasing participation, boosting deferral rates, enhancing asset allocation, and/or providing better programs through expanded service or expense management. It is no accident that those criteria also underlie the Pension Protection Act’s designs for defined contribution plans, for only by getting more workers saving in these programs at effective rates, and invested in prudent ways, can they have any real prospects for retirement security.

We will acknowledge the finalists in the December issue of PLANSPONSOR as well as the Winter issue of PLANADVISER, and profile the winners in the March issue of PLANSPONSOR and Spring issue of PLANADVISER. The finalists also will be recognized at PLANSPONSOR’s Annual Awards for Excellence celebration in New York City in March.

It has been our privilege these past several years to lend a hand to your efforts—first via PLANSPONSOR magazine; then via PLANSPONSOR.com, the NewsDash, and this publication; and, more recently, via our education arm, the PLANSPONSOR Institute and our PLANSPONSOR Retirement Professional (PRP) designation. Believe it or not, it was a year ago next month that we officially launched PLANADVISER—and later this month, we will offer our very first adviser-focused conference, the PLANADVISER National Conference, and I hope to see many of you there (but you need to register ASAP, if you haven’t already).

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

- Nevin Adams, JD

You can nominate a colleague, your plan's adviser, or yourself HERE

Sub-prime Time

Here we go again.

I’ve been in this business long enough to call to mind several big financial scandals. Not Enron and WorldCom types—ultimately, those were, to my way of thinking, pretty isolated cases, albeit driven by the motivation that seems to drive all financial scandals: greed and hubris.

However, over the past couple of weeks, retirement savings balances have been buffeted about by concerns about liquidity in the market, triggered by issues regarding institutions that have (apparently) loaned money to people that were based on property values that were projected to go up—when they haven’t. The problem, of course, isn’t just people being overextended on their mortgages (though that is a problem), or the firms that have allowed that situation to occur (though that is also a problem); it’s that the latter have created a whole category of investments that consist of those unraveling mortgage commitments—and lots of us have money tied up in those investments – or impacted by money tied up in those investments - whether we know it or not.

Signs of Trouble

It’s not like we couldn’t see this coming. People have been wringing their hands about the housing bubble bursting for quite some time now. Just like we did about junk bonds (before we called them “high-yield”), derivatives (before we started referring to them as “alternative” investments), and hedge funds (which are also sometimes called alternative investments, but here mainly because, IMHO, many have really been alternatives TO investing, à la betting against the market). Now, I’ll concede that the latter hasn’t imploded yet, at least not on a broad-scale, but the signs are all there, and we’ve already seen a couple “blow up.” But, as for our most recent problem, let’s be honest with ourselves—those who buy into (or take on) something called “subprime” certainly can’t plausibly say they didn’t see the potential for problems.

None of this is inherently bad, of course. Part of the beauty of our free market system lies in its ability to create new ways for innovative minds to raise capital and make money. Where we get into trouble is (a) when everybody “catches on” to the latest idea (thus drying up much or all of the opportunity), and (b) when “they” do so via “leverage”—that is, spending money they don’t have. Now, leverage, too, can be an enabling thing, but when everybody is doing it, well, sooner or later, the people who lend money always seem to want to be repaid—and, generally speaking, when the collateral that supports such investments can least afford that demand.

Not that that rationalization is likely to be of much solace to the retirement plan participants whose accounts are currently taking it on the chin, however. It’s not their fault (unless, of course, they contributed to the problem by taking out a mortgage they couldn’t afford, betting on the continued rise in house prices—just another form of borrowing money you don’t have), and yet they, as investors in and beneficiaries of the investment markets, must ride out the bad as well as the good.

The current “tumult” (we seem to be past the “crisis” stage, at least for the moment) should serve to remind us all of the dangers. You already may be hearing questions from plan sponsors and participants—about what is going on in the markets, about what has happened to their account balances—maybe even about what you recommend they should do about it all.

Questions are good. It means people are paying attention. But wouldn’t it be nice if the people who created these crises did - - - before they got to be the people who create these crisis?

- Nevin E. Adams, JD

PPA's SWAY

These days, the Pension Protection Act of 2006 (PPA) is sometimes referred to as the “Pension Destruction Act.” That’s too harsh an assessment, IMHO, but it certainly has a foundation in reality.

Without question, the PPA (it was just a year ago Friday that President Bush signed the legislation into law) imposed some new—and for many plans, harsh—restrictions on funding and accounting for funding. Additionally, it did so after many of the worst offenders and abusers of the system were already “out” (legislation frequently closes the barn door after the cow has escaped), and it did so at a time when many plans seemed particularly vulnerable, and many through no real fault of their own.

We may never know how many problems were averted by its passage—and by the time its new defined benefit provisions took hold, investment markets, interest rates, and contribution levels had combined to make the problems confronting pension plans much less severe than they were at the time of the law’s passage. Mind you, I’m not prepared to say that it protected any pensions, but it probably didn’t—on its own, anyway—trigger the early demise of many programs, either (though it may have accelerated the deliberations). Moreover, the PPA’s explicit sanction of the cash balance design, by some accounts, has given a new lease on life to that hybrid approach, at least in some market segments.

Defined Contribution Impact

As for defined contribution plans, I think the PPA did some good in putting structure around some of the “automatic” solutions, and, for the very most part, took into account some of the aspects of those programs that needed tending to; notably state wage law preemption and the ability to return those “mistaken” contributions. We now have some discrimination testing relief for plans that adopt the automatic enrollment approach codified in the PPA, and if some find the matching contribution requirement too expensive, the contribution acceleration provision distasteful, or the testing relief unnecessary (current safe harbor plans already enjoy much of that relief)—well, it’s optional, after all, not mandatory. If you like automatic enrollment, but not the PPA’s particular flavor, nothing prevents you from implementing your own version. As for the qualified default investment alternative—well, the DoL was working on this ahead of the PPA. Ironically, passage of the PPA may have actually slowed the timing of this particular enhancement—but we’ll have clarity soon enough.

The PPA’s participant notification requirements have been something of a burden, and almost certainly aren’t the aid to participant clarification that they ostensibly were mandated to provide. As for the concept of a fiduciary adviser—well, there’s perhaps not as much precise clarity there as some would prefer. But we do now understand (from the PPA and FAB 2007-01) that the plan sponsor’s fiduciary responsibility is for the selection/monitoring of the adviser, not the advice provided—and for many plan sponsors (and no doubt many advisers), that’s a welcome clarification. And within the guidelines of the PPA, there is another way for qualified fiduciary advisers to be compensated for their services.

Of course, almost overlooked in all the attention paid to the new tools included in the PPA is the fact that it removed the legislative “sunset” on an enormous number of crucial provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001—EGTRRA—including the Roth 401(k), increased contribution limits, repeal of the multiple use test, and modification of the top-heavy rules.

All in all, there may not be much “protection” in the Pension Protection Act—but, IMHO, there’s still a lot of good to be found there.

- Nevin E. Adams, JD

Incentives Eyed

We don’t have a large yard, but it’s big enough to be “unruly.” Despite my best efforts to ignore the unruliness (winter’s coming, after all), my wife—who thinks about things like having a yard that looks like we were in Cabo for the summer—was of a different mind.

While there are three teenagers living under our roof at present, we long ago realized that we couldn’t rely on them to see that something needs doing, much less to, on their own initiative, undertake to do something about it (dads can be pretty oblivious as well, but teenagers give a whole new meaning to the notion). They CAN, however, be bribed—er, “motivated”—and their mother made them an offer it would be hard to refuse; cold, hard cash. And while it was a sum well short of what we’d have to pay one of the ubiquitous yard services that swarm through our neighborhood, it was a lot of money to cash-starved teenagers. And it appears to be working.

