Business As Usual?

Like many, perhaps most, Americans I have viewed the unraveling “Bonusgate” scandal with a mixture of disgust and incredulity.

Essentially, the federal government, operating in crisis mode to restore the financial system and markets to “normal” - extracted through a kind of political blackmail (“you have to approve this now without questioning, or this will be on your hands”) enormous sums of money that they handed over, largely without condition, to allow certain firms to stay in business. Those firms, right or wrong, are still in business – and, much to the consternation of the American public, have then proceeded to conduct business as usual. That, of course, means honoring their financial obligations and – like it or not – that includes those now-infamous bonuses.

Of course, the American public is struggling to understand how a company that is so badly off it has to take on millions, and in AIG’s case, billions, of taxpayer dollars, can afford such apparent “largesse”. And, of course, most cannot even begin to get their intellectual arms around the enormous sums of money these companies are handing out (the largest bonus was $6.4 million, six employees got bonuses of more than $4 million, and 66 got bonuses of more than $1 million each of the $165 million, though the Connecticut Attorney General indicated over the weekend that those amounts could be understated).

Now, at least in theory, those bonuses were earned – and paid based upon objective, job-related criteria (and if they weren’t, that will surely come to light in short order, considering the number of regulators currently scouring the contracts). It may well be that they acknowledge extraordinary efforts and performance under conditions of extreme distress. None of that will matter to the average guy on the street, any more than it mattered to the US House of Representatives which last week passed a retroactive, targeted, and admittedly (even proudly) punitive tax on the individuals who received those bonuses.

As irritating as that situation is, however, what’s more concerning IMHO is how easily it could have been avoided. We know now, for example, that the agreement between the federal government and AIG had a provision in it that could have blocked the bonuses – but that changes were inserted – and inserted deliberately - at the last minute to allow them (1). We know that, of course, only after being treated to the spectacle of a U.S. Senator first expressing outrage that someone had inserted that language into his amendment – and then, less than 24 hours later, getting to watch that Senator admitting that he was the inserting “culprit” (albeit allegedly at the behest of the Administration – which, of course, denies such wrangling).

Ultimately, I suspect that tax won’t hold water in court – assuming it makes it into law, and that any of the bonus recipients are willing to contest the issue (once the current crisis is past, I suspect some would). I also suspect that the American taxpayer will be “stuck” with all of the other bonuses and expenditures paid by these firms; they’re legal obligations, after all, and in the absence of the intervention of a bankruptcy event or conditions imposed by the federal government along with those TARP infusions, not paying those bonuses is probably no different legally than not paying their electric bill. It is, it seems, “business as usual.”

Those implications notwithstanding, advisers have a vested interest in how this current imbroglio plays out. Many work for the firms drawing fire for these practices, of course, and even those who don’t, work in an industry tainted, at least for the moment, by its associations with the markets and those who sought to profit from the trust of others. Not to mention that the financial futures of many plan participants (and advisers) still rest on the futures of these institutions.

The $165 million is a lot of money, but a mere drop-in-the-bucket compared with the BILLIONS already promised to AIG and other firms – and as cathartic as it may be for some to watch the “fat cats” getting their comeuppance, the ultimate consequence of scrambling to close the barn door after the cow has already been loosed is likely less confidence in our financial services system, not more – and that will doubtless lead some to think that the solution is more intervention, not less – and that will, based on every historical precedent of which I am aware, retard, rather than accelerate the process of economic recovery.

It should be of no small concern that lawmakers would be willing to rush not just to judgment, but to a “solution” to the current situation with so little appreciation for its origins or implications. To attempt to dramatically, and radically redress a situation that, IMHO, could have been avoided with a modest amount of contemplation and thoughtful evaluation. The kind of contemplation and thoughtful evaluation one might reasonably expect to come naturally with the expenditure of billions and billions of taxpayer dollars, as a matter of normal business. The kind of thoughtful evaluation and contemplation we should be able to expect from those we elect to represent our interests and to guard the public trust as a customary means of conducting the people’s business – and that we should now demand in times that are anything but mundane or commonplace.

Because, IMHO, we’ll never get back to normal by simply conducting business as usual.

- Nevin E. Adams, JD

(1) Editor’s Note: The provision said the new limits "shall not be construed to prohibit any bonus payment required to be paid pursuant to a written employment contract executed on or before February 11, 2009. . .”

A Good Deal?

A survey published this past week by Fidelity noted that workers cited health insurance, retirement savings plan matching contributions, and dental insurance as the three most important benefits, with health insurance ranking as No. 1.

That study (see Workers Underestimate Cost of Providing Health Benefits ) offered some interesting perspectives on health care and the expenses associated with that benefit. The good news was that workers very much prize this benefit – and in large part (72%) believed that what they got through their workplace was better than, or at least as good as, what most other companies offer. That said, more than half (61%) noted that they were paying more than they once did, but were getting the same – or less – in terms of benefits than they did in 2007.

However, a more striking finding in that Fidelity study, IMHO, was that more than half (53%) thought that that health insurance benefit was costing their employer less than $5,000/year, when a more typical range (depending on where you are, for health-care costs, like housing, can vary widely depending on where you live) is anywhere from $5,000 to $15,000. A benefit that, it should be noted, is still tax-free to workers (though there have been “designs” on that from both major U.S. political parties, see McCain’s View ).

Now, that workers underestimate the cost of providing health-care insurance is perhaps not surprising, in view of how insulated most are from the “real” costs under the current system (and let’s not for a second imagine that a nationalized version would do anything to close that gap). That’s why employers are increasingly predisposed to embrace programs that do a better job of “engaging” workers in the costs, even as those workers are asked to pay more. However, as the Fidelity survey illustrates, they may know they’re paying more, but most still have no real appreciation for the cost of the benefit they are being provided, and thus doubtless have less appreciation for the “deal” they are getting. Workers may appreciate the benefit – but how much more might they if they had a clue what it was costing?

When it comes to retirement programs, workers have long been asked to pay an increasing share of the costs; but, unlike health care, the shift of those costs has been less obvious, due to the imbedded nature of the expenses within/netted against the fund returns. As a consequence, surveys routinely show that participants (and plan sponsors) also underestimate those costs. In fact, in the extreme, a large number regularly opines that they pay nothing at all for those services.

Now, I’m not saying they aren’t being “told” now – or at least given the raw data with which to discern that impact. However, I suspect – and those aforementioned surveys validate - that the vast majority haven’t a clue as to the costs they are paying for those services. And, while it’s not here yet, the day is coming – and, IMHO, coming soon - when it will be mandatory to disclose that information to participants in a format much more likely to be understood and…“appreciated.”

And on that day, whenever it falls, those expenses – however fair, “disclosed,” and well-deserved they may be – will doubtless come as a shock to those participants. Participants who may well have been getting a good price, maybe even a good deal – but who thought they were getting it for a good deal less.

- Nevin E. Adams, JD

“Passing” on the Ammunition

A couple of months ago, I started getting e-mails from readers curious about the announcements of plans reducing and/or suspending their matching contributions. As the weeks passed—and the number of reports grew—so did the inquiries. Those first inquiries were clearly seeking assurances that the announcements did not constitute a trend, that this was still just something a (very) few employers were embracing. Indeed, that was my sense of things (see "IMHO: Trend Spotting", borne out not only by one of our weekly surveys (see "SURVEY SAYS: What Are Your Plans for Your Match?", but also in a couple of industry reports as well (see "83% of Employers Surveyed do not Expect Employer Contribution Changes"—and I was happy to provide those assurances (and links to those surveys) to any and all who asked.

However, in recent weeks, those inquiries have taken on a different tone; this new wave of inquiries seems to be seeking validation, if not vindication. Now, not in every case—and not enough to persuade me that we were on the verge of a match-suspension tsunami—but enough to suggest that such a thing could be possible.

Resist “Tense?”

Throughout this process, I have resisted aggregating a list of employers that have cut their match—mainly because I worried that it would only serve to accelerate what I view as an ominous trend. Also in the back of my mind was a concern that such an accounting might be fodder for “enemies” of the 401(k), who would point to the actions as proof that that system was unreliable as well as risky.

Those concerns notwithstanding, it is a project that we have discussed undertaking —and, indeed, there have been a number of requests to provide a list of the companies that have chosen to cut or suspend their match. Sure enough, many of those more recent requests are apparently motivated by a desire to make the case for cutting back on the match to plan committee members, or as support for a communication about that move to participants.

