Conspiracy Theorist

I spent some of my precious three-day weekend perusing Teresa Ghilarducci’s When I’m Sixty-Four, an intriguing title for a book about pensions–or, as the subtitle suggests, “The Plot against Pensions and the Plan to Save Them.”

To her credit, Ghilarducci, an economics professor at Notre Dame, actually offers a serious proposal to provide a more secure retirement income stream for Americans, certainly for lower-income individuals. It is unfortunate, IMHO, that she devotes but a single chapter of the 300-page book to exploring the “plan to save them,” leaving the bulk to “the plot.” A “plot” that includes the complicity and outright scheming of employers, advisers, providers, and even the federal government (well, at least the Bush Administration).

The plan? Well, she gets there by imposing a mandatory 5% FICA-like withholding (yes, in addition to the current one) into a “Guaranteed Retirement Account (GRA),” imposing mandatory annuitization of those benefits (no lump sums, and no ability to pass that “account” along to heirs, though she would allow you to accept a reduced benefit for the ability to include a beneficiary in an annuity stream), doing away with the current tax benefits associated with 401(k)s, and replacing that with a $600 refundable tax credit that would be indexed for inflation.

The “Plot”

As for the “plot,” in Ghilarducci’s view, employers offer defined contribution plans instead of traditional pension plans not because they are preferred by workers (in fact, she rather seems to doubt that) or because they are less impactful to the balance sheet (particularly these days), but simply because they are less expensive (there have, of course, been studies that refute that notion). She decries the 401(k)’s disproportionate benefit to upper-income workers–which apparently results from the reality that they are more likely to actually participate in such programs than are lower-income workers. The Pension Protection Act’s tightened reporting strictures on pensions were, in Ghilarducci’s view, at best an overreaction to a non-existent funding crisis and, at worst, an overt move by politicians who so desperately wanted to promote an individual account system over defined benefits that they effectively legislated it out of existence. Oh–and if you’ve been worried about Social Security funding, you can breath a bit easier. Apparently, the actuaries are notoriously pessimistic, according to Ghilarducci.

In Ghilarucci’s world, the current travails of the nation’s retirement system are not due to the lack of a coherent national policy, the aberration of a voluntary savings system inadvertently converted into THE retirement savings device, or the challenges that a pay-as-you-go Social Security design naturally experiences as it tries to pay for more people going than paying. Instead, it all seems to be the result of some form of Machiavellian plot–and one that, IMHO, is a perspective of someone who has perhaps not spent much time with plan sponsors who agonize over the very issues she seems to think they proactively set in motion.

She doesn’t seem to think that we need a different or additional system simply because the current approach isn’t working for everyone–rather, she seems to see the malicious and deliberate hand of employers in undermining the system (and, it seems, in championing the concept of working in retirement. “Working ‘retirees’ help manufacture healthy profits,” she says).

The Plan

Little wonder, then, that her solution relegates employers to the role of payroll withholder (she makes an allowance for employer-sponsored defined benefit plans that contribute 5% of payroll each year), while–like many who see government as a necessary part of the solution–advocating what amounts to higher taxes for all, willingly embraces a broad redistribution of wealth, and puts the management of said funds in the hands of the federal government.

Ghilarducci is remarkably sanguine, IMHO, about the funded status of Social Security and pension plans generally (though, as I have said in this column before, I think too much was made over the effects of the so-called “perfect storm”). She “solves” the apparent tax “inequities” of the voluntary savings system by imposing a new FICA-like withholding on everyone. However, 5% withholding alone wouldn’t be enough to do the trick––and that’s where the pooling comes in, and where, like Social Security today, if you die early, your “account” is simply assimilated into the broader pool. The financial risks attendant with the program’s guarantee? “Borne by the government, not by the worker,” she explains–as though the government has a funding system independent of those workers.

I think most Americans would find the Ghilarducci proposal problematic. People who can save for retirement today but don’t ostensibly have reasons (or excuses) that would be impeded by the 5% mandatory tax. Those who currently have and appreciate the tax benefits of their 401(k) would surely hate to see that disappear (one wonders what would eventually happen to those workplace retirement plans and/or company matches if such a universal system were in place). While Ghilarducci takes pains to distinguish the GRA from Social Security, those distinctions will be invisible to most workers, and with good reason. Moreover, once the federal government gets its hands on that money, it’s hard to imagine that Congress won’t find other ways to spend it (one need look no further than how the original purpose and withholding rates of Social Security have morphed to today’s design to appreciate the potential).

We do need solutions beyond what is available today, IMHO–and Ghilarducci’s proposal will, and should, certainly contribute to the discussion. However, I think that discussion would be better served with less emphasis on the alleged conspiracies—and more on the theories that will truly make a difference.

- Nevin E. Adams, JD

You can check out a paper that was a precursor to the book HERE

The Rest of the Story

Last week, AARP published a report on how economic worries are impacting Americans.

The report, aptly titled “The Economic Slowdown’s Impact on Middle-Aged and Older Americans", "revealed” what seems obvious to most—that a large majority of Americans think the economy is in trouble (even though most respondents’ personal lives seem largely unaffected) and that, as a result, some are making adjustments in lifestyle (things like vacations and eating out), saving, investing, and retirement plans.

In fact, the headlines—including ours—tended to focus on the fact that more than one out of four (27%) workers age 45-64 say they postponed plans to retire, and nearly as many reported they are prematurely taking money out of their 401(k)s and other investments (see “Delayed Retirement, Early Withdrawals Result from Economic Downturn”). Another interesting data point was that 27% said that recent stock market losses had led them to start putting less in their retirement accounts.

That anyone is cutting back on savings is disconcerting, of course, since, by and large, people seem not to be saving enough as it is. But, “buried” in the survey data was another interesting data point: Nearly as many—25%—said that because of losses (or despite them) in the stock market, they were actually putting MORE of their income in retirement accounts.

The real point in all of this, of course, may be that—while they are concerned about the economy (though even in this survey, most Americans haven’t been impacted directly)—most haven’t made any significant changes to their retirement preparation habits. According to the poll, 77% haven’t changed their minds about retirement timing; nearly half were saving exactly the same amount before the market turmoil as now. In fact, if you take that latter group, and add in the group that has stepped up their savings, the headline could—and perhaps should—have been “Americans Cut Back on Eating Out—But Still Saving.”

As noted above, that wasn’t the focus of the coverage—not even ours. Discerning motivations is a tricky business, particularly when those motivations are as varied as the individuals covering these surveys (or the editors looking over their shoulders). It is, perhaps, natural to assume that a slowing economy would inexorably lead to a reduction in savings—and, in fairness, those cutbacks were highlighted in the press release that accompanied the survey’s release. And, lest we forget, there was absolutely nothing misleading in acknowledging the reality that a significant minority had, in fact, cut back on their retirement savings.

There’s an old journalistic maxim that says “if it bleeds, it leads.” It’s the reason why the teaser for the nightly news is about murder, a horrific fire, or a natural disaster—and you can’t just blame that on the news producers. They may not be giving us what we “want” when they do so—but they are, in fact, giving us what we tune in to hear about. Crudely put, it’s the kind of thing that sells papers (or Web clicks).

Still, we owe it to ourselves—and those we support—to look for “the rest of the story.”

- Nevin E. Adams, JD

One More Thing To Do

Last week, the Connecticut legislature didn’t get around to voting on a bill that would have effectively set up a state-sponsored 401(k) plan for small businesses (see CT State 401(k) Plan Proposal Dies as Session Ends). Proponents—which included AARP—claimed that the legislation would save businesses with fewer than 100 workers a lot of money, basically by allowing them to pool their plan investments—a pool large enough to provide the negotiating power that small businesses generally lack on their own (workers would have individual accounts and be able to choose from various investment options, while employers could contribute a percentage or set up a program to which employees would contribute).

Opponents—which included the Connecticut Business and Industry Association (CBIA), the Connecticut Bankers Association, the Insurance Association of Connecticut, the American Society of Pension Professionals and Actuaries (ASPPA), the Council of Independent 401(k) Recordkeepers (CIKR), and the Small Business Council of America (SBCA)—refuted that cost-saving claim. Cost-effective alternatives exist already, they said, in the form of SIMPLE IRAs. Moreover, they were doubtful that the projected cost savings would actually occur under the new design. And, of course, they also were concerned about the “competition” resulting from such a program for their members.

