End "Points"

Several years back, after a day of meetings in Manhattan, I caught the train home. I wound up on one of those “milk run” trains that makes every stop along the way—and, trust me, there are a lot of stops between Manhattan and “home.” To make a long story short, I decided to take a short nap…and woke up just as the train was pulling away from my station.

It wasn’t a big “miss,” mind you. But that 15-minute nap cost me about two hours of time and a lot of aggravation…and, of course, it could have been a lot worse.

It seems that many things long taken for granted in our business are today being subjected to a whole new level of scrutiny, including the very efficacy of the 401(k). The most recent “target” is, of course, target-date funds—and the examiners no less than the U.S. Senate, the Securities and Exchange Commission, and the Department of Labor (see More Details Given on EBSA/SEC Hearing on Target-dates , Senate Committee Takes Aim at Target-Dates) .

That examination is not necessarily a bad thing, of course. The reality is that these offerings have quickly become a de facto investment solution for the nation’s prime retirement savings alternative, and in the past couple of years received nothing less than the official sanction of the DoL itself (at the instigation of Congress via the Pension Protection Act). That said, these solutions have benefited hugely from their simplicity. What is sold is the concept: professional money management, monitored and rebalanced over time. And to some extent, that is also what is bought.

What’s Being Bought

However, IMHO, there is something else that is being bought, if only implicitly—the ability to not have to worry about saving for retirement(1).

With target-date solutions, and more specifically with target-date solutions as part of an automatic-enrollment strategy, we’ve been able to set aside many of the messages we once viewed as essential to participant/investor education. We no longer have to teach participants about the importance of asset allocation, the wisdom of “not putting all your eggs in one basket” (quite the contrary, in fact), nor the need to keep an eye on your investments and to regularly rebalance. The message today is, tell us your birth date and “we’ll take care of all that.” And so we have.

There are two problems with that approach as I see it. The first is one of message—I think we may well have given a fair number of participants a message, if only subliminally, that they no longer need to worry about their retirement savings because we’ve attended to their retirement investing(2). That, of course, can be easily remedied—an effort that will doubtless be encouraged by the sustained market downturn and its impact on investors of all kinds. Still, for many, I’m sure the recent downturn has left them feeling the way I did as I watched the train pull away from my station.

The second problem is perhaps more insidious—and it is that “problem” that I suspect regulators will be trying to deal with next month. It is quite simply that, at the moment, we have lots of target-date funds on the market with nearly identical names—but very different philosophies. And, like it or not, in an age where we’re selling “don’t worry about it”— somebody has to.

Personally and professionally, I would hate to see us “fix” the problem by complicating the simplicity of a target-date choice. On the other hand, how can we continue to hold out a dozen different versions of the “right” asset allocation mix for a particular point in time without doing a better job of articulating that those differences exist, and explaining what those differences are?

What’s a Target-Date?

I’d start by explaining “target-date.” Once upon a time, the target-date was widely understood as being your retirement date, but more specifically, it was the date on which you would stop accumulating money for retirement and start drawing it down; and, yes, in most cases that was focused on the year in which the investor turned 65. Of course, these days, the definition of retirement is less precise; it’s not always 65, for one thing, and a growing number may leave a full-time career for a while and renter the workforce a couple of years later. Those kinds of changes, if not always in the control of the individual participant, are at least things that he or she is in a position to be aware of.

But for any number of target-date solution providers, the target-date in their fund family name is only a mile marker along the way, rather than the destination itself. They have developed strategies that ostensibly take the participant investor not only beyond that retirement date, but, in some cases, to the date upon which they leave this mortal coil.

Now, there’s nothing wrong with that as a strategy if the participant-investor understands that and appreciates what that means. On the other hand, if they think—as I am sure many do—that the target-date is the end, the point at which they are “done”— well, they could well wind up, as some surely have, being taken beyond their intended station—with no easy way to get back.

—Nevin E. Adams, JD

(1)I realize as well as anyone that you don’t invest your way to retirement security. But we also know that most participants tend to concentrate on the things they can’t influence (picking investment funds, market trends, the availability of a company match) rather than their rate of saving—ironically, the one thing that they can, subject to certain economic realities, control.

(2) While automatic-enrollment programs are clearly an effective means of getting workers to save for retirement, I’ve worried in this column previously that it might also insulate them from these issues (see IMHO: “Expert” Opinions).

College 'Bound'

In just a couple of months, I will find myself in the unenviable financial position of having two children in college at the same time.