What's In It For Them?

I was talking to an investment analyst this past week, and after a long conversation about automatic enrollment, QDIA prospects, discrimination testing, and how many working Americans were (and weren’t) covered by a workplace retirement plan (even today, less than half are, incredibly), he posed a simple question: “So, what’s in the Pension Protection Act that would encourage an employer to set up a 401(k) plan?”

I pondered that question for a moment before I finally—and somewhat hesitantly—offered, “Nothing, really.” Now, I went on to talk about the things that were in the PPA that might make it easier for plan sponsors who currently offer a program to continue doing so: how design “sanctions” like the automatic enrollment safe harbor could surely help on troublesome aspects like participation rates and discrimination tests; how the emergence of a true, clear definition of a qualified default investment alternative (QDIA) could remove some of the uncertainty behind some of the toughest decisions for plan sponsors; how access to professional help via the new financial adviser role might make it easier for participants to make better decisions. Still, when I stopped to think about it, I couldn’t imagine that any of those “new” approaches would have any sway in convincing an employer who didn’t already offer such a program to do so.

That’s a real problem for the retirement security of this country, of course. As I noted above, the Bureau of Labor Statistics says that only about 43% of working Americans are covered by a workplace retirement program today. While we rightly spend much time and energy worrying about the savings habits of those 43%, we are literally missing the big picture if we ignore the reality that a majority of working Americans lack the support of the kind of retirement programs many of us take for granted.

Why Knots?

There are reasons for employers to offer these programs, of course—potential workers care about them, and current workers often stick around for these benefits. Employers do receive some tax benefits for offering them as well, though in many cases, perhaps not enough benefit to counter the costs associated with sponsoring the program, not to mention the fiduciary risks attendant with choosing to do so.

IMHO, we tend to take for granted that employers will “do the right thing”; that they will simply care enough about their workers to take on these additional costs and risks. Fortunately, many do—but just as obviously, while they can clearly see the need, like my teenagers, they have other priorities (in fairness, those priorities frequently include “little” things like meeting a payroll). There are those in Washington who already are taking a hard look at the numbers of working Americans not covered by a workplace program and looking for ways to balance that out, to “level the field.”

Unfortunately, for some, that doesn’t involve encouraging more employers to get in, it means developing alternatives that don’t require the involvement of an employer; and some, I’m sure, would be perfectly content to take the existing enticements, such as they are, away altogether and—in an ironic display of nonpartisanship—rely solely on individual initiative or the support of the federal government. Either direction would, IMHO, serve only to encourage employers who are currently providing such programs to rethink that commitment, and the rumblings certainly do nothing to engender interest on the part of employers who aren’t currently doing so from changing that position.

Still, we can all attest to the tremendous impact of workplace retirement plans in helping ensure individual retirement security, whether it is through workplace education, the employer match, and even “peer pressure” in terms of encouraging participation. What we seem to have lost along the way is a sense that we need to provide incentives to employers to make that commitment.

Failing those incentives, is it any wonder that so many are still on the sidelines?

- Nevin E. Adams, JD

For the People, By the People

Last week, no fewer than a dozen industry trade organizations put their collective heads together and tried to help the Department of Labor—which has been working on a project regarding fee disclosure, and has asked for input—put together some workable principles on retirement plan fee disclosure (see Retirement Associations Submit Fee Disclosure Recommendations to DoL). Also last week, and perhaps not coincidentally, Congressman George Miller (D-California) did what he has been making noises about doing for some time now: He introduced a bill that would put the force of law behind better retirement plan fee disclosure, both to plan sponsors and plan participants (see Representative Miller Introduces Fee Disclosure Legislation). Miller’s 401(k) Fair Disclosure for Retirement Security Act of 2007 would go beyond mere words, however. It would mandate the inclusion of at least one “lower-cost, balanced index fund” on retirement plan menus.

It’s hard to credibly argue that we shouldn’t be telling participants how much they are paying for these retirement programs. On the other hand, we—rightfully, and this was a big part of the combined trade organization communication—don’t want participants to focus obsessively on fees alone. In this business, as in life generally, sometimes you get what you pay for, after all.

Where that leaves us, of course, is with a need to provide participants even more information about their retirement plan accounts than they receive at present. Now, we’re already burying them in paper—enrollment kits, prospectuses, fund information sheets, 404(c) communications, black out notices. Moreover, thanks to the Pension Protection Act (PPA), this year we began providing quarterly diversification notices (we’ll set aside for a minute the fact that we had to begin doing that before we had final clarity on exactly what was supposed to be in those notices). I have yet to talk to an adviser, third-party administrator, or plan sponsor who doesn’t think that we long ago passed the point of information overload—where participants are absolutely just dumping all of this paper straight into the waste basket. Yet, despite this knowledge, our solution is to create some more “information.”

Even if we weren’t at that stage, however, think about where we are as an industry with participant involvement with these accounts: automatic enrollment and contribution escalation, defaulted investments. We are rapidly entering a period where it’s going to be quite “fashionable” for workers to be even less involved with their retirement accounts than they have ever been. The mainstream media is already touting these “automatic” programs as something workers ought to be looking for and asking about. Kathy Kristoff, a personal finance columnist in the LA Times, last week said, “If you're lucky enough to have the newest kind of 401(k) plan, experts say you're off to a good start even if you don't lift a finger.”

Do we really think that this new generation of participants that didn’t even have to “lift a finger” to join the retirement plan will pay any attention to the current plan disclosures—much less the new ones that appear to be looming?

That won’t keep us from pushing for more and better disclosure, nor should it. At some level, whether participants read it or not, there’s just something about making people put information in writing—and knowing that SOME people WILL read it—that helps keep things on the “up-and-up.”

But, IMHO, we’ve had far too many “solutions” created by regulators and legislators—by lawyers for lawyers, if you will—and they’re not doing a bit to help the people for which they are ostensibly intended (here’s a hint: If a disclosure requires a footnote, it’s too complicated). At the risk of greatly oversimplifying the challenge, I wonder if we couldn’t develop an “elevator speech” for these programs, boiled down to the essence of what a participant really needs to know—deliverable in the space and time of an elevator ride.

I’ll bet we could do it. I’ll bet some of you have.

- Nevin E. Adams, JD

Note: If you’ve got an elevator speech for participants; something that gets to the heart of the reason for savings, the selection of appropriate investments, and the fees associated with those decisions – please share it with me at nevin.adams@plansponsor.com. We’ll share the best in a future issue of PLANSPONSOR magazine, anonymously if you – or your compliance department - prefer.

Lies, Damned Lies, and Statistics

I am fortunate enough to have access to a vast array of studies, research, and surveys about this business. Even more fortunate to have access to a PLANSPONSOR research arm that provides an opportunity not only to gather and analyze, but to pose our own questions to a remarkably diverse audience. Still, as Mark Twain once famously wrote, “There are three kinds of lies: lies, damned lies, and statistics.” (1)

We recently ran coverage of a survey that spoke to trends among defined benefit plans. That engendered the following response from a reader:

Isn't it interesting how perspective can rule the most simple things? The article you refer to that shows defined benefit plans decreasing in number is such a case. Mercer deals with the larger corporate plan sponsors. Their plans are underwater for numerous reasons and are being terminated in wholesale lots. On the other hand, small companies are making defined benefit plans the plan du jour. There are several reasons for this; larger tax deductions, demographics, insecurity with Social Security, the investment experiences of 1999-2002, the desire for a "guaranteed" benefit, etc. Our company is the largest pension administration firm in Florida, and we have set up five defined benefit plans to every three defined contribution for four consecutive years. Our experience has been shared by virtually all TPA's in the small-company market all over the country.