In comments submitted on behalf of ASPPA, CIKR, and the SBCA, Michael Callahan, founder of Southington, Connecticut-based third-party administrator Pentec, Inc., said, “If an employer doesn’t want to set up a retirement plan, it is generally either because the employer is not educated about available options, or the employer does not want to commit to making contributions for employees each year.”

Now, one can hardly argue that small business owners are, as a rule, intimately familiar with their retirement plan options, and surely there are any number of them who are not comfortable committing to making contributions every year. But, IMHO, neither of those is a major impediment to adoption of these programs by small businesses.

Fees Matter

And, despite the assertions of those opposed to the Connecticut proposal, I do think fees are an important issue, though perhaps not a central concern. These days, it’s not unusual for even moderate-size plans to be able to pay no explicit fees, courtesy of revenue-sharing offsets. However, smaller programs—particularly start-ups—are confronted with different realities; frequently forced to embrace proprietary fund solutions, and fund solutions of higher-priced mutual fund share classes, in addition to explicit administrative charges. However, for the very most part (explicit fees are always a complication), these “extra” charges, while real, are drawn from the participant investment accounts, not the employer’s purse (business owners frequently overlook the fact that theirs is the largest balance—and thus the largest “contributor”).

There are other noteworthy impediments: A fear of getting sued by participants looms larger every day (even though the plaintiff’s bar seems focused on more lucrative targets), not to mention concerns about the time and energy associated with keeping up with these programs. Indeed, IMHO, one of the biggest impediments to small-business adoption of these programs was noted in Callahan’s comments arguing against the proposal. “The ERISA rules, and Internal Revenue Code non-discrimination requirements, are designed to protect rank and file workers. These rules are important—they are also complicated and time consuming.”

While it was cited as a reason to oppose the legislation, that admonition applies with even greater force when it comes to what is required of employers to administer these programs on an ongoing basis.

Those rules and restrictions are, of course, in place for good and valid reasons, and many were put in place to deal with specific, real-world abuses. But the fact remains that offering a qualified retirement plan benefit is neither simple, nor easy—and until it can be, we probably shouldn’t wonder why so many choose not to take on that responsibility.

That’s not to say the Connecticut legislation dealt with any of that, though I’m guessing that it might well have made it easier for small businesses to choose a program, and perhaps one that charged participant accounts less than they would pay outside that model (they may well have paid more in taxes, of course). We often fret about the shortcomings of a system where only three-quarters (or less) of those eligible to participate in a 401(k) do so, and we rightfully worry about the adequacy of the deferral rates of those who do save.

However, the sad fact is that only about half of working Americans today even have the option of participating in a workplace savings plan—and most of the job creation in this nation’s economy comes from small businesses. We need to be creative in order to help make it easier for small businesses to embrace these programs and give those they employ a chance to save for retirement.

It takes a lot of courage, time, and energy to start and run a small business, after all. What small business owners generally aren’t looking for - is one more thing to do.

- Nevin E. Adams, JD

Their Own Devices

There’s been a lot of talk about tax policy of late.

It’s an election year, after all—and while most of the rhetoric revolves around targeting only “the wealthiest Americans,” it’s hard to shake a sense that the impact will be less than precisely targeted.

There’s talk of raising the tax rate on capital gains and dividends, for example—as though only the rich invest in stocks and mutual funds. A prominent presidential candidate talks openly about the fairness of increasing the amount of income subject to FICA withholding, and while it certainly sounds “fair,” that could represent a pretty big tax increase for some decidedly unwealthy families (worse, unless the benefit calculations are adjusted—and it would certainly be most unfair to do so—the move won’t even help the Social Security deficit; we’ll just pay out more in benefits to the people from whom we have now taken more FICA).

Another prominent presidential candidate wants to sever the tie between employment and health insurance, and if he is successful, many in the working middle class who currently enjoy that workplace coverage could find some or all of that benefit taxed—and probably shouldn’t hold their breath waiting for a salary boost to compensate for the loss (even more could simply find themselves with the “opportunity” to shop for insurance on their own). Others have resurrected the notion of imposing a “windfall profits” tax on Big Oil—as though we don’t all know who will actually wind up paying for it (note to politicians: It’s been tried before…it didn’t work).

Complicate Ed

Unfortunately, our economic lives are going to get more complicated in the coming months. We’re not technically in a recession, but regardless of such technicalities, many feel—and are hunkering down—as though we are. Ultimately, of course, perception is reality in such matters—and none of the current U.S. presidential candidates has any real interest in convincing us otherwise.

What that means, of course, is that between now and the election, we’re going to have a lot to fret about. Concerns about the rising cost of—well, just about everything—and anxiety about how the markets (and our 401(k) accounts) respond to that uncertainty will almost certainly continue to be the order of the day. In the months ahead, it’s likely to be harder than ever to keep participants focused on, and committed to, their retirement savings. Frankly, even the well-intentioned coverage and focus on 401(k) plan fees (and not all of it qualifies as “well-intentioned”) serves to undermine participant confidence in these programs.

As a solution, the Democratic candidates are touting payroll deduction plans for retirement savings (Senator Clinton’s are voluntary, Senator Obama would make them opt-out for participants) with government matches of up to $1,000. These solutions, of course, relegate the employer to nothing more than a payroll agent in the transaction (Senator McCain has yet to address the issue).

Doubtless, the ease of payroll deduction will spur some takers (certainly Obama’s opt-out version), but one can’t help but wonder how well-served workers, left to their own devices, will be in the retail IRA market, certainly compared with the structure, guidance, and institutional pricing afforded most employer-sponsored plans. It is a shame, perhaps a tragedy, IMHO, that the candidates have yet to consider the opportunity to provide real incentives for employers to “suit up” as a fiduciary for these programs.

But if there is a tragedy greater than the fact that only about three in four eligible actually participate in a workplace retirement savings plan, IMHO, it is that roughly half of working Americans don’t even have the opportunity.

- Nevin E. Adams, JD

Overdue

I was discussing the subject of retirement the other day with a friend. We decided we weren’t sure when that would happen, we weren’t even positive that it would happen—and we really didn’t know what “it” would be like if and when it did happen. Finally—it had been a pretty hectic week, after all—I somewhat playfully suggested that the best definition of retirement would be the absence of time-critical deadlines. Ah, now that’s something to look forward to!

Retirement has its own pressures. But the “difficulty” that my friend and I had actually describing what we would “do” is a real problem in retirement planning. If you don’t know what you are saving for, after all, it’s difficult to be very effective in your planning. The things we are accustomed to saving for—a car, a house, the kids’ college tuition, a vacation trip—generally are not only things we can envision, they have a very specific price tag.

Now, I know you’re thinking that retirement—more precisely, living in retirement—also has a price tag, and anyone who has an interest in knowing what that is can turn to any number of readily available calculators capable of revealing that number. Unfortunately, those disembodied numbers don’t shed much light on defining what we’ll get for our money—and they tend to be so large that the normal reaction is, “Isn’t there a cheaper model?”

I’ve seen a lot of interesting—and very creative—attempts to help overcome these obstacles, and I’ve no doubt that they have done a good job helping many participants prepare for a better retirement (whatever that may be).

To me, however, the answer to what retirement savings is for starts with a budget. And no, not what you’ll need in retirement, but what you spend money on today. The simple reason is this: A participant who doesn’t do an annual budget—even if it’s on the back of an envelope—while he or she is working doesn’t have a chance, IMHO, of beginning to understand the concept of retirement planning, much less savings.

Once you have that list of what you spend money on today, you’re well on your way to explaining what you’ll spend money on in retirement. Oh sure, some things you’ll spend more on—and others less; there are things you don’t have to buy now that you will then, and some things, like the care and feeding of your children, that you at least hope have a time limit. But I think that annual budget list answers questions about retirement in a way that no beach-umbrella-embossed retirement savings brochure ever can.

Budgets, of course, are composed of two basic elements: income and expenses. And just as surely as the latter deals with the “what am I doing this for” motivation, I have found that filling in the gaps on the income side very effectively deals with the realities of needing to put enough money aside. Not that those answers are generally “easy,” of course, but all of a sudden, retirement savings is transformed from looking like “extra” money to live, to what it actually is—replacing income sources that will not continue after retirement.