Now, if you have put—or helped put—your children through college in recent years, you’ll have an appreciation for the impact of that statement. If your kids are younger—or if kids are not yet part of your household budget—well, let me just say you don’t have nearly as much time to get ready as you think you do.

First off, you don’t really know how much it’s going to cost. There’s the whole private-versus-public decision (the costs of the latter will be heavily influenced by your current state of residence), and even that decision can be driven by the field of study your graduate chooses to undertake. Each school has different policies (and costs) about things like meal plans, student vehicles, and even how the dorms are furnished.

But the worst of the variables is the sheer annual increase in tuition. My eldest, who will be a senior in the fall, will be presented (well, technically, I will be presented) with a tuition bill that is roughly 20% higher than the one she got just a couple of years ago. Talk about your moving targets!

Now, I said the worst of the variables was the increase in tuition, but a close second has to be the bite the market has taken from the money we had set aside in their 529 college savings programs (see my 2003 column on the experience, “IMHO: College ‘Education’”). At one point, I had hoped that those investments—in target-date funds before target-dates were “cool”—would grow enough to make up for some of our late start in saving for college (braces first, you know?). Now—well, you know what’s happened there. Despite that, I’m proud to say that the family CFO (and that’s not me) has figured out ways to increase our 529 savings without dipping into the retirement fund(s).

Savings Parallels

Still, as we’ve spent the past couple of months trying to figure out how we were going to pay for whatever college daughter No. 2 chose (and not a little time trying to prepare her for a financial fallback, just in case), I’ve seen any number of parallels between saving for college and saving for retirement.

There’s the uncertainty of the amount, the unknown impact of inflation and/or higher prices and, of course, the market’s “contribution.” As with retirement, there is a “target date” of sorts—one that can, at least in theory, be postponed, and one can certainly choose to adjust one’s choice(s) to accommodate financial realities as that date draws nigh. And, as with retirement, a lot of uncertain nights between the planning and the actualization of the event itself.

As it turns out, my two daughters, through their hard work and effort (spurred by their mother’s constant pressure to complete the applications and essays, and doubtless aided by their father’s gene pool contribution) have both managed to obtain academic scholarships that have made it possible for them to attend colleges that would, in all likelihood, otherwise have been beyond our means.

Ultimately, while we had done the right things, the right way, we had perhaps not done enough, or done the right things the right way soon enough. And while our daughters would have been able to go to college—and good colleges—regardless, as a father, I’m thrilled that they’ve been able to pursue this education at the schools they chose. Still, with one more at home to clear that hurdle (just two years hence), it’s been something of a financial wake-up call, a real college “education.”

Many retirement savers—including this one—may well find themselves in the same boat one day. Having done the right things the right way(s) for a long time, they could nonetheless one day find themselves coming up short due to any number of circumstances beyond their immediate control—and some choices that aren’t. Ask any parent; time has a way of slipping away from us, and tomorrow is always closer than it seems.

—Nevin E. Adams, JD

Poll Positions

There was an intriguing survey published last week, but one that, IMHO, generates as many questions as answers.

The online survey (accurately, if somewhat inelegantly, titled “Investors’ Beliefs about the Role of Target-Date Funds in Retirement Planning”—see Workers Might Have Wrong Idea about Target-Date Funds) captured the sense of 251 respondents, most (55%) of whom were earning less than $50,000/year, but many (75%) of whom were saving for retirement. A full third were age 55 or older, and none was younger than 25. Consequently, while we know nothing about how they are saving, or the size of the programs in which they participate, one might well expect that they have at least a passing familiarity with one of the most popular and powerful 401(k) investment tools—target-date funds.

Not so. Only 16% said they had even heard of target-date funds prior to reading the description in the survey, and apparently even among those, 63% weren’t able to explain the concept. From the response(s) shared (and there weren’t many), it seems that they “got” the date part, but tended to associate that with a maturation of that investment —worse, that on that date, a certain guarantee would be fulfilled.

The survey participants were shown a composite description of target-date funds, drawn from “the collateral of three leading providers,” and then were asked if target-dates promise anything. Presumably at least somewhat influenced by those provider descriptions(1), over half (61%) said yes. According to the survey’s authors, when asked what these offerings promised, 69% also got that wrong. Again, the response sampling provided was scant, but suggested that the individuals felt that the funds promised a certain level of financial security—despite market downturns.

That said, in other responses, most (62%) did NOT agree that the funds promised a guaranteed return, nor that those investments would grow faster than other investments (64.5%). A solid majority refused to believe that you would be able to save less in a target-date fund and still meet your retirement goals (70%), nor were they fooled into thinking that there was little or no chance that you would lose money before (76.9%) or after (76.1%) the target-date.