Now, I have no independent validation of that reader’s claims, but I heard from a number of advisers and providers that support smaller employers that the rumors of the defined benefit plan’s demise is, to draw on another quote from Mr. Twain, “greatly exaggerated”.

In our business, we must constantly guard against the favorable positioning of some survey results vis-à-vis the interests of a sponsoring organization; or the extrapolation of too much conclusion from too small, or unscientific, a sampling. Generally speaking, I favor sharing as much information/insights as possible—with as much full disclosure about the size of the sampling and/or the interest(s) of the sponsoring organization as possible. In our coverage, we try very hard to position—as high in the story as possible—the size of the sampling, the sponsoring organization, and where it seems applicable (and not obvious), some indication of possible motivation in putting out the information. It’s not that they necessarily would be pushing a specific result—sometimes it just influences their perspective on the proper conclusion to be drawn from the data.

Surveys Say

The challenge, of course, is that some data are simply more available. Larger providers tend to have larger client bases, and client bases of larger clients, to draw on, and/or larger budgets to pay other organizations to gather that information (generally from plans that fit their targeted plan demographics). Moreover, the use of “averages” frequently, if unintentionally, obscures the reality in small samplings. And when averages are averaged—well, it’s Katie, bar the door!

In my experience, human beings are inclined to focus on surveys that reinforce their own version of reality, rather than one that challenges it. Still, market trends are a significant motivator of plan sponsor behavior. That’s not illogical, IMHO—in an environment where complex financial decisions fraught with personal and professional risk are the order of the day, “what everyone else is doing” can offer a compelling reality check. But only if the reality is real—and not just “lies, damned lies, and statistics.”

- Nevin E. Adams, JD

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When considering data that purports to offer insights, it’s worth knowing:

Who sponsored/conducted the survey?
What are they selling?
Is the conclusion supported by the data?
Does that conclusion “fit” with those drawn by similar surveys?
How unbiased is the survey sampling?
How scientific is the survey sampling?
How similar is the survey sampling to your perspective/size?


(1) While the original quote is attributed to Benjamin Disraeli, Twain popularized it in the U.S. in “Chapters from My Autobiography.”

Question Marks

Without question, asset-allocation solutions—particularly target-date fund solutions—are well on their way to becoming a dominating force on retirement plan menus. More than three-quarters of the roughly 5,000 respondents to last year’s Defined Contribution Services Survey already had one of these options on their menu.

Moreover, the popularity of these offerings has resulted in a burgeoning number of choices, with what seems like a new introduction every other week, and by some of the most well-known and highly regarded names in the asset management business.

Having said that, the notions of what constitutes an “appropriate” asset allocation, much less an appropriate asset-allocation fund—or fund family—are varied, to say the least. Almost as varied as the number of choices, in fact—and it appears that those notions are shifting as well. These “moving” targets (see “Moving Targets”) will keep us all on our toes for the foreseeable future—and I suspect that we will all bring to that evaluation process certain grounding biases as we evaluate the alternatives, whether we admit to them or not.

Here are some of mine:

Stock up. Longer life spans suggest (to me, anyway) a need for more equities, longer, than traditional asset-allocation models seem to call for. At the moment, the primary battle for the “hearts and minds” of target-date design seems to focus on the amount—and motivations for the amount—of equities in the portfolios, particularly the further one goes out on the time horizon. The equity markets have been kind of late (to say the least) to those who have leaned heavily on them. Some target-date offerings have beefed up their equity allocations; others have grown increasingly critical of those decisions. The bottom line: I find that many of the more “conservative” asset-allocation strategies look very much like the traditional asset allocations of 40 years ago. That was then….

"Go long" in matching matching participants with target-dates. Although participants are already talking more about working past age 65, the current logic associated with picking a target-date fund still largely focuses on when you will attain 65. Even though most of the literature speaks to “retirement date” as the target, I think it’s a good idea to round “up” when it comes to picking the right choice.

Risk evaluation shouldn’t be a one-way street. When it comes to discussions of risk, I find that the risk of outliving money isn’t weighted as strongly as the risk of losing money. Now, this is a tricky thing because people tend to worry hugely about the latter until they get to a point where the former is a reality—and then, of course, it’s too late. This is exactly why participants (and plan sponsors who make default investment choices for participants) lean toward stable value and money market fund choices (see “Other People’s Money”). Now, I’ll admit there’s a big difference between going 100% stable value at age 30, and going 80% fixed income at age 60. But I think some of those conservative allocations don’t contemplate actually having to live on those investments for a quarter century—though once you get to age 65, the odds are pretty good.

Bond funds don’t act like bonds. Consequently, those late-cycle diversifications into bond funds don’t feel like they accomplish the same thing as diversifying into bonds. It’s one thing to pull some gains out of the stock market and invest in a security that stands a reasonable chance of returning your principle at a definite point in the future with scheduled interest payments along the way. Something else altogether, IMHO, to make that same investment in a bond mutual fund. Less volatile than stock funds, perhaps—but also more volatile than bonds, in my experience.


No doubt you have biases of your own, perhaps even some of the above. No doubt at least some of you would take issue with some of mine. I hope so. Clearly, no one person or firm has all the answers, and just as clearly, the ones who think they do—probably don’t. What’s important is that we continue to ask the questions, challenge the assumptions, doubt the “common wisdom.”

Ultimately, the quality of the answers lies in the quality of the questions—and the people asking them.

Nevin E. Adams, JD

Other People's Money

I was on a panel at our recent Plan Designs conference, and the topic of qualified default investment alternatives (QDIAs) came up. There was discussion about the Department of Labor’s proposed regulations on the subject; some observations about when we might expect to see final regulations; and ruminations from co-panelists Fred Reish and Mike Barry about ERISA’s embrace of the concepts of modern portfolio theory (MPT), and the importance of capital accumulation rather than capital preservation in making “appropriate” investment choices for participants that hadn’t, for whatever reason, elected to make their own.

Then, a plan sponsor in the audience raised her hand and shared the experience of her plan—shared how they had carefully considered the alternatives of a stable-value investment alongside an asset-allocation alternative, and how they had decided on the former, and did so just before the market tanked in 2000. Her perspective was simply this: If they had chosen the asset-allocation alternative—chosen the option that many (most?) experts say they should have—people would have lost money.

These days, I think it is fair to say that “common wisdom” would call for a different decision. In fact, the expert panel went on to basically lay out all the reasons why that was, if not a bad decision, at least not the one that ERISA’s prudence standard would seem to call for.

Stable "Values"

I understand the logic and rationale behind that perspective; and frankly, IMHO, most of the admonitions to broaden the DoL’s proposed QDIA definition to include stable-value choices seem self-serving, at best. We all know the issues with stable value—it’s ill-diversified (at least from the standpoint of the participant investor, though I find that the “single asset class” labels are generally not precisely accurate), pricey, frequently layered with early withdrawal penalties and/or restrictions, and anything but “guaranteed” (the way the old GIC label suggested). Still, I suspect that, for most of the participants that choose the option (and plan sponsors who choose default investments for participants), stable value provides what they are looking for—a return of their principal investment along with some stated rate of income. Simplistically, a bird in the hand, rather than two in the bush.

That doesn’t mean that stable value will gain the Department of Labor’s (DoL) official endorsement as a QDIA, of course—and, if stable value fails to make that list, it certainly will diminish its allure as a default choice (little wonder that the stable-value industry is up in arms, and that the mutual fund industry, which stands to gain significantly by the apparent endorsement of target-date solutions, has weighed in on the other side). That point of contention notwithstanding, current trends certainly seem to favor the adoption of asset-allocation solutions, rather than stable value, as default investments. Let’s face it: There’s a definite allure to being able to match a defaulted investment choice with the retirement date of a participant—a one-for-all solution that nonetheless seems at least somewhat customized. Finally—and for the lawyers, no doubt, sufficiently—ERISA’s concepts of investment prudence may well presume a certain reliance on the principles of MPT, ultimately demanding an asset-allocation solution.