Finally, having waited far too long to be willing to tell participants the truth, many now have, IMHO, gone too far the other way—insisting that we either tell participants the total amount they need to have saved at retirement, or at least some percentage representation of how close they are to attaining that total amount. Those numbers are too big to be meaningful, and the accompanying percentages generally too small to provide the encouragement participants need to stay with it.

Unfortunately, we have tended to continue to treat retirement savings as discretionary savings. Personally, I think we’d do a better job of paying that retirement bill if participants set an annual budget for retirement planning just like we have for the mortgage or the car payment. That would give them a shorter-term target that could still be part of the larger goal.

Too often, retirement savings is a function of what is left over after everything else is paid. And that means that, too often, particularly when things like health care and filling the tank cost more than we had planned, we not only don’t pay that “bill,” we don’t even see it as overdue.

- Nevin E. Adams, JD

The Sum of Its Parts

Last week, the House Committee on Education and Labor passed the 401(k) Fair Disclosure for Retirement Security Act (H.R. 3185). That it passed was no surprise (it did so along party lines, and it is, after all, a bill sponsored by the chairman of that committee, Congressman George Miller (D-California)).

The issue that seems to loom largest in the minds of those paying attention is the requirement that all service providers break down their charges into four specific categories: administrative fees, investment management fees, transaction fees, and other fees. This isn’t a big deal for many, perhaps most—and it’s a lot simpler than the first version of the bill. Still, a number of bundled providers are claiming that it will be a burden for them to determine what that breakdown is, that the process of discovering—and communicating—those figures will cost money, and, at some point, that it doesn’t make sense because those services aren’t available from them at an à la carte pricing.

A stronger case can perhaps be made that these disclosures will amount to naught; that participants won’t read or understand them—or have any frame of reference. Plan sponsors are concerned that the disclosure will simply generate more participant concern and/or confusion, and potentially provide some with an excuse to defer or forego participating in the plan, and I think there are merits in all these concerns. Still, it seems unlikely that the Miller bill will go anywhere, certainly not in the short-term (it’s an election year, after all)—and the Department of Labor is well into the process of setting out its own proposals on enhanced fee disclosures.

Adults Education

But I think—and I’ve said this before—that it’s time we started treating participants like adults. We need to tell them the truth about retirement expenses, we need to be blunt about the realities of their current savings patterns, and they need to understand that these services we work so hard to provide have a cost. And, IMHO, the advent and widespread embrace of “automatic” plan features makes that honesty more critical than ever.

In that spirit, and regardless of what we wind up with on the regulatory or legislative front—or when—I think it’s time we insist on the following:

• Every plan sponsor should receive—today—a detail of the fees paid by their plan—and, IMHO, the breakdown articulated in the Miller bill is a good framework. Bundled providers can surely provide estimates, if nothing else. You can’t fulfill your fiduciary duty to ensure that fees and services are reasonable if you don’t know what the fees for those services are.

• Every plan sponsor should receive some idea of the fees paid by participants in their plan. You don’t have to see the Miller bill as inevitable to know the day is coming when we’re going to HAVE to tell participants what they are paying in a more explicit way. Worst case—take the detail above and divide it by the number of participants; or take the total plan fees, divide it by the total plan market value, and multiply it by the individual account balances. You might be surprised how close that will get you (certainly if the fees are largely asset-based).

"Compare" Ability?

Now, assuming that their plan adviser has—or will take —a leadership role in attaining those two results, I think it’s time to give plan sponsors and, eventually, plan participants one more thing: something with which to compare that result.

Other, comparable 401(k) plans would be good—but why limit it? Why not compare it with the account fees, transaction charges, and retail share-class charges participants would pay if they truly did it on their own?

Many have been worried that participants would be put off by knowing how much these programs really cost—some in Congress clearly think participants are getting ripped off.

It may be naïve, but I still think most are getting a real bargain—they just don’t know how good they have it.

- Nevin E. Adams, JD

"Better" Pill?

I hate going to the doctor for a checkup.

Or the dentist, for that matter. I don’t even like to take my car in for “scheduled maintenance.”

Granted, for the most part, it’s no big deal—just a minor inconvenience of time, setting aside that gentle comment from the doctor about how I need to lose some weight, to get some more exercise. Or that somewhat incredulous tone from the dental hygienist as she says, “How long HAS it been since you flossed?”

Still, I hate going and will put it off just as long as humanly possible—not because the process itself is particularly painful or arduous, but because I am always nervous that there will come a time when they will find something that requires a more significant change in my lifestyle.

There is, of course, the chance that they might find something at a stage that allows for plenty of time for treatment—and I know that those regular checkups provide the best opportunity to head off something truly calamitous. I know this—rationally—but sometimes it just seems “better” not to know.

I’m sure that same kind of thinking holds sway in many participants’ minds when it comes to retirement savings projections.

"Lack" Luster?

Last week, the Employee Benefit Research Institute (EBRI) published its 18th annual Retirement Confidence Survey (RCS)—or, as I’m beginning to think of it, the annual lack of retirement confidence survey. Not surprisingly, the survey tracked the biggest one-year drop in confidence in its 18-year history (see “Retirement Confidence Plummets in EBRI Survey”)—to a level where less than one in five (18%) was “very confident” about having enough money for a secure retirement. What wasn’t so widely reported was that that 18% matched the levels in 1993, though it has fluctuated over the intervening years (retirees in 2008 were actually more confident than were 1993 retirees).

The RCS is based on phone interviews with participants and retirees, not an objective evaluation of their incomes and actual savings accounts, and it’s hard not to wonder how many are confident when they have no reason to be, IMHO. For, while only 18% were very confident, nearly half (43%) were somewhat confident, a number unchanged from last year’s RCS (see “Workers’ Confidence in Traditional Benefits Slip”). All told, then, well over half—in fact, nearly two-thirds—of respondents expressed some level of confidence in having enough money to live, and live comfortably, throughout their retirement years.

Unfortunately, there is little in the RCS data to suggest that this confidence is grounded in anything other than wide-eyed optimism, a willing suspension of disbelief, or good old-fashioned ignorance. About half of the workers surveyed by the RCS (among those that provided this information) said that the total value of their household’s savings and investments (excluding the value of their primary home and any defined benefit plans) is less than $25,000, and nearly a third plan to retire prior to reaching age 65. Nor do they seem to be expecting a lot of support from the government; most are not confident that Social Security will continue to provide the same level of benefits as it does today (37% are not at all confident of that result), and two-thirds are not confident about the level of support from Medicare.

Nor did the process of participating in the survey seem to do anything to heighten concerns. Although the survey’s authors thought that respondents would have less confidence in their retirement preparations at the end of the survey than at the start, that was not the case. Two-thirds gave identical responses—and the others were as likely to gain confidence as they were to lose it by completing the survey.

It’s one thing to feel confident about one’s retirement prospects, of course, and another altogether to feel that way with justification. Still, nearly half (47%) of this year’s RCS respondents said that they (or their spouse) had at least tried to do a retirement needs calculation, and that’s MUCH better than the 31% who had done so in 1994. That’s an important first step, and one of the few that, IMHO, ever lead to changes in savings behavior.

The challenge, of course, is getting those participants to take the time—and run the risk of knowing that they have to undergo a change in savings behavior to avert disaster…while there’s still time to do something about it.

- Nevin E. Adams, JD

Legends for Our Times

Ours is an industry of fairly recent invention–one that is, in many respects, only just beginning to emerge from the growth pangs of adolescence. Ours is an industry constantly and dramatically evolving–and one that all too often seems relentlessly driven to push us forward to the next challenge, through the next legislative overhaul, and onto the next wave of tumult in the markets, sometimes in the same six-month period. For plan sponsors, change is not only the order of the day, it is the day. That certainly has been true for the 15 years during which PLANSPONSOR has been published.

But if the pace is relentlessly forward, there are nonetheless those among us who have a vision that stands out from the crush of the day, who provide a better way for the rest of us, either through thoughts or deeds, to succeed in helping bring about a more secure future for those who depend on us.

As our 15th anniversary approached, we began thinking about those individuals--individuals who have made an impact on this business of retirement benefits. For clarity, we limited our focus to the past 15 years, though there are certainly individuals whose contributions predate that timeframe and whose impact is still felt today. We also limited our list to 15, though it could easily have been twice that size.