On the other hand, the flip side of those percentages—albeit a distinct minority of the total group—concurred (at least somewhat) with those errant propositions. And that, of course, is a cause for concern, if only because so many participants these days are choosing—or being defaulted into choosing—those target-date solutions(2).

Ultimately, however, as I looked over the survey results, I had to wonder: Were the respondents participants in a plan that offered a target-date option? Had they made, or been defaulted into, one of those options? Had they been ill-served by that decision? Do they think they have been ill-served?

Regardless, this survey, like all too many others, paints a picture of participant savers who doubtless need, and probably want, the kind of professional investment assistance that a target-date solution surely can provide. However, it also reveals a group of participant investors who are just ill-informed enough to fall prey to the bad counsel of unscrupulous advisers or to be disadvantaged by the indiscretions of inattentive plan fiduciaries.

We don’t need a survey to point that out to us, of course. But it doesn’t hurt to be reminded.

—Nevin E. Adams, JD


1 The excerpts, in case you were wondering, were:

“Take the guess work out of investing for retirement. Just decide when you want to retire, and we’ll pick the fund that’s the closest fit. A professional fund manager will keep that fund’s investments on target.”

“A target-date fund is a diversified portfolio of funds that offers all the benefits of asset allocation and active management. Just select your age, and we’ll do the rest.”

“You can get closer to achieving your retirement goals, with a little help from target-date funds.”

“We do the work. You do the retiring.”

2 Not that, IMHO, a lack of participant understanding or appreciation renders these investments inappropriate, certainly since most participants in the survey sampling seemed to understand the boundaries, even if they couldn’t (to the author’s satisfaction, anyway) articulate them.

Survival Instincts

Several years ago, I bought my Dad—one of the world’s most proficient worriers—a copy of the “Worst Case Scenario Survival Handbook.” I did it tongue-in-cheek, of course. After all, how many of us really need to know how to escape from a mountain lion, how to take a punch, or how to land a plane? Not that there aren’t times when that knowledge might come in handy, but let’s face it—the “worst” case rarely happens. On the other hand, if you’re prepared for the worst case, you’re generally better prepared to deal with the inevitable bumps and potholes along life’s road (in my Dad’s case, I worried only that I would provide him with NEW things to worry about…).

Lacking a politician’s motivations, I am disinclined to describe the events of the past several months as “worst case,” though there is no disputing that we are all working our way through a rough period. As a nation we have been in—and come through—rough periods before. Despite that, human beings seem inclined to see travails of the present as something new and different, unique and unprecedented. Perhaps we simply want to believe that we live in extraordinary times, though IMHO some are simply enamored of using the crisis of the moment to sell newspapers (or “solutions”). Regardless, I have always found those characterizations to be simplistic at best, and frequently born of an ignorance of history and economic cycles. On the other hand, once the crisis passes—and it always passes—then the voices of reason return, and we learn once again that history’s lessons were there all along.

In normal times, the market’s tumultuous path, a shaky economic underpinning, and looming budget deficits would doubtless converge to forestall any significant change in the status quo of workplace benefit programs. Changes in workforce benefits have traditionally been slow to come on line, reflecting the sensitivity of workers and employers alike to the delicate balance between cost and value, not to mention “promise” and practicality.

But these are not normal times, and, if rhetoric becomes reality, change could well be the order of the day, with the potential for seismic shifts in the responsibility, costs, and characteristics of benefits long associated with today’s workplace. Here, IMHO, are some things to keep an eye on:

The Silver Tsunami

Just over a year ago, the “moment” a generation of plan sponsors had been bracing for arrived, as Kathleen Casey-Kirschling, the nation's first Baby Boomer, became the first of her generation to receive a Social Security retirement benefit. Casey-Kirschling, who filed for benefits at the age of 62, was hardly a “typical” retiree, since she enjoyed coverage both from a defined benefit and defined contribution plan. Over the next two decades, nearly 80 million Americans will become eligible for Social Security retirement benefits, more than 10,000 per day on average, according to the Social Security Administration.

What that means, of course, is that the “pig in the python” imagery long associated with the retirement of the Baby Boomers is finally coming to fruition, calling into question the adequacy of private- and public-sector retirement solutions, as well the financial viability of Social Security itself. Even more so, this “sandwich generation” is increasingly finding itself pinched between calls to support both its parents and its children. It remains to be seen how we as a nation will respond—but the last time things reached a crisis level (1983), withholding taxes were hiked, “normal” retirement ages were pushed back (albeit gradually), and more of these “benefits” were subjected to taxation.