There remains, however, IMHO, a case for a potentially different result when it comes to making decisions about “other people’s money.” A solution that doesn’t require a plan sponsor to explain to participants about MPT, or to offer a rationalization about timing and the markets—and one that, certainly on a net basis, might provide a reasonable return compared with the relative volatility of an asset-allocation alternative. I’m not saying that that decision doesn’t have to pass ERISA’s muster, or that it doesn’t have, as outlined above, problems of its own. I am saying, however, that the plan sponsor is clearly responsible for the prudence of these default investments, and that they must therefore ask themselves, “Do I think that this default is prudent for the likely term of its investment in this plan?”

And if they can make a case for the prudence of that decision, then, “common wisdom” notwithstanding, I think they have a case.

- Nevin E. Adams


For some interesting perspectives on the inclusion of stable value as a QDIA, see “SURVEY SAYS: Should There Be a Stable Value QDIA?”

See also “Default Ed”

"Might" Makes Right?

Last week the Government Accountability Office (GAO) published a 67-page report titled “Conflicts of Interest Involving High Risk or Terminated Plans Pose Enforcement Challenges.” In announcing the results of that report, Congressmen George Miller (D-California) and Ed Markey (D-Massachusetts), who had commissioned the report, issued a press release claiming that “Undisclosed Conflicts Reduce Pension Plan Returns,” and that “Workers Likely Bear Brunt of Lower Returns in the Form of Reduced Pension Benefits.”

The gist of that report: “[P]ension plan consultants assisting significant numbers of pension plan sponsors may have conflicts of interest, as a result of their affiliations or business arrangements with other firms that could affect the advice they provide to these sponsors.”

However, let me draw your attention to two words in that long sentence: “may” and “could.”

That’s right, after drilling down into the specific firms identified in a Securities and Exchange Commission (SEC) report two years ago (see “IMHO: Disclose Sure?”), the GAO determined only that pension consultants might have a conflict of interest that could affect the advice they provide to plan sponsors. Or, one is tempted to add, they might not.

The SEC report (see “Staff Report Concerning Examinations of Select Pension Consultants”) continues to be dredged up and referenced in media reports as suggesting that “more than half” the pension consultants examined by the SEC had potential conflicts of interest. What is frequently overlooked in that comment is that we’re talking about 13 of 24 firms (the SEC said that 1,742 firms under its oversight provided pension consulting services) – and even then, the SEC’s report said only that the “duality” in the customer base “may create a conflict of interest.”

Still, the most recent report notes that those 13 consulting firms had over $4.5 trillion in assets under advisement and, further, that a sampling of defined benefit plans “associated with” those firms had total assets of $183.5 billion. By any measure, that’s a lot of potential influence.

Performance Standards?

Now, if the report had left it there, it would have been just another expenditure of taxpayer dollars directed toward a fairly obvious result (though the GAO reports are generally very well-researched and informative in describing the historical and legislative background of the issues they cover). However, the GAO report went further – claiming to have found a difference in annual returns between the DB plans who used consultants with those potential conflicts, and those who did not – a 1.3% difference in annual returns, to be specific.

While I commend the GAO for taking the time and effort to see if a difference in result could be quantified, I have to say that I found their conclusion to be something of an extrapolation based on an assumption, founded on a premise – and thus undeserving of its appearance in the report. The GAO itself acknowledged the limitations of their analysis, noting that, “because many factors can affect returns, and data and modeling limitations limit the ability to generalize and interpret the results, this finding, while suggestive, should not be considered as proof of causality between consultants and lower rates of return.” (1) Indeed, consultants offer many types of guidance to pension plans, guidance that is not always solely oriented toward providing the very highest rates of return.

The GAO, again to its credit, acknowledged that the Department of Labor’s Employee Benefits Security Administration (EBSA) “noted a number of concerns about our statistical analysis and in particular our econometric analysis that suggests a negative association between consultants with undisclosed conflicts of interest and rates of return on assets. EBSA expressed important cautions that should be considered when interpreting our results, including some data limitations and our use of an estimate for our investment returns variable.”

Additionally, while the GAO claimed to have found a return differential between plans that were associated with the potentially conflicted consultants and those that relied on other firms, they “did not find significant differences in returns for those plans that had associations with both types of consultants.”

So - there are questions about the assumptions employed, the data itself, proof of the existence of a real conflict of interest that might have resulted in tainted guidance, doubt that the result measured – absolute performance results – would be appropriate under the circumstances - oh, and no apparent difference in the performance results of DB plans that worked with potentially conflicted AND ostensibly unconflicted firms.

As for the impact of all this on retiree benefits and pension funding, the GAO said that EBSA “emphasized the view that it is primarily the failure of plan sponsors to adequately fund pension plans causing plan underfunding problems rather than poor investment advice from self-interested service providers.”

Ultimately, IMHO, we’re left with more questions than answers – loose allegations predicated on tenuous assumptions – and the certainty only that consulting conflicts of interest may exist and could, if present, result in a difference in performance results. That, and a few hyperbolic headlines that, IMHO, cast a broad net of overly generalized assumptions.

If, indeed, there are real conflicts of interest, it’s time we identified them and ended the practice(s), once and for all. No ifs, ands, or “mights” about it.


- Nevin E. Adams, JD


(1) Among the caveats in the report about the assumptions employed were: the use of a “potentially unrepresentative sample of pension consultants to identify the pension plans included in our investigation that therefore limits the ability to generalize the results. A few pension consultants that had significant conflicts of interest that impacted their activity could very well drive the observed negative relationship. Further, the imbalance between the large number of plans associated exclusively with conflicted consultants and the small number of those that were not raise additional statistical issues and limits the ability to generalize the results. Lastly, given the short time period analyzed, it could be possible that some plans’ returns were abnormally low due to their investment strategies, and would have higher returns had the time period analyzed been lengthened.”

Fighting Words

“[T]he complaint is a rambling 38 page collection long on legal argument, public policy rhetoric and repetition, but vague in its allegations of facts which might be relevant to the claims alleged.”

With all the tact of a law professor dressing down a first-year student, U.S. District Judge John Shabaz of the U.S. District Court for the Western District of Wisconsin last week dismissed one of the so-called 401(k) revenue-sharing lawsuits brought by the St. Louis-based law firm of Schlichter, Bogard & Denton – and did so in just 18 pages. And he did so “with prejudice and costs.”

It was the second such case to be dismissed. In an even more succinct dismissal in February (two-pages), U.S. District Judge John Darrah said that the 401(k) participants in the Exelon Corp. plan failed to make a "link between the administrative fees they were charged and their market-based losses" (see Court Tosses 401(k) Participants’ Request for Investment Losses Relief).

Not that there weren’t elements of plan structure that might raise eyebrows in some quarters in the most recent case—the agreement between the plan sponsor (Deere & Co.) and the provider (Fidelity) to limit the fund menu to funds managed by Fidelity, for one thing (23 of the 26 funds on the menu were Fidelity’s). And then there is the judge’s matter of fact assertion that “Defendant Deere could have negotiated lower fees with Fidelity Research, or could have selected different funds from different providers with lower rates but has made no effort to do so.” One could readily imagine those exact words being uttered as a stark condemnation of a fiduciary that had failed to live up to its duty—but this court recounted it as a statement of fact, nothing more (and, for the record, there’s no fiduciary bar to doing what Deere did, so long as their motivations were solely in the best interests of plan participants/beneficiaries, and the fees and services so obtained were reasonable). Besides, the plan did offer access to a brokerage window. If participants wanted something beyond a Fidelity offering, they could tap into some 2,500 other alternatives.