They are leaders, innovators, partners—some have challenged the status quo, others have laid the foundation for a new one, and still others have helped us all negotiate the period(s) in between. There are some familiar faces, as you might expect–many have appeared in our pages over the years, several were highlighted as “influencers” in our 10th anniversary issue, and a number have subsequently been honored with PLANSPONSOR’s Lifetime Achievement Award. There also are some with which you may not be familiar, though you are almost certainly aware of their contributions. We are pleased to be able to introduce them to you here. Admittedly, there may well be those on this list that some may challenge–or some not represented who have arguably made equally significant contributions.

This is, however, our list–15 who have, in our estimation, during the passage of the past decade and a half, made a lasting contribution to the nation’s retirement security.

There are those who make a difference in our lives– parents, spouses, mentors, friends–and then there are those who make a difference in all of our lives.

They are legends.

- Nevin E. Adams, JD

The legends are online HERE

The Letter of the Law

An early “win” for plan sponsors (perhaps more accurately, a win for a plan sponsor) was Hecker v. Deere & Co.

That’s the case where, last June, U.S. District Judge John Shabaz tossed “with prejudice and costs” allegations that the plan had incurred excessive fees and had violated its fiduciary obligations by not disclosing revenue-sharing relationships to participants (see “Fighting Words”). It was, many experts said at the time (including this writer), a correct decision, but bad law, with Shabaz too broadly (IMHO) applying the shield of ERISA 404c to excuse an entire series of fiduciary responsibilities not encompassed by that statute.

Not surprisingly, that decision has been appealed—and this time, the Department of Labor has offered its opinion as a “friend of the court” (see “DoL: ERISA Fiduciaries Could Have Disclosure Mandate Not Specified in Law”). And perhaps not surprisingly, the DoL also seems to think that Judge Shabaz missed the boat on a number of his conclusions.


404(c) "Immunity"

First and foremost, the DoL stated that “the statutory safe harbor in section 404(c) does not immunize the Plans' fiduciaries to the extent they acted imprudently in offering investment options with excessive fees”—and also that “section 404(c) does not give fiduciaries a defense to liability for their own imprudence in the selection or monitoring of investment options available under the plan.” Further, that “[a]ll of the fiduciary provisions of ERISA remain applicable to both the initial designation of investment alternatives and investment managers and the ongoing determination that such alternatives and managers remain suitable and prudent investment alternatives for the plan.” None of those statements are particularly controversial, IMHO, though they may surprise some that have seen 404(c) as some kind of magic talisman to ward off all fiduciary evils.

In fact, in its amicus brief, the DoL noted that “[i]f, as alleged, the defendants violated their fiduciary duties by selecting investment options with excessive fees, section 404(c) provides no defense to their fiduciary misconduct,” and made no bones about where it stood on Judge Shabaz’ ruling: “The district court thus erred in holding that ERISA section 404(c) immunizes fiduciaries from liability for any resulting losses as the basis for dismissing plaintiffs' claim for excessive fees.”

However, the DoL also noted that fiduciaries are forbidden from “misleading plan participants about their plan”—and said that that duty, “in certain circumstances, require[s] fiduciaries to disclose information that participants need to know to exercise rights under the plan or protect their interests in the plan.”

And while the DoL did note that there might be an obligation to disclose information to participants beyond that outlined in the so-called “black letter of the law,” that did not equate to an absolute obligation to disclose everything, much less the particulars of revenue-sharing relationships. The DoL noted, “This is not to say, however, that the Secretary agrees with plaintiffs' more sweeping suggestions that the fiduciaries of participant-directed plans must always, or even usually, disclose revenue sharing arrangements as a matter of general fiduciary principles. Indeed, we are skeptical that, absent any misrepresentations, ERISA's duties of prudence and loyalty would have required disclosure to plan participants of revenue sharing among Fidelity affiliates.”

At this juncture, we still don’t know if the fees charged in this case (or the dozen or so that alleged similar transgressions against a variety of employers by the Schlichter, Bogard & Denton law firm) were unreasonable or not, or if the alleged breaches of fiduciary duty are founded on anything of substance.

What we do have, thanks at least in part to the DoL’s brief, is a clear restatement of what the law actually requires. And that’s a step toward better law, as well as a better decision.

- Nevin E. Adams, JD

The DoL brief is here.

Safety "Net"

Over the past several weeks, I’ve gotten a lot of calls from reporters across the country looking to understand more about what appears to be a recent uptick in the volume of loan and hardship withdrawals from 401(k) plans. By most accounts, those volumes are up—in some cases, perhaps, up by a factor of two—from a year ago.

The natural assumption is that some combination of the subprime crisis, the struggling investment markets, and/or just general economic stress is forcing participants to tap into their 401(k)s. Of course, pretty much year-in and year-out, somewhere between 10% and 12% of participants have loans outstanding (though a huge database maintained by the Employee Benefit Research Institute (EBRI) indicates that the percentage with loans outstanding has been in the high teens for a number of years, certainly among larger plans). Still, there is clearly movement afoot.

The question, of course, is what should be done about it? If savings rates and accumulated balances are already inadequate to ensure retirement security, it’s hard to imagine a scenario under which depleting them—even if only for a short time—doesn’t make a bad situation worse, IMHO.

Moreover, when people “borrow money from themselves,” as the 401(k) loan process is often characterized, they quickly find out that they are really borrowing money from the plan, collateralized by their balance. That not only means that the 401(k) loan must be repaid on a regular basis (the plan fiduciary has an obligation to oversee these just like any other asset of the plan)—it also means that, while the participant may have satisfied one obligation, they have just picked up another.

The Loan Benefit

There are, of course, reasons to take advantage of the loan benefit, for that is surely what it is. There’s the interest rate, of course—generally prime +1%. Interest that, even if it has to be funded by the participant, does at least eventually wind up in their own account, rather than some credit card company’s. Plan loans are usually relatively easy—and the ability to simply tap into money that you have set aside is certainly more appealing to one’s sense of self-reliance than prostrating oneself before some loan official.

This industry has long and consistently embraced the notion that loans were something of a necessary evil in these programs. After all, if we didn’t give participants a way to tap into those funds in an emergency, they’d be much less inclined to save—or so runs the common wisdom. Odds are, if you’ve had the opportunity to explain these loan features to reluctant savers, you’ve perhaps thrown in the notion that “you can get to the money in an emergency.”

All in all, most participants appear to have treated that option responsibly. Over the past 20 years, the number of participants with loans outstanding has remained relatively constant, and while there are certainly cases of individual abuse, the combination of plan limits, processing fees, and sheer inertia has evidently served to keep this genie in the bottle. There are, however, clear signs of a shift here—a shift likely to accelerate along with the uptick in mainstream media coverage of the issue.

This doesn’t have to be a bad thing, of course. And while there is reason for concern if this simply becomes just one more way of fueling (no pun intended) our nation’s apparently insatiable desire for “stuff,” there’s little point in having a retirement savings account if you and your family get thrown out of your home 20 years before then.

However, unsettling economic periods are not restricted to the here and now, and as important as the safety net afforded by these programs can be in the short-term, it is a net that must be repaired and restored at some point. It’s one thing to borrow from yourself, after all—and something else altogether when you simply rob Peter to pay Paul.

- Nevin E. Adams, JD

Marshal Law

When a co-worker forwarded to me an e-mail about Eliot Spitzer’s alleged tie with a prostitution ring last week, I thought it was a joke.

It was no joke, of course—though, in incredibly short order, it became something of a circus (one can only hope that with Spitzer’s resignation, we’ll be spared the tiresome details about the personal life of the prostitute(s) whose services he engaged).

Spitzer was touted as a crusader by some—but like the crusaders of old, his motives and actions surely weren’t always pure. And though he reportedly embraced the image of a sheriff, he more accurately brought to mind Henry Fonda’s gunslinger marshal Clay Blaisdell in “Warlock” who, hired to rid the town of terrorizing bandits, soon became an even more ominous threat to the peace and well-being of the citizenry.

Spitzer made a lot of enemies during his career—IMHO, not so much because of what he did, but how he chose to do it. He was, of course, challenging large and powerful interests, but he frequently seemed all too willing to resort to the equivalent of extortion to impose his will on the targets of his investigations.

He may or may not have had the interests of his New York constituency at heart—he may well have merely viewed it as part of a political calculus designed to take him to Albany, and perhaps beyond. However, for the very most part, he wrested acquiescence and money, not guilty verdicts, from his targets. And, mind you, much, if not most, of the financial benefits have wound up in the Empire State’s coffers, not the pockets of those actually injured.

