National Treasure

This coming Friday, the nation will, in large part, set aside its normal business for a three-day weekend filled with cookouts and fireworks displays, as we commemorate the birthday of our nation. Despite those “distractions,” some will think back on the courage of the nation’s founders and their vision in crafting a structure of government that remains a unique role model for the world—and well they should.


Still, students of history—and even aficionados of the musical 1776, readers of David McCullough’s John Adams, or its recent HBO miniseries adaptation—know that the decision to declare independence was no easy matter. Indeed, the political bartering involved in getting to a “unanimous Declaration of the thirteen united States of America” would have been all-too familiar to the legislators of today.

While we celebrate the Fourth of July as Independence Day, that is neither the day on which the Continental Congress passed the resolution (July 2), nor the day on which the declaration was signed by the members of that Congress (only President of Congress John Hancock and Charles Thomson, Secretary, signed it on the 4th (the former in a hand "large enough for King George to read without his spectacles"). Most delegates didn't sign it until August 2. One didn't sign until 1781. Three delegates never signed.

The signers—who stood to lose everything they possessed, including their lives—surely did so with trepidation. Indeed, Hancock reportedly said at the signing on August 2 that they must all stick together—to which Benjamin Franklin reportedly responded, "Yes, we must, indeed, all hang together, or most assuredly we shall all hang separately.” Of course, that declaration was neither the beginning nor the end. Hostilities with England had already been underway for more than a year, General Cornwallis' surrender at Yorktown was still more than five years off, and an official end to the hostilities would not come until 1783.

Invoking the Vision

Less than a hundred years later, armies were once again fighting over those principles—one side defending the same basic rights of property, and freedom to enjoy it, that their forefathers struggled to establish; the other, to extend those same rights to all Americans. In the middle of that Civil War that would threaten to rip the young country asunder—and on the Gettysburg battlefield where July 4, 1863, would forever mark the end of the bloodiest battle in American history—President Abraham Lincoln invoked the vision of the nation’s founders to launch his Gettysburg Address with the words; "Four score and seven years ago our fathers brought forth on this continent, a new nation, conceived in liberty, and dedicated to the proposition that all men are created equal."

The choices our nation faces today—on terrorism, the fighting in Iraq, health care, energy costs, the economy, and. yes, even retirement savings—seem relatively modest in scope when considered next to the daunting prospects our forefathers faced in 1776, IMHO. What they could not have had at that time—but what their vision has surely bequeathed to us—is a confidence in what we now consider American ideals, and the resilience of the American spirit.

Their sacrifices were made a long time ago—and the liberties they fought to win, and to preserve, are so interwoven into the normalcy of our day-to-day expectations that it is easy to forget just how precious they are, and how rare still in this world.

With all its faults, all its frailties, what we have here remains a special gift. A gift that young men and women are still sacrificing to extend to others today. A national treasure we should appreciate every day—even if we only celebrate it once a year.

- Nevin E. Adams, JD

'Swimming' Pool

Having just spent most of the past week in Chicago at our annual Plan Designs conference (bigger and better than ever, I might add!), my head is still swimming with new ideas, modifications of existing “assumptions,” and the occasional validation of the “tried and true.”

I’m dedicating this week’s IMHO to a rough summary of some notes I took during that time (in some cases, I have “refined” statements to be more declarative than they were presented to make a stronger point):

• A prudent process helps you win in court; a good result keeps you out of court in the first place.

• Lots of people have already decided who they are going to vote for in November.

• Automatic enrollment (still) isn’t for everyone.

• Some people who nod their head knowingly when you start talking about glide paths don’t have a clue what you are talking about.

• In an era where asset-allocation solutions dominate, you’re better off picking the best target-date fund(s)—and then finding a recordkeeper that can/will accommodate that selection.

• Target-date fund benchmarks are available—but they incorporate certain beliefs/assumptions on the part of the index maker (though that’s not exactly radical, IMHO. The S&P 500 also incorporates certain beliefs/assumptions in its composition).

• Nobody (except perhaps the lawyers who wrote them and the regulators that mandated them) is actually reading all these participant notices.

• We’re getting ready to know more about fees charged than some ever thought possible—then, we’re going to have to be taught what to do about what we (now) know.

• Lots of plan sponsors are “OK” with the fees they are paying—but they aren’t sure that they are “reasonable.”

• Retirement income is an “easy” sell, but still a tough “buy.”

• Mentioning that you’re thinking about beginning a provider search (even if you’re not) is an easy way to gain a quick fee/service concession.