Reasonable Doubts?

Furthermore, IMHO, Judge Shabaz was too willing to conclude that, since Deere participants were paying the same for their mutual investments as other investors, the fees must be reasonable. On the surface, the fees weren’t obscene—fees ranged from .07% for the Spartan Fund to 1.01% for the Diversified International Fund, according to the ruling. Still, it’s one thing to conclude that those fees were reasonable; quite another, IMHO, to assume that they are reasonable simply because others (and retail investors, to boot) are willing to pay them.

Still, Shabaz was clear in refuting the notion that the plan had any obligation to delve into the specifics of any revenue-sharing arrangement (“recent proposals to amend the regulations…to require revenue-sharing disclosures in annual reports make it apparent that present regulations do not require it”), and clearer still in rebuffing the notion that there was an obligation to share those details with plan participants (“Nothing in the statute or regulation directly requires such a disclosure”). Additionally, Shabaz concluded that the fee disclosures included in the Summary Plan Descriptions (SPDs) and prospectuses were sufficient for participants to make informed investment decisions—or at least that requiring more would “require judicial expansion of the detailed disclosure regime crafted by Congress and the Department of Labor pursuant to its statutory authority.”

While he acknowledged that some of the issues raised were undergoing reconsideration (1), when all was said and done, he found no merit in the claims, concluding in effect that it appeared “beyond a reasonable doubt that the plaintiffs can prove no set of facts in support of the claim which would entitle the plaintiffs to relief.”

One should be cautious in drawing too many conclusions from this result, of course. In the same way that lawsuits contain only one side of the situation, dismissals all too often shuttle aside potentially triable issues, not because the issues aren’t there, but because plaintiff’s counsel didn’t make an effective presentation. Still, on the issue of revenue-sharing disclosures, I think Shabaz got it right.

When the cases were first filed I, perhaps like many of you, was no doubt surprised that these kinds of allegations were applied to some of the largest 401(k) plans in the nation—plans that, by any reasonable assessment, probably had the staff and plan-size “clout” to get such matters “right.” Of course, they also had the size that makes for “deep pockets” and public brand(s) that typically eschew the kind of publicity that accompanies a lawsuit and facilitates a quiet settlement.

This time, however, it seems that they have a willingness to fight back.

- Nevin E. Adams, JD

(1) “A review of the report confirms that the revenue sharing issue raised by plaintiffs’ complaint is a matter of policy concern within the Department of Labor. It also unequivocally confirms that present regulations do not require disclosure of the information.”

Caveat Emptor

A couple of weeks ago my better half told me that she thought it was time that we traded in two of our aging vehicles – one a car that is too small for our family, the other a van that now seems too big for all but cross-country trips – for something in the middle. I was amenable to the idea – until she mentioned that she didn’t think we needed to buy a new vehicle as a replacement.

If you have ever in your life purchased a “pre-owned” anything, you’ll appreciate the dangers inherent in the principle of caveat emptor, literally “let the buyer beware.” That’s why, to this day, the notion of purchasing a used car practically causes me to break out in cold sweats. Not that lemons don’t roll off the new car lots every day – but there, at least, it seems that your odds are better – if not in terms of product, at least of obtaining satisfaction if something doesn’t work out.

Buying a used car is, of course, as much art as science – particularly if you aren’t mechanically inclined. That’s why it has become fairly common to enlist the support of a trusted mechanic to assess the reliability of a potential vehicle purchase. Of course that works only if you actually HAVE a trusted mechanic to rely on. In my experience, the only way – outside of a personal relationship - for a mechanic to have earned that trust is for you to have spent a lot of time at the garage (which, of course, may be why you are looking for a different vehicle in the first place).

Plan sponsors are increasingly looking for guidance on what constitutes reasonable, and – spurred by the flurry of recent 401(k) plan lawsuits, and the increasing level of scrutiny applied by regulators and lawmakers – have, logically, tended to be dominated by a focus on fees.

It’s hard to argue with the “clarity” of that focus, but what do you think would be the result if my used car purchase used cost as the only criteria? All things being equal, cost may be a perfectly adequate point of differentiation, but all things are seldom “equal”. When it comes to used cars, common sense dictates that a vehicle in better condition could well be worth more than an identical make and model that has been handled roughly. And we all know of “cheap” car purchases that have more than made up for that initial price differential in terms of subsequent trips to the repair shop.

Things are even more complicated with retirement plans, where plan design flaws are often obscured, and where subtle restrictions and operational limitations don’t appear until well after that finals presentation. Fortunately, ERISA doesn’t require “cheapest.” However, it does call for plan fiduciaries to make decisions that are solely in the best interests of plan participants and beneficiaries, to ensure that those decisions culminate in the selection of services (and fees for those services) that are “reasonable” – and to do so with the insights and perspective of an expert in such matters, or to enlist the support of those who are.

Failing that – “caveat emptor’.

Nevin E. Adams, JD

Moving Targets

In nearly 30 years working with employer-sponsored retirement plans, I am hard-pressed to call to mind a product innovation that has been adopted with as much vigor as the current generation of target-date funds. In PLANSPONSOR’s 2006 Defined Contribution Survey, more than three in four of the nearly 5,000 responding plans had a risk- or target-date-based option on their menu – compared with “just” 54% in the prior year’s survey.

There’s being on the menu, of course, and there’s being chosen from that menu. Still, in the 2006 survey, roughly 25% of participant balances, on average, were already invested in such options – and, on the median, 15% - and this well ahead of the Department of Labor’s tacit enhancement of these vehicles as the default investment vehicle of choice. All in all, it would appear that participants have more access to such choices and are beginning to wake to the simplicity of an investment choice that requires referencing little more than a birth certificate (many still make the case that a single investment allocation approach cannot possibly be suitable for each and every participant who plans to retire in the year 2040).

Moreover, the investment management industry has responded to the opportunity with enthusiasm. One need consider only the number of new offerings introduced in 2007 alone to appreciate just how much more choice is available than was the case the last time I penned a column on the topic (see “Style Conscious,” PLANSPONSOR, September 2005). That’s a very positive development for the most part – after all, a lack of choice was, in the very recent past, a cautionary note of consideration for plan fiduciaries. Additionally, as the choices have expanded, competition (not to mention a renewed emphasis on fee transparency) seems certain to provide a pricing discipline that surely must be applied by fiduciaries, certainly in a “just pick one” fund alternative.

Philosophical Differences

Our free market also has served to bring to the fore a dazzling array of differences in basic asset allocation philosophy. There are compelling arguments being made for allocations that are heavily laden with equities at retirement, while others embrace a more “traditional” fixed-income bent, and still others seek to mirror the allocations in evidence among large defined benefit programs (which themselves are undergoing some fairly radical shifts). These competing notions – and seemingly everything in between – are still often “cloaked,” certainly in the case of target-date offerings, behind names that are frustratingly similar. All claim to be focused on helping the investor achieve retirement security, while minimizing risk – that of running out of money too soon, or of not having enough to run out of in the first place. They can’t ALL be right, surely.

On the other hand, in the midst of all this burgeoning interest, it also has been interesting to watch some of the industry’s more revered asset allocation fund pioneers reinvent and/or rejigger their strategies, their glide paths, the logic that underpins their asset allocation philosophy.

It’s impossible at this point to say who is “right,” of course (perhaps even harder to say that a single investment allocation approach is suitable for each and every participant who plans to retire in the year 2040). Still, IMHO, the industry’s willingness to continue to contemplate and embrace change in these glide paths bodes well, I think, for the intellectual rigor that surely must attend their emergence as a ubiquitous presence on defined contribution plan menus.