Still, whatever lies ahead for Mr. Spitzer, he has unquestionably left his mark on this industry. Because of his efforts, a number of illegal—and many highly questionable—practices were brought to light, and a new, sharper focus was brought to bear on the fees paid by the investing public, including 401(k) plan participants. I can still remember reading—with much the same incredulity that accompanied the early reporting of Spitzer’s prostitution ties—the arrangements that fund complexes had made to facilitate late trading, the pre-communication about trading movements with hedge funds, and the written agreements that violated both the spirit and letter of these same funds’ commitment to shareholders (see “IMHO: Wrong-Headed”). And let’s not forget that certain other regulatory bodies, given the opportunity to step in, did not (see “IMHO: Between the Devil and the Deep Blue Sea”).

Ultimately, of course, what got most of those firms in trouble was the hypocrisy of saying they did one thing while they did something else altogether. That, and a certain hubris about the application of the law. These are maladies often visited upon those grown too rich and too powerful.

It’s more than mildly ironic that they now appear to have contributed to the downfall of a man who also grew rich - and perhaps too powerful - at the expense of others.

- Nevin E. Adams, JD

Utility "Bills"

While it’s been a relatively mild winter here (and it’s not over yet), it’s been cold enough—and our house old enough—that opening the various utility bills has been akin to a monthly exercise in economic roulette. Not that we don’t know what the rates are (though that doesn’t mean they’re reasonable, IMHO), and not that, with some effort, we couldn’t find the appropriate meters and, at least in theory, undertake the calculations that would allow us to know what we have to pay before that envelope arrives. Still, those fees (more accurately, fee rates) are disclosed, and in theory, I am able to monitor them.

The reality, of course, is something different. The placements that make it convenient for the entities that deliver fuel and power to my home make it somewhat less than convenient for me to get to them on a regular basis (particularly during the winter months). Not that it would matter in any event—when it comes to utility preferences, my choices as a homeowner are relatively limited. My only viable recourse—and one that I entertain at least briefly following the receipt of each month’s bill—is simply to consume less of what I am being charged for. Sweaters for everyone!

Retirement savings plan participants are not dissimilarly positioned, IMHO. In theory most—despite the angst of lawmakers—are already in possession of information that would allow them to figure out what they are paying for their retirement accounts, although not always in a place, or explained in a manner, that makes the task easy (1). Additionally, when it comes to retirement savings plans, most of us are “stuck” with the plan chosen by our employer.

It’s not quite a utility monopoly, of course—I don’t have to save for retirement, and I certainly am not limited to doing so within the confines of a workplace retirement plan (of course, I don’t have to heat my house, either, but you take my point). It is, of course, the only practical way to avail myself of the “free money” of the company match (if available), and for most, it’s a significantly more convenient option than setting up a payroll deduction for a savings account (particularly for those lacking the discipline to deposit money regularly). For most, then, if there is an issue with what they are being charged for those services (and many don’t have an issue because they don’t know how much they are paying), the only viable recourse is, like with my home utilities, to consume less of what they are being charged for.

Tell “Tail”

That, of course, is the concern expressed by those defending the status quo on participant fee disclosure; that if we tell people how much they are paying, they will stop participating in these programs. That would be an unfortunate and, I think, unintended consequence, since by most measures, most folks already aren’t saving “enough.”

As a consumer, I’m not happy about the high cost of my utility bills. There are limits to how many layers one can put on, or how low you can set the thermostat at night and still be able to sleep. But seeing that cost every month does at least provide the opportunity to consider alternatives, including a greater involvement with the powers that oversee such matters. Similarly, seeing the cost of my retirement plan spelled out as a number separate and apart from the investment returns in which it is currently imbedded isn’t a panacea. Some may well decide that they don’t want to pay that much, or use that cost as a rationalization for not saving at all.

But it also might provide a reason for participants (and plan sponsors) to consider some more-cost-effective alternatives (such as index funds or lower-expense share classes), it might engender a more proactive dialogue about curtailing some of these unnecessary “bells and whistles” that add cost but little value to these programs—and it might even foster greater participant attention to these critical savings vehicles. But even if it doesn’t—and even if the disclosure costs participation in the short-term—no one is well-served by a system that people think is “free.”

We don’t know how participants will react if those disclosures were more explicit(2). But every time I hear someone caution against doing so, one of two thoughts comes to mind: first, that they haven’t got a clue how little attention participants actually pay to these accounts and the accompanying disclosures; and second, that “they” have something to hide.

- Nevin E. Adams, JD


(1)Ironically, most of the regulatory focus to date has been on the types of accounts where prospectus disclosures are available, but almost none on the part of the industry reliant on annuity investments, where, by most accounts, fees are higher and disclosures nearly non-existent – but that’s a topic for another column.

(2)Anecdotally, there are a growing number of programs out there that offer that level of fee disclosure – and I have never heard that it has actually created an issue with participation rate declines of any real consequence.

All For One

Looks like James LaRue will get his day in court, after all.

Last week’s Supreme Court result (see Justices OK Individual ERISA Suits in Landmark Ruling) could perhaps have been anticipated – certainly there has been little of late to suggest an interest in depriving participants of their right to sue - but the margin of victory – 9-0 – was striking.

The case - LaRue v. DeWolff – involved a participant that claimed he had instructed his plan administrator to transfer his balances to different funds. Those instructions were either ignored, or never presented in the first place, depending on who you choose to believe – but the lack of attention to those instructions allegedly cost James LaRue $150,000. What really happened, why LaRue chose to sue when he chose to sue, and how much damage was done as a result has yet to be established – the case was dismissed by two lower courts that, relying on an earlier Supreme Court precedents, determined that ERISA did not permit individual participants to bring suit on behalf of their own interests, only on behalf of the plan as a whole.

I can’t say, however, that I was impressed with the rationale presented by Justice Stevens, who authored the court’s decision (he was joined by Justices Souter, Ginsburg, Breyer, and Alito, while Chief Justice Roberts and Justice Kennedy filed an opinion concurring in part and concurring in the judgment, and Justice Thomas filed an opinion concurring only in the judgment, which Justice Scalia joined). Essentially, Justice Stevens admitted that the Supreme Court had previously held in Massachusetts Mutual Life Ins. Co. v. Russell, that ERISA didn’t permit individual participant suits (1) - but that while “Russell’s emphasis on protecting the “entire plan” from fiduciary misconduct reflects the former landscape of employee benefit plans. That landscape has changed.”

Change “Parse”?

How has it changed? Well, to put it simply, because defined contribution plans have individual accounts, and – here I’ll let Justice Stevens speak for himself – “Russell’s emphasis on protecting the “entire plan” reflects the fact that the disability plan in Russell, as well as the typical pension plan at that time, promised participants a fixed benefit. Misconduct by such a plan’s administrators will not affect an individual’s entitlement to a defined benefit unless it creates or enhances the risk of default by the entire plan…. Thus, Russell’s “entire plan” references, which accurately reflect §409’s operation in the defined benefit context, are beside the point in the defined contribution context.”

Of course, defined contribution plans were not “beside the point” when the Russell case was decided, and the justices then ((in an interesting touch, Stevens also authored that opinion) addressed what ERISA allowed, not what it provided for suits brought in a non-individual account context under ERISA. Consequently, to my eye, anyway, it’s as though the Supreme Court sought to “excuse” its prior decision as not being applicable to ALL plans covered by ERISA (you’d think that could’ve been mentioned at the time), or worse – to suggest that because the “landscape” has changed, so has the law.

I suppose some will appreciate the “vitality” such flexible interpretations give the law, but it’s precisely those kind of situational determinations that unduly complicate our lives, IMHO. Defined contribution plans (and those individual accounts) have been with us more than a century, ERISA for a generation. What about the prevalence of defined contribution plans relative to defined benefit programs warrants a reinterpretation of the latter to adequately address the former – other than perhaps the fact that the justices themselves didn’t “get” individual accounts in 1985 when the Russell case was decided? Or, more cynically, that the justices messed up in their Russell decision, and wanted to rationalize what could plausibly be viewed as a repudiation of the previous decision?