Now, several of our stories on the subject detail a listing of similarly situated employers that have made that decision (see “Apparel Retailer Freezes Pensions to Cut Costs”, “J. Crew Cost Cutting Clips 401(k) Match”)—and you can make your own list at any time by going to our Web site(s), and searching for “match.” Still, my head kept seeing a need for cataloguing those individual decisions, even as my heart told me that no good would come of it.

Unable to resolve my internal “debate,” I settled on a solution that I thought would be simple, fair, and effective: ask our readers. I did so in our weekly NewsDash survey last week, in fact—only to discover that my internal dilemma was nearly perfectly embodied in that readership; the vote for and against compiling the list in last week’s NewsDash poll split right down the middle (see “SURVEY SAYS—Should We List the Match Cuts?”). I kid you not.

As I poured over the responses, however, at least half of those who supported the compilation conditioned that support on the ability to keep that information “in context.” Some went so far as to suggest (or at least imply) that that would require listing the thousands of plans that hadn’t cut their match, though most said that desire could be satisfied by simply noting how many 401(k) plans there were in existence relative to the listing. Others noted the difference in impact when an employer was continuing to support/maintain a defined benefit plan despite suspending the match, or how safe harbor 401(k)s couldn’t suspend their contributions as easily as those with standard 401(k)s. However, even if we were able to do all that, we still wouldn’t have taken into account the situations where employers were making a decision to keep jobs with those matching dollars. Let’s face it—if you don’t have a job, you’re missing more than a 401(k) match.

And then, the day after the survey results appeared, I got a long and, IMHO, thoughtful response from a plan sponsor. He concluded by saying: “I would add my vote to the list who say ‘no’ to compiling and publishing a list. It will only get picked up and appear elsewhere in print. The Wall Street Journal or CFO Magazine will cite the list and suggest that ‘everyone is doing it. In fact, if you haven't already suspended your 401k match, you're out of sync with what the cutting-edge companies are doing.’ Don't give them this ammunition.”

Now, that was only one voice—and one that wasn’t even reflected in the survey results. It was, however, a voice that spoke to my head AND my heart—and provided, for me anyway, a shining moment of clarity.

We will, of course, continue to report on the news and trends regarding employer matches, while presenting it in a thoughtful way that provides context for those decisions. I’ll apologize in advance to those of you looking for the convenience of the single listing (as I noted above, you can still make your own)—and trust that those of you who perhaps don’t see this as a big deal will at least appreciate the deliberations.

As for those of you who have made a decision, those who are still struggling with a decision, and those of you trying to help those who are struggling with a decision, I hope this discussion—and the comments of those who contributed to it—helps you with yours.

—Nevin E. Adams, JD


Editor’s Note: Unfortunately, the “news” about a match suspension will continue to be just that—and if this plays out the way it did the last time (2003), the restorations will be much less obvious, even invisible. But I’ll make this commitment now: We will happily and proudly report every single match restoration when they come back.

Trust “Company”

I saw an interesting event headline the other day. It said simply, “Trust is an economic stimulus package.”

A short, and somewhat simplistic, assessment to be sure. And yet, IMHO, one that may well lie at the heart of our current economic turmoil; trust – or perhaps more accurately, the lack thereof.

Trust was surely at issue when the financial system ground to a halt last fall, with investors anxiously pulling back funds from institutions that were similarly concerned about the financial integrity of those to which they had extended credit. In response, the federal government first tried to broker deals between troubled firms and what turned out to be soon-to-be-troubled firms…and then decided to sit on the sidelines when the second “opportunity” emerged, leaving everyone to wonder if the government would step in or not – and if so, how (and how much)? Under stress (if not duress), the first big bailout was pressed through – but the articulated plan for its dispersal was abruptly set aside – and before you know it, $350 billion of our money seems to have vanished with no more apparent impact than a cupful of water poured onto a raging inferno.

Since then, we’ve had a change in administrations, and while some surely remain hopeful, trust remains elusive. Nor, IMHO, has there been much, if any, effort to nurture a restoration of trust. Let’s face it, the choices some of firms have made regarding compensation packages and activities (including their mode of transportation to Congressional hearings) in this environment do demonstrate an incredible disregard for the sensitivities of the times (in their defense, some legitimate business activities are being caricatured as abuses, and not every dollar spent by these firms came from the taxpayer’s pockets; however, the resonance of those criticisms is indicative of the climate of mistrust). Many of those same members of Congress that evidence such outrage about those activities turn around and, with a straight face, claim that they’ll “stimulate” the economy by chumming in projects to an “emergency” package that are surely every bit as wasteful and inappropriate for the times as the corporate activities they publicly disparage. And then they have the temerity to tell the nation that the package contains no “earmarks.”(1)

Advisers know first hand how important trust is in cultivating relationships, both at the plan sponsor and participant levels. Unfortunately, trust is one of those things that can be wiped out in an instant – and once damaged, even under the best of circumstances, can take years to restore. Those entrusted with other people’s money have perhaps a unique obligation, for when they violate that trust, that impact can be felt beyond that one individual, but even to the system(s) they represent. For example, clients of Bernie Madoff – or clients of firms that were clients of Bernie Madoff – will surely, for a time anyway, be less trusting of their advisers – and who can blame them? When might participants – most of whom seem, for the moment, anyway, to be willing to stick with their current investment plans – decide that they can’t afford to keep throwing good money into a market that continues to erode, not reward, their hard-earned savings? How much of their patience with that result is a function of the trust they have invested in you?

I think we can all accept the notion that these are extraordinary times, and that even the so-called experts aren’t exactly sure what will “work,” or how much of what will work will be required. I think we can even accept some misguided attempts to do the right things – even if they turn out to be the wrong things – so long as they are well-reasoned, well-intentioned, and well-articulated (or at least explainable).

What we really can’t tolerate - while we’re trying so hard to pull together – are the kinds of attitudes and behaviors that keep pulling us apart.

- Nevin E. Adams, JD


(1)One man’s definition of “pork” is another’s “much needed expenditure of government funds” (and always has been), and the definition of “earmark” remains more art than science. For some, the Congressional definition of an “earmark” wouldn’t include specific projects that are included in legislation that is voted on (as opposed to specific projects that are added on AFTER legislation is adopted) – and that is apparently the definition being applied when we’re told that the bills being signed in recent days are bereft of earmarks. It’s not a wholly illegitimate position – but, IMHO, one that is at least “nuanced.”

Note that the Congressional Research Service defines earmarks as "Provisions associated with legislation (appropriations or general legislation) that specify certain congressional spending priorities or in revenue bills that apply to a very limited number of individuals or entities. Earmarks may appear in either the legislative text or report language (committee reports accompanying reported bills and joint explanatory statement accompanying a conference report)." Personally, I think that is consistent with the way in which most Americans would see the term accurately applied. Feel free to disagree.

Anything's Possible

I’ve spent most of my life, certainly my adult life, confident that Americans, certainly in large part, are reasonable and rational. I have not, unfortunately, always been as sure of certain subsets of the population, notably politicians.

On numerous occasions during the political season just past, as one outrageous claim after another was laid at the feet of one candidate or another (and sometimes both), I heard (and was heard to utter) “rebuttals” of a sort—“They’d NEVER do that,” for example, or at least, “They’d never get away with that.” Granted, sometimes I’d say those words—and yet wonder if, this time, “they” actually might. One’s position on such things is inevitably interwoven with one’s comfort with the idea, of course. “Anything’s possible” can be both an anthem of positive change and an ominous portent of doom.

Those were the kinds of reactions that last fall’s hearings on the impact of the markets on retirement engendered, certainly in terms of the reactions to comments made at those hearings, particularly those held by the House Education and Labor Committee. Hearings that included the perspectives of some who clearly see the 401(k) as a failure—and who seemed willing, if not anxious, to trade it in for a better model. Indeed, the notion that we’d not only impose a new Social Security-like tax on workers and employers to build a new solution—and fertilize it with the carcass of the 401(k) (or at least the carcass of the tax support for the 401(k))—drew a lot of (IMHO) well-deserved comment and criticism, including mine (see “IMHO: The Pit and the Pendulum”). In fact, “The Plot to Kill the 401(k)” was the December cover story of PLANSPONSOR.