What that also means, of course, is that plan fiduciaries will be similarly challenged to keep pace.

- Nevin A. Adams, JD

Life Lines

A couple of weeks ago, I stumbled across a paper published by the National Bureau of Economic Research titled “New Estimates of the Future Path of 401(K) Assets.” In this particular case, “new” appeared to relate to the paper, not the future path of 401(k) assets. Bottom line: 401(k) assets are going to keep growing, and at a better rate over the next couple of decades than they have the past 20 years (there was also a brief article on this paper in the New York Times last week, which you also may have seen syndicated locally). In fact, the paper notes enthusiastically, “We conclude that the increase in the pension assets of future retirees will be much greater than the assets of current retirees.”

This is good news, of course, since such programs seem destined to represent the primary retirement savings in the decades to come. We need them to grow, and we need them to grow faster than they have heretofore, certainly based on the average and, more significantly, median account balances reported from various sources.

Projections of the future are, inevitably, based on understandings and extrapolations of the past, and this paper is no exception. The paper’s authors remind us that 401(k)s are a relatively recent “invention,” with contributions to them beginning only in 1982. Thus, the argument goes, the balances in today’s retiree accounts have not had as long to accumulate as will those who retire 40 years hence. Moreover, they compare data from 1984 with that in 2003 that illustrates a large increase both in the number of workers eligible for a 401(k), and in those actually choosing to participate. In essence, today’s retiree balances have suffered from both a late, and a slow, start relative to the retirees of the future. And, since the retirees of 40 years hence will have had “full” access to the benefits of saving (and investing) via a 401(k) for their entire working lives, they will wind up with more—significantly more—In the way of savings accumulations than their parents.

None of this is particularly controversial logic, though it seems to me that it ignores another reality—that defined contribution savings programs existed well before the advent of 401(k)s. As a mid-range Boomer, I was saving in my employer’s “thrift incentive plan” for the “free money” from a match just as soon as they would let me (waiting a year to be eligible was normal in those days). My savings weren’t pre-tax then, of course (1979)—but the earnings and company match were.

Now, it is entirely possible that the advantages of pre-tax savings drew the attention of workers in the 1980s who had not previously taken advantage of various “thrift” plan alternatives—programs that were (including stock bonus and profit-sharing), in large part, subsumed (in name, anyway) into the newer 401(k). It is equally possible that the nation’s economic resurgence in the 1980s led employers to offer 401(k)s that had not previously offered a defined contribution plan, or that the tightening labor market of the 1990s compelled employers to offer new programs as a competitive advantage. Furthermore, there seems little doubt that the decline in coverage and availability of traditional pensions, and the widespread media coverage of same, has more recently led some to contribute to their own retirement security in amounts they might not otherwise.

Still, while we certainly have more ways to save today, ways that are generally “better” and more “convenient” (don’t even have to fill out an enrollment form these days) than they were 20 years ago, the savings rates I hear reported for younger workers today strike me as remarkably consistent with those of the past. IMHO, choosing to save for retirement, or for any purpose, is—and always has been—about balancing current economic realities with long-term goals. Generally speaking, the former looms larger the younger—and poorer—you are.

There’s little question that the 401(k) has attained a certain ubiquity (though it’s worth remembering that most American workers aren’t covered by a workplace retirement plan). But we shouldn’t assume that just because more workers have an earlier ability to participate in a 401(k) plan—and for their entire working lives—that they will do so. We—and they—can’t afford to.

- Nevin E. Adams, J.D.

The research paper is online at http://papers.nber.org/papers/w13083.pdf

Starting Blocks

There’s little question that automatic enrollment “works,” at least in terms of turning employees into participants—just as there is little doubt that, left to their own devices, too many employees remain on the retirement-savings sidelines.

However, as I talk to advisers, third-party administrators, and plan sponsors around the country, I’m increasingly aware that the Pension Protection Act’s automatic enrollment safe harbor is more unpalatable than one might have imagined on first blush. Sure, automatic enrollment is an effective way to get people into the plan—but that 50% matching requirement on an escalated contribution (Congress apparently thought that a 50% match up to 6% of pay deferral was “normal,” rather than merely common among larger plans), particularly on participation levels escalated by automatic enrollment, is simply too expensive for many. And many, already taking advantage of the current safe harbor designs, simply don’t need the discrimination testing shield that the PPA’s version offers as a carrot to offset the match’s “stick.”

As that realization sinks in, I am increasingly asked about other ways to turn more workers into participants. Here’s a quick list:

(1) Start Sooner. The typical plan still makes people wait to join, generally as a matter of administrative practicality—Why go through the paperwork of setting someone up who is going to leave in three weeks, after all? Still, I wonder how many people we lose to the “take the package home, discuss it with your spouse, and turn it in 90 days hence” message that is part-and-parcel of today’s enrollment mentality.

(2) Start Simpler. A growing number of providers now make available something they call “ez-enrollment,” or something to that effect. Workers only have to pick a deferral amount in some cases, while others ask them to pick a deferral amount and perhaps one target-date fund.

(3) Return “Engagement.” Even if there are good reasons for making people wait to join, there’s no reason to let them off the hook. Certainly, these are voluntary programs, but there’s no reason you can’t make workers return the enrollment form, even if it is just to say “thanks, but I’m not interested in participating now.” You can make them turn the forms in at the same time all the other employment-related forms are turned in (even if you don’t start withholding contributions for a period of time), or you can simply build a reminder system of some sort to ensure that they turn the forms in. You might be surprised how many, forced to do so, actually become participants (see also Participant Directives - I
).

(4) Meetings Matter. Admittedly, mandatory enrollment/education meetings bring with them certain “complications”—but it’s hard to persuade the unconvinced to join the plan if you only preach to the choir (the ones who come voluntarily are generally already committed to the process).

(5) Management Matters. Make sure that the boss is in the room for the enrollment meeting, and give them a speaking role. First, if the boss is there, voluntary meetings quickly become mandatory (see above). Second, if the person who signs their paychecks tells them how important this is, that message is almost certainly more impactful than the perspective of an “outsider” (see also Meeting Minders).

(6) Make Missionaries. One of the most effective encouragements to workplace savings is the workplace leaders. These can be supervisors, of course, but sometimes the hierarchies are less formal than that. These are the folks that everybody else listens to—respected individuals in the workplace who, once they are committed to the program, can talk up the plan, the benefits, etc. during the regular work day on the shop floor—long after you’ve packed up the presentation and gone home. These folks can (and do) preach the gospel of savings—and those who don’t save feel pretty stupid for not doing it. An additional benefit? They can help reach across barriers of language, race, etc. They literally speak the language.

Finally, it may be worth reminding employers who have a problem with the “strings” attached to the safe harbor automatic enrollment design that they can still do automatic enrollment outside of the PPA’s auspices. They’ll miss out on some of the PPA’s protections, of course, but, ultimately, they’ll likely get what they most care about—better participation rates.

- Nevin Adams

A Prospective Perspective

Plan sponsors (and advisers) who think the Pension Protection Act’s automatic enrollment safe harbor represents an easy solution to disappointing participation rates may have another “think” coming, according to the findings of recent industry data—Including PLANSPONSOR’s own 2006 Defined Contribution Survey.

The 10th annual version of PLANSPONSOR’s assessment of the activities of nearly 5,000 plan sponsors found that the median participation rate for plans that had implemented automatic enrollment was 80%. Now, that’s certainly nothing to sneeze at, but it’s not very much ahead of the 75% median rate for the plans in the same survey that had not taken the step toward automatic enrollment—and it’s well short of the outcome that one normally sees touted alongside that option (generally in the 90-95% participation range).