A Loss is a Loss

That’s why I much prefer the rationale expressed by Justice Thomas in his concurrence – a concurrence that “is not contingent on trends in the pension plan market. Nor does it depend on the ostensible “concerns” of ERISA’s drafters.” Thomas goes on to affirm the statutory right of a participant, beneficiary, or fiduciary to bring suit (“obtain relief”), and then goes on to state what common sense dictates – losses to individual accounts in a plan are losses of the plan – and recoverable as such (2).

Whatever the rationale, the law of the land now affirms that participants can bring suits based on injuries to their individual accounts. Frankly, the court’s previous sense that an injury to a participant in a plan was not a plan injury smacked of the kind of legal hair-splitting that only lawyers (and I have a JD) and politicians relish. Now, in the wake of the LaRue decision, I can understand and appreciate the concerns expressed on behalf of employers – that this case will simply set off a wave of new and expensive litigation.

No doubt the coverage of the LaRue case will serve to discourage some who were contemplating offering a 401(k), but I doubt that it will lead to the demise of plans already in existence. Much as I hate to contemplate the prospect of more red meat for the plaintiffs’ bar, I suspect the individual participant lawsuit “shield” pierced by the LaRue decision was unappreciated by most plan sponsors. Perhaps most obviously, why else would so many have sought the protections of ERISA’s 404c, but to avoid the possibility of an individual participant suit?

Still, one need look no further than the rash of so-called stock drop cases or the revenue-sharing challenges to see the potential – and the LaRue headlines certainly convey the sense of a new way for workers to sue their employers. But I think plan sponsors – certainly the ones attentive to their fiduciary responsibilities - have long been concerned about participant lawsuits.

Of course, they’re also probably not the ones who should be worried.

- Nevin E. Adams, JD


(1) ERISA Section 409(a) provides: “Any person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries by this title shall be personally liable to make good to such plan any losses to the plan resulting from each such breach, and to restore to such plan any profits of such fiduciary which have been made throughuse of assets of the plan by the fiduciary, and shall be subject to such other equitable or remedial relief as the court may deem appropriate, including removal of such fiduciary. A fiduciary may also be removed for a violation of section 411 of this Act.” 88 Stat. 886, 29 U. S. C. §1109(a).

(2) “The allocation of a plan’s assets to individual accounts for bookkeeping purposes does not change the fact that all the assets in the plan remain plan assets.”

The Not-So-Fine Print

If you watch commercial TV (that is to say, TV with commercials), you’ve no doubt been struck by the proliferation of ads for various prescription medicines. Medicines that you generally can’t buy directly, of course - but you CAN “…ask your doctor or pharmacist about how they might work for you.”

Setting aside my personal disgust at just how many (and how explicit) Via.gra ads are shown (and shown so early in the evening), I’m always struck by the length and content of the disclosures that accompany such promotions. Frankly, IMHO, by the time they’re done reeling off the potential side effects, it’s a wonder anyone actually makes an inquiry about taking them. Truly, the “cure” often sounds worse than the disease.

Disclaimers are also increasingly popular in our industry. There’s the disclaimer that plan fiduciaries are asked to sign if they choose not to follow the counsel of their financial adviser, disclaimers that purport to limit the liability of providers, and exactly why do you suppose those admonitions that past performance isn’t indicative of future results come so intriguingly positioned vis-à-vis the trumpeting of those results? Just ahead of the press toward automatic enrollment, some were requiring that participants physically opt out by acknowledging that they realized the consequences of their decision. Not that they necessarily did, mind you. One would expect that if they did, they wouldn’t opt out, if for no other reason to get the “free money” associated with the company match.

No, like the litany of disclaimers on those pharmaceutical ads, the consequences of not saving for retirement are, for many, simply a reminder that some highly unlikely side effects could, but probably won’t, happen. Part of that, of course, lies in the inability to portray something so uniquely individualistic, and part of it, surely because the audience itself has no real idea what a secure retirement looks like, much less what it will be like to live through the alternative. But part of it also is our collective unwillingness to share that truth, or to do so only in the smaller sized text, the fine print of “disclaimers”.

I’m sure the pharmaceutical companies would just as soon not bother with their little disclaimers – ditto those consent forms that accompany the most modest medical procedure. Let’s face it, if any of us EVER thought those “possible” results were likely (including the folks shoving the forms in our face), we’d surely walk away.

Disclaimers, of course, are generally defensive mechanisms; written by lawyers, for lawyers – by the people who have spent time figuring out how all the things that can possibly go wrong to protect themselves against the impact on those who haven’t – or can’t. The drug company tells you that dire consequences are a possibility precisely because they don’t want you to later claim (in a court of law) that you weren’t told they were. They are NOT, however, generally designed to so fully and completely apprise you of the negatives that you hesitate. The “fine print”, in other words, is not designed in such a way as to gain your full attention.

Are your disclaimers any different? Are they truly designed to get people’s attention…or are they simply designed to cover your….assets?

- Nevin E. Adams, JD

The Ant And The Grasshopper

One of the more well-known Aesop’s Fables is the story of “The Ant and the Grasshopper.” In the story, the ant works hard all summer long, storing up food for the winter that it surely knows is coming. The grasshopper, though he too knows that winter is coming, decides instead to fritter the summer months away—going so far as to make fun of the ant for working so diligently.

Of course, winter does finally arrive, and the grasshopper finds himself stuck in the cold, and hungry. He quickly remembers his “friend” the ant—and hops over to his anthill and proceeds to ask for a handout.

There have been certain animated retellings of this fable over time—in most of those, the grasshopper comes to see the error of his ways and appeals to the ant for a morsel of food in a contrite manner. And, in those “happier” versions of the fable, the ant has enough to share—and does—and everyone seems to live happily ever after. But in the original version of the story, the grasshopper approaches the ant not with a sense of contrition, but with one of entitlement. And in at least one older version of the story, the ant slams the door in the grasshopper’s face.

Respect “Ed”

I’ve not been a huge proponent of automatic plan solutions. Not that they don’t have their place, and not that they don’t have the ability to have a positive impact on plan participation rates. Certainly, some would-be participants just don’t get around to completing or turning in the enrollment forms, and surely others are intimidated by the process. But my thinking over time has been that those who could afford to save were—and that adults should be accorded the respect of allowing them to make their own financial decisions, even when those decisions weren’t the ones I would make, or the ones I think they should.

More recently, I had been concerned that many workers simply couldn’t afford the discretionary savings. But over the past couple of years, the miniscule drop-out rate from automatic enrollment programs has persuaded me that many of those who think they can’t afford it find a way (that, or they haven’t yet figured out that they can opt out). Economics is clearly a factor for some—but studies seem to suggest that isn’t the issue for most.

That’s left me wondering—again—why so many eschew voluntary savings programs, and that’s why, though I am philosophically opposed to mandatory programs (the fact that employees can opt out doesn’t mean that they actually feel that they can, or know how to), these days, I am willing to take a more aggressive stance That was inspired in some part by the whole subprime debacle. Clearly, there were a lot of people who made questionable (to put it mildly) financial decisions—decisions that, depending on who’s making the call in Washington, could come to be underwritten (directly or indirectly) by people who had the good sense not to overextend themselves.

It does not require a hyperactive imagination to see a point down the road where many Americans lack the financial resources to fund their retirement years, including workers who once had an opportunity to participate in their workplace retirement plan—“grasshopper” workers who simply may have made a choice to invest in things other than their retirement security at a time when most of the “ants” who had the chance gladly took advantage.

Of course, “automatic” enrollment is not mandatory participation, and the Pension Protection Act’s provisions (and the required annual notices) may make it easier for those who are automatically enrolled to opt out than it has been up till now. I’ll also concede that, as articulated motivations go, “making it harder for people to shirk their responsibility to save for retirement” comes off as rather, well, harsh.

Nonetheless, we’re all running out of time to do the right thing—and I’m not sure the rest of us can afford to let the grasshoppers continue to have their day in the sun.

- Nevin E. Adams, JD

Don’t Just Do Something, Stand There!

If you’ve been asked in the past two weeks what to do about the market (and who hasn’t), I’m sure your response has been something along the lines of…“Nothing.”

There are, of course, more eloquent ways to express that sentiment. And, let’s face it, when it seems that everyone is asking that question – it’s generally well past the time when it is prudent to try and do something. Still, it seems that throughout my professional career, every time the market plunges (even when it stays down for an extended period), the pundits all seem to say the same thing; “the fundamentals are sound,” “we’re going through a period of short-term volatility”, sometimes even that that period of “short-term volatility” was anticipated (apparently even an innocuous footnote about the possibility of such things “counts”).