Best, Worst Case

Despite those ominous portents, the Washington insiders I have discussed this with over the intervening months—nearly to a person—dismiss the notion. At worst, they view this as a bridge too far, even for the commanding majorities in Congress. At best, they simply don’t think this is what Congressman George Miller (D-California), Chairman of the House Education and Labor Committee, has in mind or would support.

That said, that same committee is getting ready to start up another wave of hearings (see “They’re Baaack….Hearings on Retirement Security, 401(k) Resurface” )—and, much as I would like to console my fears with those Washington-insider voices, I can’t quite get there.

Don’t get me wrong. When, in announcing the hearings, the Committee Web site speaks to “a series of hearings to explore the shortcomings of our nation’s retirement system and look at solutions,” I couldn’t be more supportive. By nearly any measure, many Americans aren’t saving enough on their own, most don’t have the support of a pension, and whatever fiscal integrity Social Security still enjoyed has surely been sacrificed in an era where the federal government claims to be providing tax “cuts” to workers who aren’t paying any kind of federal tax beyond that earmarked for Social Security (FICA). Nor, though I am an ardent supporter of the 401(k) system, do I see it as sufficient in every case to do the job (see “IMHO: ‘Broken’ Record”).

I keep thinking that maybe I’m being too sensitive—that I’m too willing to impugn the motives of folks who are genuinely trying to do something that I have long advocated needs doing: figuring out a solution to the “problem” of ensuring retirement security (see “IMHO: ‘Focus’ Group”). And yet, when I also read in the Ed/Labor Committee’s announcement that the “first hearing will examine how the current economic crisis has highlighted existing weaknesses in the 401(k) retirement savings system,” I can’t help but feel that at least some of this is about excoriating a valuable part of the solution, rather than crafting a more complete one.

Those reservations notwithstanding, I’m going to try to watch these hearings with an open mind—and I hope you will as well (to their credit, the Ed/Labor Committee has been very good about broadcasting these hearings on the Internet and archiving them for later viewing). For we surely need some alternatives not yet on the table—and, IMHO, we need to be attentive to preserving and enhancing the ones we currently do have.

Because, after all… anything’s possible.

—Nevin E. Adams, JD

“Winning” Ways?

We got another verdict on those infamous revenue-sharing lawsuits last week. Not a verdict in the sense of a Perry Mason trial, perhaps - but we did have two sides presenting their case to a judge who, once again, basically felt that the plaintiffs didn’t make their case.

Personally, I find this entire class of revenue-sharing lawsuits abhorrent. Not that I don’t think there are some real issues to be had with regard to how some plans are being charged, and how some of those revenue-sharing arrangements are perhaps being abused. Rather, I resent them because, in large part, I think the cases brought to date—at least as I understand the facts—are probably not where the real problems lie. They do, however, represent huge piles of money—and if you’re a contingent-fee lawyer, that is (to borrow Willie Sutton’s famous phrase) “where the money is.”

Consequently, back in 2007, when U.S. District Judge John Shabaz of the U.S. District Court for the Western District of Wisconsin tossed—and, IMHO, “trashed”—the case brought against Deere & Co., it felt like a vindication of sorts—at least until I studied the rationale Judge Shabaz relied on. Good decision, bad law, IMHO (see “IMHO: Fighting Words”). But hey, it beats a bad decision, right?

In the intervening months, the plaintiffs appealed Judge Shabaz’s verdict, of course, and other experts—notably the Department of Labor—also weighed in (see “IMHO: The Letter of the Law”) and managed to express the application of the law in a manner consistent with what my nearly three decades of experience in the field had taught me to believe.

However, my reading of last week’s decision by Judge Diane P. Wood of the 7th U.S. Circuit Court of Appeals (see “Appellate Court Backs Deere Case Dismissal”), suggests that we’re still making the “right” decision—but for the wrong reasons, IMHO.

Decision Tree

For example, based on my reading of the case, if I were advising a plan sponsor on how to stay out of court (or at least on how to win once dragged there), based on the 7th Circuit’s ruling in Deere:

I would advocate giving participants LOTS of fund choices1—via a brokerage window if possible—and I would make sure that there were at least some low-cost fund choices available via that window 2.

I wouldn’t concern myself at all with whether the core menu was comprised strictly of a single provider’s offerings3, nor would I concern myself overly much with the fees paid by the plan/participants—so long as those fees were paid via mutual fund expense ratios that are the same as those paid by investors in the retail market.4

I would be comfortable telling participants with a straight face that the employer was paying all the administrative fees of the plan—even if those fees were all really being paid via the aforementioned mutual fund expense ratios5(nor would I be ashamed to admit that I thought that there were no administrative fees—because then, even if I was paying nothing, well, at least I couldn’t be accused of distorting the facts).6

Oh, and as for the protections of 404(c)—I would just make sure that participants are given the opportunity to transfer their balances between all those investment options and given prospectuses about those options that include details on the expense ratios of those choices.7, 8 Better yet, you won’t even have to worry about being prudent in the selection of fund options for the plan, because, according to the recent ruling, that safe harbor extends to that decision9—as well as pretty much any issue a participant might raise regarding their retirement account investments.

None of this, of course, is how I actually see the law, or the obligations of plan fiduciaries to uphold their responsibilities. On any given day, it might be good enough to persuade a sympathetic jurist—or to overpower impotent plaintiff arguments.

But, IMHO, winning for the wrong reasons doesn’t necessarily mean you’re right.

--Nevin E. Adams, JD


1“[E]ven if, as plaintiffs urge, there is a fiduciary duty on the part of a company offering a plan to furnish an acceptable array of investment vehicles, no rational trier of fact could find, on the basis of the facts alleged in this Complaint, that Deere failed to satisfy that duty.”

2“The 2,500 mutual funds available through BrokerageLink had fees ranging from .07% to 1%. Any allegation that these options did not provide the participants with a reasonable opportunity to accomplish the three goals outlined in the regulation, or control the risk of loss from fees, is implausible….”

3 “[M]any prudent investors limit themselves to funds offered by one company and diversify within the available investment options….We see nothing in the statute that requires plan fiduciaries to include any particular mix of investment vehicles in their plan.…We therefore
question whether Deere’s decision to restrict the direct investment choices in its Plans to Fidelity
Research funds is even a decision within Deere’s fiduciary responsibilities.”

4 “As the district court pointed out, there was a wide range of expense ratios among the twenty Fidelity mutual funds and the 2,500 other funds available through BrokerageLink….Importantly, all of these funds were also offered to investors in the general public, and so the expense ratios necessarily were set against the backdrop of market competition…It is untenable to suggest that all of the more than 2500 publicly available investment options had excessive expense ratios.”

5 “The fact that there were no additional fees borne by Deere is immaterial. While Deere may not have been behaving admirably by creating the impression that it was generously subsidizing its employees’ investments by paying something to Fidelity Trust when it was doing no such thing, the Complaint does not allege any particular dollar amount that was fraudulently stated.”

6 “The Complaint does not allege that the representation in the SPD supplement—that Deere paid the administration expenses for the Plans—was an intentional misrepresentation. To the contrary, plaintiffs have since submitted evidence with their Rule 59(e) motion showing that Deere believed that Fidelity Trust’s services were free.”

7 “[T]o the extent participants incurred excessive expenses, those losses were the result of participants exercising control over their investments within the meaning of the safe harbor provision.”

8 “If particular participants lost money or did not earn as much as they would have liked, that disappointing outcome was attributable to their individual choices. Given the numerous investment options, varied in type and fee, neither Deere nor Fidelity (assuming for the
sake of argument that it somehow had fiduciary duties in this respect) can be held responsible for those choices.”

9 “Plaintiffs would like us to decide whether the safe harbor applies to the selection of investment options for a plan, but in the end we conclude that this abstract question need not be resolved to decide this case. Even if § 1104(c) does not always shield a fiduciary from an imprudent selection of funds under every circumstance that can be imagined, it does protect a fiduciary that satisfies the criteria of § 1104(c) and includes a sufficient range of options so that the participants have control over the risk of loss….”

"Spreading" the Wealth

In one of the more memorable sound bytes of the Presidential campaign just past, candidate Obama tried to explain the rationale underpinning his economic philosophy as a belief that we should “spread the wealth.”