• Tax breaks associated with tax-deferred savings and employer-sponsored health care add up to a lot of money—and some in Washington want to spend that money other ways.

• More people (still) seem to be worried about the 25 basis points being split between the recordkeeper/TPA and adviser than the 80 basis points being spent on investment management.

• There is an inherent mismatch when revenues are based on something (assets) that has very little correlation with costs (plan structure and participant count).

• Most plan sponsors still have a better chance of being struck by a meteor than being sued by a plan participant.


- Nevin E. Adams, JD

Time Enough?

My dad has been on my mind a lot of late—for no particular reason that I’ve been able to identify. The anniversary of his passing was several weeks ago—his birthday not until October. The approach of Father’s Day is the most obvious explanation—but the truth is, Father’s Day with my dad was never a particularly memorable occasion (Dad always liked his Sunday afternoon naps).

He was a man of few words (outside his pulpit, anyway) and, like many men of his time, wasn’t inclined toward big shows of emotion. Ultimately, he was with us longer than he expected to be—but a lot less time than I ever anticipated.

Perhaps because I’ve been in that frame of mind—perhaps because of his closeness with his father, and his books that shared that relationship with the rest of us—the news of Tim Russert’s untimely passing Friday really stuck with me this Father’s Day weekend.

People die tragically and prematurely every day, of course. However, most of them are unknown to us, and nearly all are unnamed to us. As for Russert—well, I didn’t know him, never met him—but he spent a lot of Sunday mornings in my living room. Politics aside, his was a face and a voice that I got to know. He was older than I, but not so much so that his passing would be expected. He was, by all accounts, a loving son, husband, and father—a man in the prime of his career. That he might have gone to work Friday just like any other day—to realize that on any given day, any one of us could go to work and simply not come home…well, it reminds us just how precious and sometimes tenuous life can be.

We know that, as ironic as it sounds, death is a part of life. Thoughtful individuals prepare for the possibility of death—through faith and, with luck, sound financial planning. Most don’t dwell on those realities, and that’s doubtless a good thing, IMHO.

In this business, we spend a lot of time worrying about the risks of outliving our retirement savings. Participants increasingly seem to rely on an assumption that they will work longer, or save more later, to make up for their current shortfalls.

However, Tim Russert’s passing should remind us all again that we don’t always have as much time as we might want.

- Nevin E. Adams, JD

A “Simple” Plan

More than a decade ago, my mom was getting her finances ready for retirement. A schoolteacher her whole life (except for that swathe of time when she set that aside to be at home with her brood during their formative years), there weren’t a lot of varied sources and complicated tax planning to worry about. The most significant component was the balance she had accumulated in her 403(b) plan.

Then, as now, I fancied that I had at least enough investment savvy to make reasonable investment decisions for myself–and I’ve never been shy about offering my sense of the markets to anyone willing to listen (and worth every penny they paid for that advice, I might add). But this was my mother’s money–and a significant component of what she would need to live on for the rest of her life. Frankly, I was nervous about making a decision that would wipe out her years of savings.

Fortunately, I had the presence of mind to recommend an asset-allocation fund. Nothing too fancy, certainly in hindsight–just your basic 60/40 mix split between the S&P 500 and Treasury bonds, in a very reasonably priced mix. It helped that Mom had been paying attention in those education meetings over the years: She understood the importance of diversification, the balance of stocks and bonds, and was willing to have a larger exposure to stocks than many in her age cohort might have preferred. And, from the standpoint of a well-intentioned but frequently preoccupied son, it was a relief knowing that someone who actually manages money for a living would be keeping an eye on things.

About six months later, during one of our periodic calls, Mom asked if it wasn’t time to put some of that money in another fund. I was puzzled, Had she been disappointed with the fund’s performance (this at a time when one might well have wished for a higher apportionment to equities)? No, she said she had no issues there. Was it a problem with the fund company itself, I asked? Was she worried about their financial stability? After all, it was a mutual fund, not a bank; so, was she worried that it didn’t really have anything like FDIC insurance? No, she said, there was no problem there, so long as she knew. Well then, I asked, why did she want to move some of it to another fund?

“Because,” she explained patiently,“isn’t it important to diversify my investments?”

Now, I thought I had done a brilliant job of explaining the asset-allocation fund premise–how that diversification was accomplished within the fund on an ongoing basis by people who spent their working hours paying attention to such things. But to her great credit, my mom–who had no real education in investing or the market other than what she got in the workplace–may not have known what to invest in, but she did know that you shouldn’t put all your eggs in one basket.