Naturally, we’d all like to believe is that we don’t need to do anything in these times of - “uncertainty” - because, well ahead of the current tumult, things have already been done to protect us on the downside. However much we would like to believe that, there’s something to be said for a timely, comforting voice of reassurance. Better yet if that reassurance comes from someone knowledgeable in such matters – and better still when that reassurance comes from someone familiar with the particulars of our investment portfolio. That’s why, to some extent, I find the platitudes from various economists somewhat disingenuous; not only are they blissfully ignorant of my own personal asset allocation, what they always seem to be saying, IMHO, is “don’t take your money away from us.”

Still, plan sponsor fiduciaries are generally appreciative of those messages. They bear responsibility for the prudence of such investments, after all – and the reassurances of experts that prudence has been manifested in their decisions (or their non-decisions) is understandably welcome. Most are only too happy to pass along those reassurances to the those on whose behalf their decisions (or non-decisions) have been made.

Those retirement plan participants are often reminded that their 401(k)s are long-term investments, that they continue to benefit from the on-going benefits of dollar-cost averaging, and perhaps increasingly that their investment in a diversified asset allocation “solution” means that they needn’t concern themselves with those kind of interim swings. And, for the most part, at least in my experience, on a day-to-day basis most are oblivious to a fault about the status of those investments. They may have a passing awareness that the markets are down, and some consciousness that their retirement plan investments could be impacted.

There is, however, a new generation of participant-investor emerging. One that has, consciously or, increasingly, unconsciously, relinquished control of that portfolio to experts – individual advisers, perhaps in the form of managed accounts, or less personalized solutions, such as target-date funds. What remains to be seen is how some of these “proxies” will fare in troubled markets – and perhaps just as importantly, how they will be perceived as doing.

Tough times can engender resentment and, in extreme cases, litigation. But they can also foster an appreciation for past expert counsel, and that current reassurance that the storm has been anticipated – and tough times can bring opportunity.

So, are the portfolios you’re responsible for standing pat – or just standing still?

- Nevin E. Adams, JD

Spend Thrifts?

With lightning speed, the House managed to cobble together an economic stimulus package last week, the Senate will take it up this week, and President Bush seems anxious to sign it. Even more amazing in the current political environment (and in an election year, no less), there appears to have been true compromise on both sides of the aisle in pulling it all together.

But for those of us who focus not only on the importance of saving for retirement, but on trying to remedy the inefficient (and non-existent) savings behaviors of working Americans, there were huge ironies in the logic behind this particular stimulus, IMHO.

I fully appreciate the economic spiral that sometimes sets in – people get worried about their personal finances, quit spending on non-essentials, which leads to less revenues for businesses, whose employees get worried about THEIR personal finances, and who subsequently quit spending on non-essentials, which leads to…well, you get the point. I’ll also confess that my blood pressure rises dangerously every time I fill up my tank (there’s something wrong when a non-SUV costs more than $50 to fill the tank). Clearly, lawmakers figured that they needed to do something before everyone who was already “mad as hell” decided to “do” something (like elect new lawmakers).

Mixed Messages

So, what’s inconsistent with this message? For starters, the government wants people to spend these “rebate” checks – and spend them NOW. Indeed, there was concern about it being given to people above certain income levels (families making more than $174,000/year will get no rebate) because – they would be inclined to save or invest it, rather than spend it. Contrast this with the message of most enrollment meetings – how one should forgo that cup of Starbucks or that movie rental for an investment in long-term financial security. A little now adds up to a lot later on, right?

Secondly, there was a desire on the part of some lawmakers to extend this “rebate” to every working American – including those who don’t actually pay income taxes. What that means, of course, is that for them (and it’s a remarkably high percentage of Americans) this isn’t a “rebate” of income tax (they already have all that is withheld returned to them when they file) – it’s essentially a return of their FICA (Social Security) withholdings. Not actually, of course. That’s merely the rationalization for why they should get one of these checks (though what else could we be rebating?). Little wonder we tell folks that they need to prepare for the eventuality that Social Security won’t “be there” – at least not in its current form - when they retire.

“How” Now

Finally, what isn’t being said out loud – but has to be a concern for those banking on this stimulus package to live up to its name – is how people spend it. Specifically, they would prefer that people not use the rebate to pay down debt.

We all know the impact that debt can have not only on people’s ability to save for retirement, but on their current financial situation. We also know that taking a loan against one’s 401(k) plan balance, while frequently characterized as “borrowing money from yourself” is really just another case of “borrowing from Peter to pay Paul”. Still, our industry has been largely persuaded that workers won’t contribute to 401(k) plans if they don’t have some way to tap into those funds in an emergency.

There’s some reason for that underlying concern about rebate spending on debt – recent history, in fact. The government did something similar in 2001 (basically as an “advance” on the 2001 tax cuts). Government data indicated that only about 20% of the rebate check money was spent by consumers – and 60%, was used to repay debt. Of course, in 2001 just $38 billion was distributed in rebate checks (0.4% of GDP), versus $100 billion this go round (0.7% of current GDP). Paying off debt is not a bad thing, by the way, though it’s not likely to provide the intended economic jolt.

It remains to be seen if the stimulus package will work – and it’s by no means certain that the situation will feel as dire (or that it won’t) by the time the checks actually arrive (June is the current estimate). I also realize that there is a difference between trying to stimulate the economy and focusing on long-term financial security.

Still, I can’t help but think that the government’s response is promoting the kinds of behavior we would typically scold participants for; spending, rather than saving – and spending retirement savings, to boot.


- Nevin E. Adams, JD

Beta "Test"

After months of research, informal talks with vendors, and not a few inquiries to a few “trusted advisers,” just before Christmas, we finally made our decision.

We bought a Blu-Ray DVD.

Now, that may not mean much to many of you. However, even the most casual renter of DVDs these days is frequently subjected to a commercial for that “next level” of viewing experience. The problem, of course, is that there are two levels: HD and Blu-Ray. The former has been around longer and, at this writing, that means that there are more movies in that format. The latter, if one is to believe the research, is “better” technology (you can put five times as much content/material on a Blu-Ray as on regular DVD versus just two times as much on an HD)—but your movie selection in that format (today) is smaller (none of this matters unless you also have a high-definition TV capable of displaying all this grandeur, by the way).

The other problem, of course, is HD and Blu-Ray are not compatible. You can’t play HD on Blu-Ray or vice versa (you can play regular DVDs on both HD and Blu-Ray players—fortunately, for those of us who have invested a small fortune in the current DVD format). Now, I’m not altogether sure that my aging eyes can discern the difference in quality between the two formats (there IS a noticeable difference between high-definition and regular), and I don’t now care, and never have cared, a bit about those DVD “extras.”

But you see, I used to own—and loved—a Betamax. If you’ve been around long enough to remember cassette music tapes, you may remember that there used to be two videotape formats—Betamax and VHS. Betamax tapes were physically smaller than VHS, but held as much recording time and with superior quality. But being “better” obviously wasn’t enough. Sony was the only firm that made “Betas”—while everybody else made recorders in the VHS format. When my beloved Beta finally died—and with it my ability to enjoy my collection of recorded movies—well, let’s just say it was an expensive lesson in the travails of being an “early adopter.”

Personalized advice has been around ever since participants have been asked to make their own investment decisions. Granted, some of that advice came from Joe in the lunchroom, but it’s been there, nonetheless. There’s little question that personalized advice is “better” than less-focused solutions like target-date funds (when provided by a trained professional, that is). Even the most casual observer will generally acknowledge the short-sightedness of an approach that dictates that every single person who is thinking about retiring within five years of the year 2040 should have an identical asset allocation.

And yet, those prepackaged asset-allocation solutions are clearly taking the retirement industry by storm. The vast majority of 5,000+ respondents to PLANSPONSOR’s annual DC Survey already have those choices on their menu, and those asset allocation options are drawing a growing percentage of assets—and that’s before the final qualified default investment alternative (QDIA) regulations take hold. Participants seem to “get” them, plan sponsors like them, and providers can’t bring their version(s) to market soon enough. Moreover, the vast majority of advisers have embraced them as well—viewing them, rightly IMHO, as a valuable tool in the arsenal to help workers start saving and investing prudently. The assumption, of course, is that when those balances get big enough to warrant a more customized solution, the participant investor will be equally ready to embrace it, rather than simply remaining comfortable with the “easy” approach that doesn’t require thought or involvement—and has worked out well for the past 20 years. Perhaps even at the recommendation of a financial adviser.