Of course, it remains to be seen just how much wealth will be spread, and to whom (and from whom) – but, like it or not – there are also certain redistributive principles at work in our retirement plans. And while I think it’s fair to say that no new ground was broken, a recent paper, “The Structure of 401(k) Fees,”,published by the Center for Retirement Research (CRR) at Boston College, highlighted the potential inequities that current fee structures may be imposing on plan participants (see “Disclosure not the Only Issue with 401(k) Plan Fees”).

Setting aside for a moment whether the fees charged are fair, the paper highlighted a fact that, while obvious, is not always intuitive: When asset-based fees are the order of the day, as they surely still are for most retirement plans, participants with larger balances pay more.

The rationale behind asset-based fees has long been a sense that larger accounts benefit more from the services associated with those fees, notably investment management. And, certainly, there is an appealing simplicity and efficiency to a process that simply takes from each investor a fixed and identical percentage of their account balance.

Still, the CRR paper offers an example with a plan where the costs amount to 0.8% of assets, costs that include marketing and administrative costs of $100 per year for each participant, as well as investment management expenses, which range from $200 a year for a participant with a balance of $20,000 to $400 a year for a participant with a balance of $80,000. In the example, the plan’s 0.8% expense ratio means that a participant with a balance of $80,000 would pay a fee of $640, even though this participant would account for only $500 of the plan’s costs – while a participant with a balance of $20,000 would pay a fee of $160 while accounting for $300 of the plan’s costs.

Twice, Told

Indeed, the CRR paper notes that “participants with twice the balances of others are not likely to entail twice the management cost, although they pay twice the management fee. Thus, a constant expense ratio is a deceptively simple method of pricing, which, by decoupling fees from costs, reduces the return credited to higher balance accounts while boosting that on lower balance accounts.”

This type of discrepancy is often acknowledged but discounted because we tend to see it as a positive thing that the participant with a larger balance – who is generally assumed to be an executive – effectively subsidizes the individual with the smaller account balance, who is generally assumed to have a smaller income. Certainly this is true in some cases – and surely discrepancies in pay can, and do, account for disparities in account balance.

Still, what is frequently overlooked is that there are some – perhaps many - $80,000 account balances that belong to workers who simply have been saving longer, or perhaps just more diligently, than those with those $20,000 balances.

Moreover, how much of the imbedded costs of “running” retail mutual funds are effectively being spread to and across retirement plan balances “proportionately,” muted only (in some cases) by a “better” class of shares? How much of the costs we don’t see – the trading costs in the funds, for example, which can be significant – are generated by retail investors with relatively modest balances…but spread across to the accumulated “wealth” of retirement plan investors?

It’s one thing to truly spread wealth – and another altogether to simply take it.

- Nevin E. Adams, JD

Somebody’s Got To Pay

Much has been made in recent weeks over the so-called Ponzi scheme foisted on the investing public by Bernie Madoff. The classic elements are all there: the promise of future returns that are, in reality, fueled by new investors lured by the promise of future returns that are…well, you know. Of course, the perpetrators of these schemes manage along the way to siphon off their cut from the flow of funds. Human beings fall prey to such schemes all the time, and for a variety of reasons: gullibility, greed, and sometimes a simple willingness to trust the wrong people. Madoff, whose role in worsening the current economic crisis is still surely underappreciated, managed to play on those tendencies better and for longer than most.

We’ve already seen some $350 billion worth of government bailout absorbed by the system like so much water into a thirsty sponge. And, since that didn’t work, the answer apparently is to double down—and then some. Which, IMHO, calls to mind a comment candidate Obama made during the campaign about the definition of insanity….(1)

Now, in fairness, the new spending isn’t being sent in the same direction as the last bailout (or whatever euphemism you’re most comfortable using). Of course, as far as I can tell, that first package (which by most accounts was strongly influenced, if not architected, by the new Secretary of the Treasury) didn’t wind up going in the direction(s) we were told it would—and while we were told that the government needed discretion to administer the funds where it best saw fit, most Americans probably didn’t think that meant it would wind up funding big corporate takeovers and massive golden parachutes. Ultimately—let’s face it—the bill was really about helping financial institutions stay in business, and, once that money was in hand, many proceeded to do just that.

On the other hand, if that first package was ill-approved in haste, the second wave approved by the U.S. House last week was, in almost every respect, IMHO, a slap in the face of American taxpayers. You don’t have to have (or win) the argument about whether infrastructure spending is truly stimulative to the economy or just a necessary investment to realize that much of what the members of Congress (at least the ones who voted for this monstrosity) apparently want us to pay for is—their reelection.

Something’s “Fishy”

What seems to be lost in the furor over needing to DO something—and we’re all surely anxious for things to get better—is that the federal government doesn’t have its own bank account. And for all the talk of the burden we’re leaving our grandchildren, there is a fiscal reality coming, and probably sooner than that. We all know this at some level—just as we all knew that that housing bubble was going to burst eventually, that those paper business plans couldn’t possibly justify that kind of market valuation for technology start-ups, and that there had to be something fishy about how Enron was reporting its revenues.

In sum, we all know this is wrong, if not criminally stupid. Maybe we’re not quite sure what to do, and perhaps we’ve been hopeful that wiser minds than ours can figure something out. However, if this is the best they can do—well, then, IMHO, it’s time to take away their ATM card—which, lest we forget, is wired to OUR bank accounts.

Now, in this, as in life generally, it’s relatively easy to sit on the sidelines and criticize those who don’t have that option. This is the time, even if you’ve never felt the urge before, to weigh in with those making decisions that will affect your job, your investments, your retirement….

Before it’s too late….because, sooner or later, somebody has to pay.

—Nevin E. Adams, JD

(1) He quoted Albert Einstein who noted that doing the same thing over and over again and expecting a different result was the definition of insanity.

Executive "Order"

Those who had been waiting anxiously (or nervously) for that final wave of regulations from the Department of Labor will have (get?) to wait a bit longer, it appears.

Just hours after the inauguration of President Barack Obama, White House Chief of Staff Rahm Emanuel issued a memorandum ordering a temporary moratorium on any regulations set to be published in the Federal Register “until it has been reviewed and approved by a department or agency head appointed or designated by the President after noon on January 20, 2009.” (see White House Executive Order Snares Fee Disclosure, Advice Regs ).

That “snared” pending DoL proposed directives requiring service providers to disclose “fees, compensation, and conflicts of interest” to fiduciaries of 401(k) and other benefit plans (see “EBSA Puts Out Provider Fee Disclosure Proposal” ), as well as a fee disclosure regulation for participant-directed individual account plans, which Labor had published in proposed form last July (see “EBSA Finishes Regulatory Package with Participant Disclosure Proposal”). Not directly impacted perhaps, but a near certainty to be influenced by the shift in control will be the recent finalization of rules regarding participant advice under the Pension Protection Act (see DoL Finalizes Rules on Investment Advice).

Now, it’s not unusual for an incoming administration to issue this kind of directive, and, frankly, it’s common sense. After all, if it’s waited until the final weeks of a presidential term to be put into law, why wouldn’t an incoming administration want at least a chance to make sure it fits with their agenda (more ominously, it’s not as though outgoing administrations haven’t been known to create problems/mischief for the next set via the implementation of last-minute regulations).

Having said that, there are some important issues and policies behind these rules – fee disclosure and participant advice – and a period of extended uncertainty likely won’t serve anyone’s interests. On the other hand, it’s not like these issues – and potential solutions – won’t be a focus for the new Congress and Administration. It is, however, unlikely, IMHO, that they will present the same solutions contemplated in the still nascent regulations.

“Safe” to Say?

I think it’s safe to say that we can expect a push for even more fee disclosure – and not just to plan sponsors. Plan sponsors certainly need more information about the fees and expenses associated with their programs, and they could use some help in getting those answers more readily than they do at present. On the other hand, the proposed regulations were hardly a panacea for the problem. IMHO, they were at best a practical response to the realities of the marketplace as DoL understood them at the time. Anyone who thought those were going to provide a completely consistent, transparent, and readily readable presentation of that information simply wasn’t paying attention. But it was a start.

Ditto participant fee disclosure. Setting aside for a moment the issue of whether participants want or will use that much information, IMHO, the regulations proposed would, in all likelihood, probably serve to obfuscate, not clarify the situation – and they would do so at an enormous cost to the system (and to the participants who pay for much of that system). Should participants be able to figure out what their 401(k) accounts cost? Absolutely. Would the proposed solution accomplish that? Probably not - but don’t blame the regulators. Trying to unravel the web of offsets, breakpoints, and revenue-sharing challenges the best of us. Let’s face it: It is a system designed to make it easy to get paid, not to make it easy to understand what is being paid. Still, however onerous the proposed solution was, the clear sense at the time from those in the party now in power was that it didn’t go far enough. Let’s hope the medicine isn’t worse than the disease.