Our survey was based on the experience of plans that had adopted automatic enrollment prior to last summer’s passage of the Pension Protection Act of 2006 (PPA), along with its new automatic enrollment safe harbor (which kicks in next year). Still, since most of those programs have been in place now for more than two years, one might well expect a “better” result.

Traditionally, caution has ruled the day in adopting automatic enrollment. That caution has generally meant that relatively modest deferral rates were chosen, that contributions were invested in relatively conservative options, and that the program was implemented on a prospective basis—only for workers hired after the implementation date. Indeed, for many plan sponsors, the still-active assumption is that workers who had previously “chosen” not to participate (generally by not returning the enrollment form) have effectively already made their decision—to let “sleeping dogs lie.” Nor is this common presumption likely to change of its own volition even with the passage of the PPA, whose automatic enrollment safe harbor does not require a retroactive application.

In fact, IMHO, it seems quite likely that this decision to implement these programs on a “prospective only” basis likely accounts for the negligible uptick in participation rates in automatic plans reporting in PLANSPONSOR’s DC Survey.

What it does mean is that plan sponsors looking for a silver-bullet solution to their participation problem (not to mention the advisers touting such programs as same) may wonder why their prospective solution isn’t turning out to be quite the panacea for those ills they had been led to expect.

While plan sponsors are understandably reluctant to rouse those “sleeping dogs,” it’s hard to imagine that they aren’t just as concerned about their retirement well-being as those that have just been brought on board. The ultimate solution, of course, lies in understanding that the reasons some newly eligible workers chose not to participate—or more likely made no choice at all —are the same reasons the not-so-newly eligible are still on the sidelines.

That, and being willing to do something about it.

- Nevin Adams

Attention Deficit Disorder

We have long been concerned about the attention deficit of participants when it comes to their 401(k) plans. There’s the problem of getting them to pay attention to the importance of saving in the first place, and of choosing an appropriate level of savings, the challenge of helping them make sound investment decisions—and the biggest challenge of all, getting them to reconsider those choices over time. Our continued inability as an industry (I realize there are pockets of exception to this rule) to fully engage participants on the issue has, ultimately, led to the adoption of automatic plan designs that don’t require the participant to “do” anything other than write the check.

I have a more radical solution to the problem: Let’s make people sign up for their 401(k)—every year.

Before you spit up your morning beverage (apologies if it’s too late for that), hear me out. I will concede that signing up for a 401(k) plan can be a daunting task for a participant, and that it is already logistically challenging for employers (and advisers) to accommodate annual meetings for new workers. But consider this: Is it any more onerous than the annual decision(s) attendant with health-care plan enrollment?

Starting Blocks?

In many ways, the “automatic” solutions are a band-aid, at best. The Pension Protection Act’s automatic enrollment safe harbor requires only a 3% contribution from workers who don’t contribute actively, and steps that up by only 1% a year, and then only until it reaches 6%. That’s where many participants start contributing today, of course—and don’t tell me that an automatic enrollment program won’t turn some (perhaps many?) who today take the time to fill out the forms into defaulted savers in the future. Ironically, the PPA could actually serve to reduce some deferral rates, left unattended (see “Starting Blocks”).

Think those target-date fund defaults will fix poor asset allocation decisions? Perhaps for those that adopt them—but many (most?) plan sponsors seem only to be interested in adopting the change prospectively, doing nothing for those who are already enrolled in the plan. And the PPA’s safe harbor only requires prospective adoption for the automatic enrollment provisions.

Still, even if the PPA’s automatic solutions aren’t a perfect solution, even if they require some implementation oversight, why would I suggest that we make participants (and employers) undertake the painful process of enrollment every year?

I have long thought that the concept of saving for an ambiguous goal like “retirement” was just beyond the short-term comprehension of most people. Just about everything else we focus on has a much shorter term—we have annual budgets, monthly expenses, weekly meetings. Additionally, saving for retirement has largely been presented as something you need to do - - - someday. Most plans don’t allow for immediate eligibility (I appreciate the administrative rationale for some high-turnover workforces), and the vast majority of programs don’t even require that the 401(k) enrollment form be returned, much less completed (see “Participant Directives”). Contrast that with your workplace health-care program—the one you have to choose every year, and return the form—or have a program chosen for you.

Decision Points

Still, to say that an annual 401(k) enrollment is no more painful than health-care enrollment is not to say that it wouldn’t be painful. However, IMHO, an annual enrollment process could well lead to better decisions with these programs. Vanguard published a study on Roth 401(k) enrollment this week—and they found that the strongest correlating factor with participants choosing the Roth was being a new employee (see “Early Roth Adopters Are Active Retirement Savers”). This single attribute increased the probability of adoption by 3.2 percentage points on top of the normal 5% adoption rate—an increase of about 65%. Are these new workers smarter? I doubt it. Younger (and thus more likely to be enamored of the tax benefits of the Roth)? Perhaps, but age, while a factor, wasn’t the determinative factor—tenure was. Moreover, this result corresponded with the findings of another survey (also done by Vanguard) a couple of years ago that found some significant differences in asset-allocation choices—depending on when you joined the plan. These studies—and any number of others—suggest that, once most workers are “in,” they’re “done” making informed decisions about their retirement savings; the amount, the investment, the type. But they also suggest that, at the point of enrollment, participants are paying attention and are, in the aggregate at least, making decisions that seem reasonably informed.

Ironically, IMHO, the current solutions touted for engaging participants more seem mostly to rely on involving them less. That may be what they want—but I’m not convinced it’s what they need.

- Nevin Adams

The Deification of DB-ification

Last week, I stumbled across another of those “DC plans are becoming like DB plans” articles—you know, the “DB-ification” of 401(k)s?

This is all supposed to be a good thing, of course, because we know that defined benefit plans do a better job of providing adequate income in retirement than defined contribution plans (well, properly funded, and when workers accumulate adequate service credits, anyway). Moreover, the new Pension Protection Act-engendered trends toward auto-enrollment (nobody asks people to fill out a form to be covered by their DB plan) and asset allocation fund defaults (nobody asks participants to make the investments in the DB plan) are also widely touted as DB innovations that we have finally had the good sense to bring to the DC side of the world.

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

The most obvious difference, of course, is that DB plans not only don’t ask employees to sign up or make investment decisions—they generally don’t ask participants to FUND them, either. In a DB plan, all the participant has to do is—well, they don’t have to do anything (other than continue to meet the eligibility requirements for the plan, and that’s generally been a natural outgrowth of keeping your job). Some might argue that that lack of involvement contributes to what continues to be a widely evidenced lack of appreciation for the benefit.

Another Difference

There is another big difference, of course, and it also has to do with how these plans are funded. Defined benefit plans are funded—at least, they are supposed to be—with an eye toward the benefit that will be paid out. As the name suggests, the benefit is defined—and the decisions that are made about how much to contribute to the plan and how those contributions will be invested are also done with that in mind.

Defined contribution plans, on the other hand—even the “new,” “automatic,” DB-ificated ones—have an entirely different focus. They are (still) about how much you can afford to put into them, not how much you need to get out of them. Oh, sure, the PPA’s safe harbor automatic enrollment includes a provision to increase those contributions on an annual basis—but starting at just 3%, and rising only to 6% of pay. That may well be all that many can afford to contribute—but is it any replacement for the kind of funding discipline that a true defined benefit focus represents? More importantly, will it be enough to provide the same kind of retirement security that the DB system promised?

Still, this notion of DB-ification keeps popping up. As though, through the graces of the PPA, we have managed to magically replace that missing leg on the three-legged stool of retirement security—when all we have really done is stick a piece of cardboard under one of the two remaining.