That wasn’t the last discussion I would have with Mom on the subject (though she let a respectable amount of time pass before she brought it up again). Not because she didn’t hear and understand my explanation, but because, IMHO, after a lifetime of having to make the investment decisions herself, she just couldn’t quite believe that the “right” thing to do was to invest it in a single mutual fund.

Things are even better for participants now, of course. Asset-allocation funds have long since incorporated sophisticated risk evaluations, and target-date funds make it easy for participants to make respectable decisions without even that “bother.” Those solutions have their imperfections, of course. But I wonder how much different the focus of participant-directed savings programs might be today if those kinds of solutions (1) had been available then.

- Nevin E. Adams, JD

(1) I realize that profit-sharing programs have long operated in a “balanced account” structure that didn’t require participant-direction (or, in most cases, participant funding). On the other hand, from the very beginning, accounts funded with employee contributions have sought to give participants the opportunity to decide how to invest their own money.

Magic 'Cull'

Participant education meetings have long touted the “magic” of compounding; that apparent miracle of finance whereby income earned on investments becomes part of an account balance, and earns more income that in turn adds to the account balance, which earns more income, and so on. The net result, of course, is that at the end of a savings career, you wind up with a lot more money than you ever thought possible.

The funny thing is, I’ve known about this magic for so long, I had almost forgotten how impressive the results could be. Or had, until Russell Investments published a short paper with a long title— “The 10/30/60 Rule: Where Do Defined Contribution (DC) Plan Benefits Come From? It’s Not Where You Think.” This paper wasn’t about compounding per se—if it had been, I doubt that I would have taken the time to read it. In fact, now that I’ve brought up the subject of compounding, you may have already gone on to other things—but stick around.

We all know that compounding is a good thing—something that works on our behalf even when we aren’t doing anything. Sort of like having a good metabolism that keeps your portfolio in fighting trim without requiring any physical exertion (I still remember those days fondly). As a consequence, we tend to take it for granted.

“Post” Script

However, the point of the Russell paper wasn’t the magic of compounding. It was a message about the importance of investment—particularly investment after retirement. How important? Well, important enough that a reasonably simplistic spreadsheet included in the paper showed that nearly 60% of one’s total retirement distribution can come from investment returns attained after retirement (age 65 in the example). How much comes from individual contributions? Well, in the Russell example, a relatively miniscule 10%, and the rest from pre-retirement earnings—about 30%.

Now, to get there, you have to embrace several assumptions—and the paper’s authors are clear on that point. They assumed a 7.8% annual rate of return and applied it consistently over the period in consideration (each year’s contributions were half-weighted). Granted, some might argue that 7.8% is a tad “optimistic,” certainly when one considers that return applied over a 64-year period without interruption (1). However, they also assume a 4.75% annual increase in the contribution. That assumption is doubtless expected to account both for wage increases and deferral growth—but still seems wildly optimistic in a 40-year savings “career.” However, if that is optimistic, then it only serves to accentuate the point of the Russell paper—that investment returns play a significant role in account accumulations (more on that in a minute). The paper’s authors also factor in distributions—again, in a consistent stream—that increase by 3% each year, designed to draw the account balance to $0.00 at age 90.

What that means for the baseline scenario presented is that, if you start by saving $1,000 when you are 25, by the time you get to 65 (under the assumptions noted above), you will have an account balance of nearly $470,000, of which only about $113,000 would have come from contributions. However, the real “magic” is that, by the time the sample participant exhausts his account at age 90 (2), he would have been able to withdraw more than $1.1 million. In other words, even after money starts being drawn from the account—and even after contributions are no longer made—those post-retirement years add nearly $700,000 to that account balance at retirement.

We all know that in the “real” world, nothing moves in a consistently positive direction. Investment returns are generally unpredictable, if not downright volatile; contributions (even “escalated” designs) tend to plateau at some point; and account balances are depleted, for a time anyway, by things like loans and withdrawals. However, the message—that your investments keep working for you even after you quit working—is timeless, and one well worth keeping in mind, IMHO, as we work toward a financially secure retirement.

- Nevin E. Adams, JD

(1)The paper’s authors examined a couple of different investment return scenarios—one where the annual return is 5% and another where it moved from 7.8% to 5% post-retirement. They did not, however, factor in any negative returns.

(2)The paper’s authors acknowledge that 90 is “slightly beyond the average life expectancy,” but explain its usage as a reflection of the need to “build in a margin against the uncertainty introduced by longevity into retirement planning.” However, if death is assumed to occur at age 85, rather than 90, the authors note that the 10/30/60 rule shifts to only 12/36/52.

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