As for participant advice – well, IMHO, it’s something of a miracle that the fiduciary adviser concept made it into the Pension Protection Act in the first place, much less into law. But it did, and Congress – including some members who now so adamantly oppose the concept – had a hand in its passage. You can hardly fault Labor for doing what the PPA mandated it to do (craft regulations regarding how that process was to take place and be overseen) – but you have to understand that there are powerful forces in Congress now who want very much to nip that “mistake” in the bud. I would be surprised if they were not successful in doing so, one way or the other.

Elections matter, after all – and matter they should – though sometimes they matter in unanticipated ways. Ironically, it is easier now to anticipate how the solutions of the new Administration will manifest themselves than it is to estimate when they will emerge, or when their accommodation will be required.

But change is coming, make no mistake – change that will be different, and perhaps “harsher,” than the change previously anticipated. Change that, even then, IMHO, might serve to make things better. Or not.

We’ll see.

- Nevin E. Adams, JD

Lest one think that my trepidations are limited to the future proposals, see:

IMHO: Irreconcilable Differences

IMHO: No One (Else) To Blame

IMHO: “Know” Way

“Focus” Group

A couple of weeks back, I got an e-mail from Robert Powell, who writes on personal finance for MarketWatch, and he asked an interesting question: specifically, what, in my opinion, were the top five retirement priorities that the Obama Administration should focus on?

Now, that’s a more complicated question than you might think at first glance. For instance, if you were to ask me what ONE thing should be dealt with, I could probably pull something hugely critical out of the air. Not that it wouldn’t be hard to come up with just one thing—but there’s a certain clarity to that process. However, once you get going, it’s harder than one might think to keep the list to five. Furthermore, there are LOTS of little things that you know would make the system better, but if you can only come up with five—and five for presidential-level involvement, no less—well, you also tend to focus on the big picture.

In any event, here’s my list:

(1) Focus on expanding coverage with the ACTIVE involvement of employers.
Everybody realizes that it is a problem that only about half of working Americans have access to a workplace retirement savings plan, and candidate Obama has talked about a mandatory payroll IRA. However, in my experience, while that may make it easier for more workers to save (they would be auto-enrolled, but could opt out), it still will be problematic for the employer to set that up for all workers, only to dump them in a retail-priced IRA. That's better than a poke in the eye with a sharp stick, but they'd be MUCH better served, IMHO, by getting the benefits of institutional pricing/fiduciary oversight that come with an employer-sponsored program.

Additionally, I think the creation of these alternatives to workplace programs will encourage employers that currently offer these plans to "step aside"—and let the government-sanctioned approach take over.

By the way—getting employers involved will mean that the government will need to spend some time understanding why more employers don't offer these programs, and it will mean that they have to understand that there is a difference between making it easIER to offer these plans, and making it truly EASY to do so. How about an “auto-enrollment” program that also makes it easy for plan sponsors to do the right thing?

(2) Shore up Social Security.

It's not only the third leg of that vaunted three-legged stool, it now represents about half of most retirees’ income (the shocking thing is how little income it is for that percentage). The future solution, whatever it is, needs to be based on a solid foundation. This is the place to start.

(3) Establish some kind of national retirement policy.

Pensions were never as widely available, or as "lucrative," as people sometimes mythologize them, certainly not in the private sector. As for 401(k)s, they were never designed to provide a single—or even a primary—source of retirement income. Social Security has "morphed" well beyond its original design and no longer accurately reflects the demographic realities of the nation. Let’s admit it: The “three-legged stool” is a rationalization, not a reality.

We need a plan—a blueprint, a roadmap—rather than the "necessity is the mother of invention" approach we have stumbled along with these past 50 years. I find it ironic that we regularly disparage participants for not developing a plan for retirement financing—when we, as a society, suffer from the same “it will work out somehow” perspective.

That plan needs to articulate what we as a nation expect our obligations—both personally, and as a society—to be. But, whatever plan we develop may—and should, IMHO—need to consider different solutions for varying generations of our society. Social Security may well have to be the primary solution for those over 55, but why should we limit ourselves to that for someone who has just entered the workforce?

(4) Help the free market fix health-care costs.

Several studies have documented the impact of health-care costs on retirement savings. Personally, I don't think a government-based solution fixes the “cost” problem, and it may well "break" the access those with health insurance currently enjoy. But you don't want people to have to drain their retirement savings for one extended stay in the hospital.

(5) Imbed financial education in the elementary school curriculum—and further.

As the father of three, I can tell you that, if kids were exposed to even half as much education about finances and the markets as they are classes on drugs and sex education, we'd all be much better served—and much better prepared to take responsibility for our financial futures, both pre- and post-retirement.

And, ultimately, isn’t that the soundest solution of all?

—Nevin E. Adams, JD

The MarketWatch column (I wasn't the only expert to contribute) is online HERE

“Broken” Record

A few decades ago, I suffered a nasty skiing accident. I was “bored” (the course was, overall, beneath even my modest skill levels), it was late in the afternoon, and—as humans are sometimes wont to do—I found myself trying to make the course more challenging by doing something stupid. Actually, by doing something stupid three times (which, by some definition, is doing something really stupid)—when “fate” intervened and kept me from breaking my neck…by breaking my leg.

It was a difficult lesson to learn (more accurately, it was a difficult way to learn the lesson); I spent the next six months in the middle of a Chicago winter in a cast—much of it in a cast that encased my entire leg, which also happened to be the leg you need to drive.

I learned a lot as a result of that experience—but one thing that never, even for a second, occurred to me was to blame the icy slope, the skis, or the tree I slammed into, though all surely played a significant role in the final result (…perhaps if I had been a lawyer, rather than a law student, at the time…).

Failing “Grades”

There’s been a lot of press devoted lately to the “failure” of the 401(k)—even though, IMHO, like my skis, it hasn’t done anything other than perform as advertised: In fact, it has provided millions of working Americans with a wonderful opportunity and incentive to provide for their own financial future.

It is, of course, that very opportunity that makes the current economic “crisis” so much more painful. Even those Americans not in fear of losing their jobs feel poorer—feel, and rightly so, IMHO, that they have been robbed.

However, it is not the 401(k) that has robbed them. Their 401(k), in a crude analogy, is no more at fault than were my skis (though there were surely some who, like I, were taking foolish risks late in the day). The real culprits are to be found in greedy mortgage lenders, pliable mortgage takers, opportunistic securitizers, and a facilitative government (see “IMHO: Pay “Back”?” ). And, as painful as those losses surely have been, and however much money has been lost in an individual account, I’m pretty sure no one has yet lost everything they ever put in, much less the “cushion” of the employer match. Compare that with Social Security—will you ever get back what was taken from your pay over a lifetime of working (odds are, you’ll also pay taxes on money that has already been taxed)? Let’s face it: Social Security isn’t immune from the economy, or the markets—it’s just that the problem seems like someone else’s to fix (and we know how they’ll fix it, sooner or later).

Let’s be frank: The 401(k) has provided millions of Americans with their first—and only—education about the markets and concepts like tax deferral and the value of compound interest. It has provided an interim source of funds in times of financial stress, and it has provided many with their first—and only—opportunity to invest in our great capital markets. Indeed, each and every 401(k) balance literally represents a conscious decision to forgo compensation in the here-and-now for the security it can (and must) provide in the future. It is a character trait and discipline that Americans are said to lack—and yet, the 401(k)’s tremendous success puts the lie to that conclusion.

Its benefits to the most highly compensated are negligible, barely enough to sustain their ongoing commitment to sponsoring these programs, while it offers those of more modest means a convenient, efficient way to take responsibility for their own financial future.

The bottom line is that, IMHO, the 401(k) has been a marvelous success: It’s a venue where millions of Americans who save nowhere else—and who would save nowhere else—choose to do so, and they do so because it is a system that encourages and nurtures that behavior—both financially and via education.

It is not the only answer to true financial security in retirement—but then, it was never meant to be.