Pension Penchants

While the private sector has largely abandoned the defined benefit pension model (certainly as an ongoing concern), the public sector has embraced its pensions with a renewed vigor. Of course, that “split”—between a private sector that does not have a pension plan and a public sector that does (at least partially financed by taxes on that private sector)—sets the stage for a potential conflict down the road, a conflict that will only be exacerbated by headlines about looming pension funding shortfalls that could impose a higher obligation on taxpayers.

Return of Inflation

Regardless how you feel about the massive amounts of government spending proposed in recent weeks, it is hard to imagine that there would not be serious long-term ramifications on the inflation front. Some are old enough to remember inflation’s bite, the toll it extracts on living expenses. If inflation were to return, and perhaps return with a vengeance, that could affect interest rates, cost-of-living adjustments, pension funding ratios, and how far those retirement dollars will go.

Target Practices

It now seems hard to believe that, just two years ago some target-date fund providers were being accused of being too “traditional” in the construction of their glide paths. Certainly retirement plan investors who had been too conservative in their rate of savings deferrals appreciated the boost in projected accumulations that those equity-laden 2010 funds purported to deliver. Now, of course, things are seen through a different prism, though the risk of running out of money looms large—perhaps larger—still.

Timing, too, has dealt a potentially cruel hand to participants just ushered into a new generation of QDIA-compliant default designs just when that diversification might seem to work against them (at least in the short run). While the current tumult seems unlikely to do much more than temporarily stem the tide in favor of these options, it will surely give plan sponsors pause—and perhaps lead to a renewed appreciation of the very real differences in philosophy that underlie these glide path designs.

Retirement Income

Much of the focus of the past generation of retirement savings has been about accumulating enough. Plan sponsors had little motivation to think beyond a participant’s employment tenure (indeed, historically, there were some fairly significant “motivations” not to do so), and providers and advisers seemed content either to count on the strength of their service/brand to retain those assets, or to accept that traditional retirement income offerings, notably annuities, already existed.

Things have changed, of course. Rates of asset retention have generally not kept pace with expectations, annuities are frequently disparaged by participants (for reasons they are not always able to articulate), and plan sponsors are increasingly concerned that voluntary savings patterns won’t provide “enough” for retirement. Enter a new generation of retirement income solutions, increasingly “in plan,” or at least attached to the plan, which not only make it easier for participants, but also for plan sponsors to play a productive role in their selection.

Production and portability issues remain, of course. Retirement income is a sensitive subject, and determining the best vehicle to efficiently and effectively deliver it can be a complicated undertaking, fraught with new risks (or at least the perception of new risks). Still, without the proper attention, decades of frugal attention can be for naught.

The Volunteer State

It’s hard (though not impossible) to find someone willing to criticize program designs such as automatic enrollment, contribution acceleration, or qualified default investment alternative-eligible funds. Not only have these designs begun to help thousands of workers do the “right” things when it comes to saving for retirement, plan sponsors have, since the Pension Protection Act (PPA), had structure and sanction to act. Even critics had to admit that all an unwilling (or financially unable) participant had to do was “opt out.”

Voluntary remains the order of the day, even for the new automatic IRA designs recently touted by the Obama Administration (well, at least for workers—employers won’t have a choice, other than to offer that program or some kind of qualified plan).

Still, there seems to be a growing interest in underpinning the financial integrity of that system with a core level of mandatory withholdings, both from worker and employer; and a sense that “leakage” from things like in-service withdrawals and loans need to be plugged—and a notion that lump-sum options are better replaced with annuity streams, at least as a default.

Ultimately, of course, that could mean that our voluntary system will be converted into a mandatory approach. One in which employees would have to contribute a fixed amount/percentage, in which employers might be required to match, and from which workers would not be able to withdraw prior to retirement—and then only in some kind of periodic annuity.

It could happen—in fact, it might need to happen.

—Nevin E. Adams, JD

Editor’s Note: A somewhat modified version of the above appeared in the April issue of PLANSPONSOR magazine. You can check it out HERE

Famous Last Words

“It was a gray, chilly morning in midtown Manhattan and a line of unemployed, mostly white-collar workers, stretched for blocks around the Radisson Hotel. More than 1,000 middle managers, stockbrokers, consultants, secretaries and receptionists had come hoping to find a job. It was called a career fair, but there was no merriment - only a whiff of desperation.”—Intro to “60 Minutes” segment, “401(k) Recession.”