IMHO, we won’t really have a “DB-ification” of our defined contribution designs until we shift the focus—not just the funding.

- Nevin Adams

A Different Kind of "Investment"

As the parent of a daughter away at college for the first time, the events in Blacksburg, Virginia, last week had a particularly horrific effect.

No, she’s not going to school at Virginia Tech, but what happened there could happen anywhere. Parents often worry that, despite years of raising them carefully, our kids will, nonetheless, wind up in the wrong place at the wrong time. Yet, so far as we know now, all those poor kids did was be in the right place – where they were supposed to be - at a very wrong time. In a matter of minutes, bright and promising futures were brought to a premature close for no better reason than their proximity to a madman.

Many will try to get back to “normal” this week – while for some, normal will never again seem possible. I’ve tried several times to pick up some other theme or idea to speak to in this week’s column – some normal topic, if you will – but all I can think of is those students that won’t be coming home to families. Families that, like mine, were anxiously waiting to have their family once again be complete.

People die unexpectedly every day, of course – and children much younger than the students at Virginia Tech unfortunately have their lives snuffed out in much less dramatic fashion. Still, those tragedies that grab our collective attention for a brief time can serve as a vital wake-up call to things that our busy lives all too frequently set aside for “another time.”

The admonitions that are part of our industry’s DNA – start early, do as much as you can, keep an eye on things – apply to many areas of life. As we make investments in our 401(k)s, we also invest in our friends and family – investments that generally produce a yield that would put to shame the most giddy hedge fund investor.

This week, if you don’t already, I’d encourage you to tell those you care for how you feel – tell them as often as you can; and keep an eye – or an ear - on them, particularly the ones you don’t see every day.

You never know how long you’ll have to do so, after all. And the only thing worse than losing a loved one – would be losing them without having told them how you feel.

“Self-Fulfilling” Prophecies

The Employee Benefit Research Institute (EBRI) and Matthew Greenwald & Associates published the 17th Annual Retirement Confidence Index last week – and, for the very most part, it’s probably safe to say it didn’t tell us much we didn’t already know.

More than half (52%) expect to be comfortable, another third categorize their post-retirement income status as “adequate,” and 6% are looking forward to being “well-off” – at least in the first five years after retirement. Just 10% say they will be “struggling.”

While they are apparently less confident than they once were in terms of a traditional pension benefit, they remain largely complacent about their overall prospects for a comfortable retirement – more than a quarter are VERY confident, and another 43% are somewhat confident, in fact. Still, only 18% are much less confident about receiving that traditional pension. (Oddly, and perhaps proving that confidence is a relative term, “only” 29% of those who do not expect to receive a pension are less confident. Can one truly be less confident of receiving something that you don’t expect to receive?) And while 62% say that they expect to see that traditional pension someday, only 41% say they are currently covered by such a program.

The survey, well-regarded for its breadth and depth of analysis, also revealed that almost half of the workers who are saving for retirement (bear in mind that only about 60% are at present) have accumulated…less than $25,000. Seven in 10 of these workers have less than $10,000 saved (including more than a quarter of those older than 55). They also continue to misjudge the age at which they will be eligible for full Social Security benefits (it’s no longer 65, by the way), appear to overestimate the existence of long-term health coverage (they think they have it, though only 10% of the population does), and – at least based on current trends – seem to be more optimistic about the availability of employer-provided health care in retirement.

“Agree” Mien?

But what I found most intriguing about the RCS results from the perspective of advisers – was how survey participants responded to the notion of advice. There have been any number of surveys done in recent months about participants and the need for help in making investment decisions, and they consistently indicate a strong desire on the part of participants for help. Setting aside for a minute the fact that many of those surveys are underwritten by firms interested in providing that help, I’ve heard that exact message from both plan sponsors and advisers in the field (although, more recently, the call hasn’t been for help in making the decision, it has been an interest in having someone just take care of it).

However, in the RCS, fewer than two in 10 workers said they would be very likely to take advantage of investment advice at a modest cost (“modest cost” was not defined for them), and only about a third (35%) said they would be somewhat likely to do so (the rest broke nearly evenly between would not likely, and would definitely not take advantage). However, advisers might take some comfort in knowing that those who had used an adviser previously, those who were under the age of 55, and those with higher household incomes were more favorably disposed toward the service.

But even among those interested in investment advice, only about one in five (21%) said they would implement all of the recommendations – if they trusted the adviser. A full 11% said they wouldn’t implement any of the recommendations, and two-thirds said they would implement only the recommendations that were in line with their own thinking.

All of this would, unfortunately, seem to portend a rough road ahead for advisers who are trying to get across the importance of retirement savings. After all, if people are feeling this “confident” about their prospects, no wonder the nation’s savings rate continues to languish. And if participants are only interested in recommendations that match their own thinking – and their thinking is grounded in these feelings of relative optimism – how are they going to be able to ready themselves for what may be a very rough future reality? Ultimately, of course, it will take more than confidence to ensure retirement security: It will take awareness, planning, and action. The RCS should, IMHO, be a wake-up call for us all.

- Nevin Adams

Note: The good news in the RCS is that workers who are saving for retirement, who have taken the time to do a retirement needs calculation (and who have higher incomes) – tend to be more confident than others about their prospects.

For more about the Retirement Confidence Survey, see Workers’ Confidence in Traditional Benefits Slip

The 80/20 Rule

Sooner or later in your career, you are exposed to the 80/20 rule or, as purists term it, the Pareto principle. Simply stated, it suggests that 80% of the consequences stem from 20% of the causes. You frequently hear how you get 80% of your revenues from 20% of your clients (and sometimes that 80% of your aggravation comes from that same minority).


Similarly, with all the furor of late focused on cost sensitivity, revenue-sharing, and the call for greater transparency, it’s easy to overlook the fact that most of that scrutiny and regulatory angst is being applied to 20% of the “problem” of retirement plan fees.

"Out of" Proportions

Traditional logic held that the fees on your “typical” retirement account ran like this: 70% for investment management, 20% for recordkeeping, and 10% for miscellaneous things like trust/custody, audit, etc. That apportionment wasn’t perfect, of course, but it was a rule of thumb that has been applied fairly liberally over the years. Investment fees were typically drawn from plan assets and, thus, participants have been bearing more than two-thirds of the costs of these programs for a very long time now.

Of course, over the past 20 years, we have seen a gradual shift where more and more of the remaining third is also paid from plan assets—and then redistributed to the same parties that used to get a check from the plan sponsor. Despite the occasional “study” from the Investment Company Institute to the contrary, 20 years ago, my sense is that mutual fund expenses were pretty much what they are now for the average 401(k) plan, at least for institutional class shares*.

So, while there is a growing sense that the participant is picking up a greater share of the plan costs, I’m reasonably sure that most are paying about what they used to, at least on a percentage basis. What’s different is those shareholder servicing fees that once upon a time simply rolled back into the pockets of the mutual fund complexes - now go to reimburse entities that actually perform those services for a retirement plan.

But while we agonize over how that 25-basis-point shareholder-servicing fee is parsed out between recordkeepers and advisers, the current debate barely acknowledges the fact that 70% or more of retirement plan fees paid by participants are the 50 to 100 basis points that come out of every participant dollar for “investment management.”

I’m not suggesting that investment management isn’t a skill to be highly prized and reasonably compensated. Nor am I suggesting that current investment management fees are disproportionate in every case to the value received. There may even be legitimate reasons why these funds grow from millions – to billions – of dollars in assets with no reduction in the expense ratios.

The 80/20 rule notwithstanding, IMHO, you won’t solve 100% of the problem by probing just 20% of the fees being taken from those participant accounts.

- Nevin Adams

* The misuse of retail class shares, and the liberal application of “R” shares, is a topic for another column.