—Nevin E. Adams, JD

Trend Spotting

Here’s a headline you won’t see this week: “Nobody Cut Their 401(k) Match Today.”

That’s right, even though there is a very good chance that it will be an accurate statement on just about every day, I’m betting it won’t even make its way into the business briefs section, much less a newspaper headline.

Not that employers aren’t making decisions to cut back on, or even suspend, their 401(k) match. On the other hand, you don’t have much trouble keeping up with that activity. Regardless of plan size or industry, these days, pretty much any plan that takes that step can count on making headlines—and every article beneath those headlines spends at least a sentence or two recounting the latest list of 401(k) match casualties.

Even in our publications, sadly. Let’s face it, it’s “news.”

With such incessant coverage, it’s hard to shake a sense that we have the makings of a trend—particularly for plan sponsors. Indeed, for employers looking for some respite in one of the more challenging economic times in memory, such coverage surely plants at least the seed of doubt about the necessity of the financial obligations attendant with such commitments.

Those developments notwithstanding, I’m pretty sure that, when it comes to their matching contributions, the vast majority of the tens of thousands of employers that offer 401(k) plans will make them in 2009 at the same level they did in 2008—and as they did in 2007, though you may never see a headline to that effect (a rare exception: “Most Employers Don't Plan to Reduce Contributions”).

That said, I’m not altogether sure where one crosses the line between a series of related occurrences and “a trend”—when the tipping point is reached, the Rubicon crossed….

What I do know is that we are still at a point where the decision to suspend a 401(k) match is “news.” And I dread the day—should it ever come—when it isn’t.

- Nevin E. Adams, JD

See also “IMHO: ‘Out of’ Practice” at

The Way We Were

As a parent (or even a mentor), sooner or later, you’ll wind up sharing tales of the way things “used to be.” Whether it’s a tale of the proverbial five-mile walk to school in the snow (“uphill, both ways”), the challenges of adjusting a tinfoil-laden TV antenna to obtain a decent black-and-white picture on one of four channels, or the days of laboring to get a quarterly valuation completed by six weeks AFTER the valuation cycle, the story-telling traditions of humankind are part of what makes us – well, human. By sharing a sense of where we have been, we all gain a better sense of the importance of where we are – and an appreciation (hopefully) for the progress that we’ve made.

Now, according to a recent survey, it seems that we may well be on our way to a day when participant direction of their investment accounts seems as quaint a notion as a quarterly transfer.

The aptly, if somewhat inelegantly, titled “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2007” by the Employee Benefit Research Institute (EBRI) indicates that lifecycle funds, a.k.a. target-date funds, were available in two-thirds of 401(k) plans in the year-end 2007 database the firm maintains with the Investment Company Institute (ICI), up from 57% in the prior year’s report. That means that two-thirds of the EBRI/ICI database, some 14.7 million participants, had an opportunity to choose those investment options. And, in fact, EBRI reports that, among participants offered lifecycle funds, 37% held them at year-end 2007 (see More than a Quarter of 401(k) Participants Hold Lifecycle Funds.

Doubtless, the Labor Department’s embrace of the qualified default investment alternative (QDIA) design (among which target-date offerings loom large) accounts for much of the increase in availability. Still, at year-end 2007, more than one-third of recently hired 401(k) participants held lifecycle funds, while at year-end 2006, 28% of recently hired 401(k) participants did so.

The EBRI study noted that younger participants were, in fact, more likely to hold lifecycle funds than older participants: 29% of participants in their 20s held lifecycle funds, compared with 19% of those in their 60s. And more-recently hired participants were more likely to hold lifecycle funds than participants with more years on the job; 34% of those with two or fewer years of tenure held lifecycle funds, compared with 23% of those with five to 10 years of tenure – and just 14% for those who had been in the workforce for more than 30 years.

That augers well for the future, of course. And consider that, at year-end 2007, nearly half (48%) of recently hired participants holding balanced funds had more than 90% of their account balance invested in balanced funds, compared with a mere 7% in 1998. On the other hand, note also that “less than half” of those with an investment in what is ostensibly an already-balanced fund did NOT have more than 90% of their account in that option. Indeed, one of the issues with asset allocation solutions is that participants often still seem to view them as one more choice on the menu, rather than THE choice from the menu (see ). It remains to be seen how the current generation of target-date funds – many of which still have fee structures, glide paths, and underlying asset classes that are wildly varied – will hold up amid the current market turmoil.

Still, one can’t help but wonder if – a decade or so from now – we’ll find ourselves trying to explain to a new generation of retirement plan advisers how much time, energy, and effort we used to spend trying to help participants make their own investment decisions.

And if they’ll wonder why we did.

- Nevin E. Adams, JD

Making A List...

There was a time when Christmas shopping for my nieces and nephews was a relatively straightforward process. Simply put, we’d spend a day or two at the mall, looking for things that we thought would be genuinely fun (in my case) in a generic sort of way—some flavor of electronic car, legos, dolls, etc.

Of course, as our family has grown ever more extended—and my nieces and nephews older—it became very nearly impossible to keep up with their various and sundry interests—and to a point where the only practical solution was a gift card (even then, pains must be taken to make sure it’s from a store at which they shop).



Nonetheless, and in the spirit of the holiday season, here are some “presents” that I hope participants find on their retirement plan menus during the next year:

(1) A workplace retirement plan. It’s easy to overlook this one, particularly for those of us who work with these programs on an ongoing basis. The sad fact is that roughly half of working Americans still don’t have access to any kind of workplace retirement plan. That means no convenience of payroll deposit, no assistance from an employer match, no education and/or advice about how to properly invest their retirement savings—and, in all likelihood, no retirement savings.

(2) The ability to roll over distributions from prior programs into their current plan. We all know how difficult it can be for participants to keep up with even a single 401(k) account. How much harder is it for them to keep up with—or remember—all those stray accounts left behind at prior employers, or rolled into retail-priced IRAs? It’s better for them—and it could well be better for the plan as well.

(3) The chance to automatically increase their deferral amounts. Plan sponsors have increasingly been willing to embrace automatic enrollment—but auto-escalation, even though it’s an integral part of the Pension Protection Act’s (PPA) automatic enrollment safe harbor provisions, has proven to be a harder sell. More’s the pity. This is a chance to let participants set in motion a systematic improvement of their retirement plan fortunes—and with a minimum of effort.

(4) The opportunity to select a target-date fund. Some target-date funds have better asset allocations and investments than others, but almost all are likely to provide more favorable investment results over time than most participants will achieve on their own.

(5) Some consideration of a retirement income alternative. It’s ironic to me that we spend decades working with participants trying to help them make prudent, well-reasoned savings and investment decisions—and then, at the most critical moment (distribution), most just get pointed in the general direction of a rollover IRA or annuity. Both can be effective, of course, but can be quite the opposite as well. We shouldn’t just leave participants to their own “advices” at this critical juncture—and there is a whole new generation of options to choose from.

(6) The continued support of an employer match. I’ll admit this is a tough one, and it can be expensive, particularly when the economy is in such turmoil, and when it seems like so many others are cutting back. Still, we know that the existence of a match has a notable impact on the level of contributions, and certainly influences participation. And even if it did neither, it goes a long way toward shoring up the adequacy of those individual retirement accounts. It is, quite simply, money well spent.

—Nevin E. Adams, JD

The Gift of Time

My eldest has been carrying a heavier than “recommended” class load this semester, and that – combined with her choice of classes – has meant that she’s been trying to get ready for finals and writing several critical papers all at the same time. Now, she’s a gifted student, and more committed to her studies than most (or so she has convinced her father and mother) – but the pressure was certainly mounting. Just when she thought it couldn’t possibly all get done on time, she asked for – and got – an extension on one of the papers.

Not that she did so with enthusiasm. She is very conscientious about her work and deadlines, and on more than one occasion has pulled the infamous “all-nighter” to meet deadlines. This time, however, she was smart enough to acknowledge the need and make the request. And while the extension was modest, it seems likely to give her enough mental “room” to devote the requisite level of attention to the array of competing priorities that the end of a college semester brings with it.

You don’t have to be in school to know that things can get pretty crazy this time of year, even in the best of times – and these are surely not the best of times. Just about everybody I talk to in this business is busier than ever, caught up not only in the usual plethora of year-end duties, but in a whole new set of issues brought on by the roiling markets. Indeed, one need look no further than the provider firms and advisory businesses that have, in recent weeks, expanded their call center hours or capabilities to appreciate the uptick in activity.