When that time comes, participants may well agree that they now need a more personalized solution. But advisers that take that eventuality for granted would be well advised, IMHO, to remember that “better” doesn’t always “win.”

- Nevin E. Adams, JD

Trading Places

Back in 2003, when then-New York Attorney General Eliot Spitzer launched his investigation into mutual fund trading practices, two distinct areas were highlighted: late trading, which was illegal on its face (particularly so when facilitated by the fund companies themselves), and market-timing, which, as we were reminded in a parenthetical comment in nearly every story regarding the scandal, was not (though nearly every fund prospectus claimed to discourage such patterned trading and promised to take steps to deter it).

That distinction was frequently glossed over in the coverage that followed—and the settlements that ensued. When all was said and done, a large number of chastened fund complexes had forked over a large amount of money (much of it to the coffers of the Empire State) and agreed to adopt new controls and procedures designed to ensure that the wrongdoing they never admitted to doing never happened again. So much commotion was raised, in fact, that the Securities and Exchange Commission was roused from its slumbers—just in time to adopt a “solution” to the problems resulting from the not-illegal-but-nonetheless-apparently-troubling practice of market-timing. Of course, the solution—initially set forth by a trade group that represents the mutual fund industry—was already available to those fund companies. But now, thanks to the codification in SEC Rule 22c-2, even the most casual mutual fund investor—including those who do so only via their 401(k) plan—has been forced to be aware of redemption fees—and we’re not just talking about cases of quick in-and-out, round-trip trades, either.

Setting aside what, IMHO, is still an absurd result, it’s all old news by now. Been there, done that, bought the T-shirt….

Here We Go Again

That’s why it’s been interesting to watch the debate over market-timing once again raise its ugly head—this time among the participants of the federal government’s own Thrift Savings Plan, or TSP. Apparently, there are a couple of thousand participants (out of a universe of 3.8 million in the TSP) who are trading “frequently”—and the TSP is taking steps to rein them in.

The Washington Post has reported that 2,018 participants who sold holdings in an international fund on October 24 had transferred in just a few days earlier (10/19). And, of that group, 323 participants were trading $250,000 or more. Moreover, during the previous 60 days, those 323 traders had made 5,804 exchanges in the international fund worth $1.9 billion, according to TSP officials (one participant has traded more than $1 million back and forth a number of times). These participants aren’t trading in mutual funds, of course, so the SEC’s 22c-2 strictures don’t apply.

Moreover, an analysis by fedsmith.com (a Web site devoted to federal workers) claims that those who bought in on 10/19 did so at $25.13/unit, and those who sold on 10/24 did so at $25.32/unit, making 19 cents per unit in just a few days. A feat that looks pretty good until you consider that, at 10/31, that particular TSP fund closed at $26.31.

But the TSP’s issue isn’t with the money these folks are making on those transfers. Rather, they are concerned about the cost impact of that activity on the folks who don’t trade; higher broker fees and transaction costs—especially in the international fund, where it's more difficult for the TSP's investment manager (BGI) to match buy and sell orders. They have—rightfully as fiduciaries, IMHO—expressed concern that a (relatively) few participants are driving up the costs for the vast majority who, like their counterparts in the private sector, never trade. Those trading costs stand out in the TSP, which enjoyed a total expense ratio of 3 basis points (that’s not a typo) in 2006. The trading costs for their international fund that year? Eight basis points (again, no typo). Now, those expense ratios may be a “problem” that your average 401(k) would love to have, but we’re talking about a $235 BILLION dollar fund. So, in crafting a recommendation to deal with this situation, the TSP’s chief investment officer looked to—mutual fund practices in the 401(k) industry and the SEC’s mandate under Rule 22c-2. Ultimately, unable to come up with a transaction fee that would be big enough to cover the trading costs, the TSP has decided to impose limits on the number of trades per month. Those limits—two per month—should be enough to satisfy anybody who isn’t trading funds for a living. Moreover, the TSP has imposed NO restriction on transfers from any of the funds to the G fund, the TSP’s most conservative option, to address the concerns of participants who might want to move their balances out of the way of some economic tsunami. More importantly, IMHO, it sends a message both to those participant-traders and to “everybody else.”

I also was struck by the TSP’s comparison of their solution with that adopted by the mutual fund industry. Though we frequently bemoan the bane of participant inertia, our industry has long been concerned about participants that would fritter away their day—and their balances—trading their retirement savings. That was the mantra against daily valuation in the first place, why we fretted over day traders in the middle of the tech-bubble, and, now, why a relatively few market-timers (setting aside for a minute that the incidents taken to task by regulators involved the complicity and/or active acquiescence by the fund companies; let’s face it, we all know the odds are against participant timers) have managed to burden an entire industry with an additional layer of costs, another complicated message, and random restrictions.

I can understand why the fund managers are in favor of these impediments. I’m (still) not altogether sure why the rest of us have been so willing to go along.

- Nevin E. Adams, JD


Footnote:

In the interim, a group calling itself TSPSHAREHOLDERS.ORG has launched a web site and a petition campaign to block the new transfer policies – and they have just under 3,000 signatures on that petition (one can’t help but wonder if it’s the SAME 3,000 that have been doing the frequent trading). They have some issues with the calculation of trading costs – and they claim that the big trading surge last October resulted in a “tracking error” (basically a difference between the price at which transfers were credited and the real cost of the transaction) – and they claim that the tracking error accounted for 56 basis points in the favor of those who stayed in the fund (see http://tspshareholder.org/newsletters/Vol2_No2.html).

Now, what’s missing in that analysis, of course, is the reality that that tracking error COULD have cut the other way – and those left sitting in that investment fund could just as easily have been stuck with a loss. But then, that’s how free markets work. Some people win and others don’t (what’s also more than a bit ironic, IMHO, is that up until the past couple of years TSP participants could only transfer once a quarter).

Birthday "Presence"

Just after Christmas my family flew to Chicago for a surprise – my mother-in-law’s 85th birthday. It was a huge success – she wasn’t expecting us – in fact, wasn’t expecting to have all three of her children and their families in town on that day.

Over the course of our time there, I heard her tell several people “I never thought I’d make it this long.” Now, my mother-in-law doesn’t look (or act) 85. Still, even by today’s lengthening longevity standards, 85 is a long time – and, even as we planned our surprise trip “home”, we couldn’t help but wonder how many more birthdays we’d have together.

None of us know how many birthdays we’ll have – and how many of those will happen during retirement. Indeed, contemplation of our personal mortality is something that most, IMHO, reserve for special, isolated occasions (some not even then, of course). And yet, one of the most important aspects of planning for a financially secure retirement is making some attempt to predict just how long that retirement is going to be.

There are simple ways to deal with this complex and sensitive issue, not least of which the cogitations of actuarial science imbedded in those ubiquitous retirement projection calculators. After all, it seem so much more emotionally palatable to know that the “average” 52-year-old is likely to live to “X” than it is to actually think about the years that personally remain on this mortal coil.

Other Variables

If there are limits to our ability (or willingness) to focus on retirement’s “duration”, we nonetheless have the ability to influence other key variables in the equation of a financially secure retirement. We can, as a growing number of workers suggest they will, postpone retirement’s commencement by working longer. Not just age, but health, influences our ability to do so – a pertinent concern at a time of year when New Year’s “resolutions” are in vogue. Today’s workplace is certainly more conducive to such concepts than it was for our parents – and yet, I’m always struck by data on just how many of today’s retirees “attained” that status involuntarily, and earlier than they had planned.

A more obvious choice –one at the core of today’s retirement savings campaigns – is to save more, and perhaps to save more earlier. Unlike employment choices that may ultimately lie outside our control – or the uncertain and sometimes tenuous nature of human mortality – we all make choices every day about how to spend – or not to spend – the resources at our disposal. Admittedly those are frequently difficult choices – how much more have you had to spend to fill your automobile tank this week than you did even a year ago – and yet a tough choice now could mean the difference in an impossible trade-off twenty years down the road.

Like my mother-in-law, we may not ever think we’ll “make it” as far as we actually do. But if we’re lucky enough to get there – surprised or not - we surely don’t want to arrive empty-handed.

- Nevin E. Adams, JD