In the middle of all this turmoil, it was refreshing, therefore, to get from Uncle Sam one of the rarest of gifts – time.

During the last week alone, we got another year to deal with the document requirements of 403(b), a(nother) reprieve on 409A reporting of deferred compensation, and some breathing room so that the funding requirements of the Pension Protection Act can be more rationally assimilated with the current market realities (though President Bush still has to sign the last, and the initial signals suggest that he’s not yet convinced this is a good idea, despite the unanimous voice vote of both houses of Congress).

There are those, of course, who may take issue with those extensions; let’s face it, those that manage to find a way to comply with the original deadlines might naturally presume that everyone would have made the same effort. Still, IMHO, with the possible exception of the 403(b) extension (and even there, plan sponsors have to conduct plan operations as if the document were in place from the original date, so the “relief” is probably less than it might otherwise seem), the extra time seems fair, reasonable, and timely. In each situation, plan sponsors, their advisers, and advocates took the time to make a compelling case about the need for a little more time (I will say that having to read/assimilate and report on all this activity makes our jobs a bit more complicated). To their credit, those in a position to grant those requests listened – and, IMHO, cautiously and carefully, acquiesced.

And for those of us impacted by such matters, the holidays just got a little bit easier.

- Nevin E. Adams, JD

Unbelieve Able

As my wife and I drove to pick up our eldest for the Thanksgiving break, I saw something I never thought I would see again: $1.95/gallon gasoline (even more incredible, that was while I was still in the borders of Connecticut, which imposes some of the highest gasoline taxes in the nation).

Indeed, what with the election, the introductions of the new Administration’s team, the bailout/rescue of the week, and the continued jitters of the world markets, the reality that gasoline costs about half what it did in July has gone almost unreported. Still, I heard a report last week that suggests the net impact of that drop in price has put about $500 billion back in American pockets—now THAT’S a “stimulus package” we can believe in!

Still, what I find interesting about that dramatic turnaround in oil prices is that it happened so rapidly that the explanations of why it ran up so quickly are still ringing in my ears. I remember all too well the pundits laying the price hikes off on the growth in the emerging industrial economies of China and India, the impact of hurricanes on production in the gulf, concern about turmoil in the Middle East, the perceived vulnerability of the shipping lanes....Others, of course, cited the fact that we hadn’t built a new refinery in more than a decade, and that we refuse to consider drilling in areas that wouldn’t seem to pose a threat to man nor beast. But what I remember most vividly was how consistently the so-called experts denied that “mere” speculation could account for these kinds of increases.

Yeah, right.

IMHO, one of the most frustrating things about the current economic crisis is that nobody seems to know what is causing it and, thus, no one can offer a credible idea of how long it will last or what can (or should) be done to hasten its end, much less what the “rest of us” are supposed to do in the “interim.”

While financial pundits are, these days, prone to trace cyclical “corrections” to the bursting of “bubbles”—housing, tech—the resulting declines are generally not that sudden, nor are they, generally speaking, wholly unanticipated. Rather, they are the result of pressures on our financial system like the geological pressures that often result in earthquakes or the eruption of volcanoes. And, like those geophysical manifestations, there are often precursors to the actual “big event,” as well as significant after effects (nor do you have to be a financial genius to see them—how many times did you look at the soaring prices of homes in your neighborhood and think “this can’t go on?”). The problems at Freddie Mac and Fannie Mae that ostensibly triggered the most recent crisis were so blatantly obvious that even Congress felt compelled to hold hearings on the subject (and back in 2006, no less!).

At the outset of the current crisis, I was encouraged to see the federal government step forward to help and facilitate some—but not every—institution that appeared to be struggling. In hindsight, that may not have been as well-reasoned as one might want to believe, but at least there was the appearance of selective and intelligent, if not appropriate, involvement.

We want to believe that the so-called experts know what they’re doing. But with every passing day, it seems more and more obvious that they don’t. Little wonder, then, that the American electorate is increasingly disinclined to simply hand over a blank check. Little wonder also that some of the market’s “natural” remedies have apparently been staved off by people waiting to see how much the government would do—knowing full well that an outgoing Administration desperate for its legacy, and an incoming Administration anxious to prove itself would be more than somewhat inclined to do more than might otherwise be the case.

Retirement plan investors are consistently and, IMHO, prudently told to “stay the course” in times of turmoil; reminded that, even when change seems appropriate, even essential, to be careful about overreacting. It’s an approach that advisers, in large part, applaud and support.

Maybe it’s time the folks in Washington took a bit of THAT advice to heart.

- Nevin E. Adams, JD

'Nothing' Doings

I wouldn’t for a second suggest that the current financial/economic crisis that we are enmeshed in isn’t “real,” or that the efforts to remedy it thus far aren’t well-intentioned, but it’s hard to shake the feeling that the words put forth to explain the situation—and thus the solutions put forward to redress that situation—are being done by folks desperate to be seen to be doing something, but not quite (at all?) sure what that something should be. And, IMHO, that inclination won’t diminish with a new Administration eager to prove itself. Let’s face it—even when doing nothing might be the best medicine (and I, for one, am at that point), we tend to believe that “something should be done.”

Meanwhile, we have retirement plan participants, most of whom—again—appear to be riding this one out. Oh, there are signs of change on the fringes—some modest reductions in average deferral rates, slight upticks in hardship distributions, and, on particularly volatile days in the market, a bump in transfer activity. Still, for the very most part, participants appear to have taken the “stay the course” message to heart. Nor are they sleeping through the crisis; all the major providers are reporting a significant increase in call center volumes—but participants appear to be doing little more than assessing the damage and checking on their options. That, of course, is widely taken to be a good thing.

I’ve always thought it was interesting that we bemoan the negatives of participant inertia (or sometimes try to turn that negative into a positive via “automatic” solutions)—except when it manifests itself during times of market turmoil. At those times, it’s the rare industry pundit who doesn’t applaud the “wisdom” and calm shown by participants. It’s that one time when “doing nothing” is not a problem to be solved, but an indication of prudence.

“This time” may be different, of course—and the call center inquiries may well suggest that participants are making an active decision to stay put, though it seems to me more likely that those inclined to make a change simply aren’t sure what to do. Human beings may, like an object at rest, tend to remain so—but with this much turmoil still going on after all this time, in my experience, people feel better if they can actually DO something.

"Action" Steps

So, here are some things participants can do:

Get started on rebalancing by changing the investment elections of new contributions, rather than transferring existing balances. It will take longer to realign the entire account, but at least you aren’t realizing those as-yet-unrealized losses.

Increase your current deferral rates. When you think about just how much cheaper those retirement plan investments are compared with a year ago, it’s hard to pass up that kind of bargain. More so if you aren’t yet saving at the maximum level of the match.

Consider automated rebalancing. The vast majority of providers now have in place mechanisms that will, on some preset frequency (monthly, quarterly, annually), automatically rebalance individual accounts in accordance with your investment elections. It’s a good way to keep things in balance without having to worry (or remember) about the best time to do so.

Those 12/31 statements are now only about a month away—but there’s no reason to wait till then to start taking proactive steps on the road to portfolio “recovery.”

- Nevin E. Adams, JD

Thanks Giving

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

Here's my list for 2008:

I’m thankful that the election is over—and that the results were determined on Election Day (for the very most part). I’m thankful that so many made the effort to vote—and that, regardless of whether or not one always agrees with the outcome, we have the ability to do so.

I’m thankful that our nation has passed yet another September 11 without a terrorist attack on our soil—and thankful to the leaders of this great nation, and to the men and women in our armed forces, intelligence agencies, and Homeland Security for their continued sacrifices in keeping us safe.

Closer to “home,” I’m once again thankful that so many in Washington are concerned about the current state of employer-sponsored retirement plans, and the importance of fee disclosure—and once again (still?) just a tad worried that some of that concern will find form in a bad solution. I’m encouraged that we’re looking for new ways to replace the integrity of that fabled three-legged stool.

I’m thankful that, having figured out constructive (and voluntary) ways to get people into these programs—through devices like automatic enrollment—we are now focusing on how to help make sure they are saving and investing appropriately—through devices like contribution acceleration and asset allocation solutions. I’m also thankful that we’re seeing a growing number of retirement-income solutions come to market—because, after all, being able to live off what you have saved is what it is all about.

I’m thankful we have retirement savings accounts big enough for a 40% loss to hurt—but, of course, will be even more thankful when those “paper losses” disappear. I’m thankful we are talking about things like suspending the required minimum distribution rules to soften the blow, if not quite as sure that taking down the barriers on hardships and loans is a good idea. I’m thankful that so many employers remain committed to making those company matches that surely do so much not only to encourage the savings of workers, but also to help close the gap in savings adequacy.

I’m also thankful that so many employers have remained committed to their defined benefit plans and—certainly ahead of the market turmoil of recent weeks—had made serious, consistent efforts to respond to the new funding challenges imposed by the Pension Protection Act. I’m hopeful that lawmakers also will respect those efforts—and will give those programs the extra breathing room they have surely “earned” on the implementation date of some of those new rules.

I’m thankful that the “waiting” on implementation under the final 409A and 403(b) regulations is nearly over. I’m appreciative of the “patience” of regulators on those critical issues, their willingness—particularly the Internal Revenue Service on 403(b)s—to work so hard to assuage employer concerns ahead of that implementation date.

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

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

Thank you!

Nevin E. Adams, JD

Discontent 'Ed'

In another week (or so), PLANSPONSOR will publish its annual Defined Contribution Survey. There are other surveys in this space, of course, but ours stands apart, IMHO, for its breadth and depth, painting a portrait of the industry that transcends size, geography, and provider. And this year the survey, now in its 13th year, is even bigger than ever.

Over the years, asked to rank the criteria used in selecting their DC plan provider, plan sponsors have reliably opted to put “others” first—and this year, as in every year we have asked plan sponsors to do so, they ranked service to participants as the most important criteria, garnering a ranking of 6.5 on a 7.0 scale. Once again service to plan sponsors was the second most important (6.50). Not surprisingly (particularly these days), investment performance was deemed the third most significant, while the financial strength of the provider was ranked fourth. Interestingly enough, the numerical importance of all of these declined slightly from a year ago (more on that in a minute).

There was, however, one service criteria that actually rose in importance—transparency of fees.

Transparency notwithstanding, reasonableness of fees remained a high priority—in fact, it was deemed more important than transparency (though one might well wonder how you can be sure of the former without the latter), while brand name funds (which dropped the most of any criteria in importance, and was the lowest ranked criteria in this year’s survey), and the industry knowledge of account managers and the sales force were relegated to near after-thoughts in the rankings. Clearly, it’s about what you do and how you do it, not how much you know.

If there appeared to be some deflationary trends in the weightings, there was an even more ominous trend for providers in the evaluations. Despite the rapid expansion of target-date funds, and the enthusiasm for qualified default investment alternatives (QDIA), “focus on participant asset allocation” garnered a rating of just 5.74. Still, that put it ahead of the two lowest rated categories of participant service, overall participant education program (5.68) and fees for participant services (5.59—down from last year’s 5.64).

As for plan sponsor services, compliance was the top performing category, just ahead of the industry knowledge of account reps (though one should remember the relative unimportance accorded that knowledge in the evaluation category). Once again, fees were a sore spot: The next-to-lowest ranked criteria was fee disclosure (5.73); the lowest was fairness of fees (5.72). Some good news: Staff consistency/turnover was rated 6.04, and responsiveness to problems/inquiries a strong 6.18 on the 7.0 scale (though still down from 2007).

As a general rule, plan sponsors in the micro-plan segment, those with less than $5 million in assets, were happier at all levels than other segments. And, while it may be a function of higher expectations, the largest plan sponsors were noticeably less satisfied. Consider that while responsiveness to problems/inquiries was rated a 6.30 by micro plans, large plan sponsors gave their providers an average rating of just 5.68 on that 7.0 scale.

Now, what does all this mean for advisers? Well, it suggests that plan sponsors are less satisfied with the status quo than they were a year ago. Moreover, since the bulk of these responses were received well ahead of the recent market tumult, one can surely imagine that the level of satisfaction has not improved (though admittedly some advisers and providers will “shine” in their response to the crisis).

More importantly, plan sponsors’ satisfaction with their provider is often “linked” to that of their adviser (particularly when the adviser played a role in choosing the provider). And that link—particularly in what may be an emerging season of discontent - is something, IMHO, that all advisers—and the providers they choose to work with—would be well-advised to remember.

- Nevin E. Adams, JD

“Out of” Practice

Regardless of age, regular exercise is important – but I’m at an age where the demands of everyday life (and the toll of previous “misadventures”) frequently make that impractical, if not impossible. Nonetheless – generally after I’ve been away at a conference (where the hours, food, and drink have all been beyond my usual quotas) – I undergo a renewed “commitment” to exercise. Unfortunately, once you have gotten out of the habit – well, let’s just say your body has a way of reminding you how long it’s been.

Consequently, I was concerned a couple of weeks ago when I heard that GM had decided to suspend its 401(k) match for salaried workers (see “Benefits Cuts Next on GM Agenda”). Now, the giant automaker, like many other firms, is struggling at present. And, frankly, given a choice between having a job and having a matching 401(k) contribution, I’d opt for the former every single time.

Still, in recent weeks, that’s a move that we’ve seen a number of employers make (see “Tightening Economy Drives More 401(k) Match Suspensions”), and that is reminiscent of 2003, when a series of well-known employers – names like Schwab, BF Goodrich, Goodyear Tire & Rubber Co, El Paso Corp, and Textron Inc. – took similar steps.

The sad irony, of course, is that these moves are being taken at a time when the markets are also undermining the confidence of participants. They were also coming to light at a time when a new Schwab survey highlighted the connection between the level of an employer match and participant contribution rates (see “Schwab Finds Employer Match, Employee Savings Link”).

Now, the match that GM suspended was generous by industry standards – 100% on the first 4% of employee deferrals. And it’s not like GM hasn’t been down this road before; GM cut its match in 2005 ), and they also cut it in 2001 – but in both cases, they restored it the next year, and one would hope that, in this case, anyway, history will repeat itself.

It’s worth noting, however, that the VAST majority of employers are not even contemplating suspending the company match (for an “unscientific” sampling of PLANSPONSOR NewsDash readers, see “SURVEY SAYS: What Are Your Plans for Your Match?” at ), and that the actions of few name-brand employers do not necessarily portend a trend. Still, I have heard from a number of advisers that their plan sponsor clients are “looking at” the current level of their match. Frankly, it would probably be imprudent not to.

On the other hand, like my exercise regimen, dropping, or even reducing, the match has real consequences. There’s the obvious reduction in participant account balances, of course, but – as the Schwab survey reminds us – there is also a cause and effect on participant behaviors. Take away that “free money,” and not only do participants have less incentive to save, they may even see it as a signal that they should cut back on their retirement contributions as well.

And, like any exercise regimen, once you get out of the “habit,” it’s easy to find other ways to spend that time/money – and hard to get back to doing what you know you should be doing.

- Nevin E. Adams, JD“Out of” Practice

Ballot Initiative

For all the talk of “hope” and “change,” this extended election cycle has offered little of either, IMHO.

Now, I realize that there are those among you who are highly enamored of one candidate or the other – or at least highly un-enamored of the other. But, IMHO, if you don’t have some concerns about how both of the candidates would conduct themselves in office on at least some issues, you haven’t been paying attention.

Truth be told, neither of the major U.S. party candidates would be my first choice for the office (don’t read too much into that – I don’t have anyone particular in mind), and frankly, I’m not all that keen on the folks they’ve chosen to back themselves up (though I can appreciate the rationale behind the choices). Nonetheless, our nation’s tried and tested method of screening and selecting representatives has, with all its flaws, done its job.

Now it’s our turn.

Come Tuesday, we have a real choice to make. And this one – more than most, perhaps more than any in my lifetime – feels like a “game changer.”

As individual voters, it may not feel like we can have much impact, particularly if your state reliably goes “blue” or “red” (whether you do or not). However, the reality is that our votes do make a difference – if not in the result, then at least in the margin of the result; not just in terms of who sits in the Oval Office, but the tenor of voices on Capitol Hill, the influences in state legislatures, the composition of that local school board….

These are the people who will set in motion policies and practices that can have an impact that can, for good or ill, be felt far beyond their terms of office.

You owe it to yourself, to those you love, to those who have fought and died to preserve your right – your privilege – your responsibility – to vote.

- Nevin E. Adams, JD