By now, you have no doubt either watched, had recommended to you, or at least heard about the “60 Minutes” special that ran a week ago Sunday. If you haven’t watched it yet, you should. Forewarned is forearmed, as they say.

No, it wasn’t very long (less than 15 minutes), but it was certainly enough to fuel the fires of those who are anxious to put the 401(k) out of our misery. Short as it was, you could basically cleave the segment into two propositions: that retirement savings shouldn’t be invested in stocks (or least not so much in stocks), and that fees—and hidden fees at that—are at least as much to blame for the decline in balances as the markets. Oh, and the real culprits—the ones that created the 401(k) and convinced employers to shed their commitment to pensions—are the same ones that have been fleecing all of us for decades. Well, at least we know who to sue.

The realities are, of course, more complicated than you’ll get in a 12-minute TV segment— particularly one that spends most of that time hanging out in a job fair with a long line of the unemployed who, for reasons I have yet to discern, showed up at that job fair with their 401(k) statements in hand.

Statement Impact

That made it possible for one interviewee to share that he had lost $140,000 (of course he hadn’t opened his statement until he was on camera)—though to lose that much he doubtless had the size balance many participants can only dream of. Another woman was able to illustrate her plight by pointing to a chart on her 401(k) statement—a chart that showed a steep increase from 2005 through 2007, before dropping just as sharply—to a point that, to my eye, seemed to be just about where 2005 started.

Now, nobody likes the idea of losing two years of savings and market growth, and it’s not that I don’t have empathy for their situation. I’m on the far side of 50 (albeit barely), after all—and my 401(k) statement isn’t looking any healthier than theirs. Of course, the “60 Minutes” crew was focusing mostly on folks who were un- or under-employed, and that not only hinders their ability to save, it could also mean that they’ll have to dip into those already-depleted savings.

When all is said and done, no one (except maybe “60 Minutes”) seems to be trying to argue that the 401(k) is “enough,” or that it was ever designed to be enough(1). Frankly, the only way it could be is if we mandate not only coverage, but participation, and participation at a rate of deferral that many workers would find prohibitive (unless, of course, you adopt some of the “pooling” aspects of Social Security). But let’s be honest—even with those pooling aspects (and a mandatory withholding of nearly 13% of worker pay), Social Security isn’t exactly on sound financial footing(2), and even defined benefit plans that were in solid financial shape two years ago—well, now aren’t.

Fee Sense?

More insidious were the claims about the impact of fees, and on that count, IMHO, the industry—specifically the mutual fund industry—has no one to blame but itself. Sure, the fees—well, at least the fee rates—well, at least most of them—are “disclosed” in the prospectus. Those kinds of disclosures may work for the lawyers, but they’re not much help to your average participant: “Where would you find it? Where would you find these fees in this prospectus? You can look on any page you want, and when you're all done reading it, and you will find some of the fees and the commissions here, but you won't find them all, and I'll bet you won't find half of 'em," Congressman George Miller (D-California), Chairman of the House Education & Labor Committee, told “60 Minutes.”

Moreover, in the “60 Minutes” segment, it was said “Miller's committee has heard testimony that they can eat up half the income in some 401(k) plans over a 30-year span.” HALF the income? I can understand that SOME investment funds with particularly low returns and SOME retirement plans with particularly high fees could create the potential for that situation, but….

Rumors Milled?

Therein lies the problem, of course. There are so many rumors and innuendos running around about 401(k) fees—what and how much is being paid, who it’s being paid to—and the rumors are all about how it’s all too much, and to people who aren’t doing anything to actually earn it. Rather than counter these accusations with the facts, many in the industry continue to hide (or appear to hide) behind the shroud of “we can’t.” You know the litany: “we can’t” tell participants how much they are paying because it’s too complicated to explain, or “we can’t” tell participants how much they are paying because it will cost too much to tell them, or “we can’t” tell participants how much they are paying because they won’t look at it anyway.

I don’t doubt the realities of the last two points, and the costs of complying with proposed disclosures by the DoL—less onerous than those contemplated by Congressman Miller—are staggering (3), but once you have cracked the mantle of trust, it’s hard to shake a sense that the real reason “we can’t” tell you what they are taking from your account is that they have something to hide (4).

Having been on that side of things, I know how complicated it can be to provide those disclosures —and having worked and communicated with plan sponsors and plan participants for most of my adult life, I also know how unlikely many are to be attentive to those disclosures that may be so costly to provide (5). Still, no one is well-served by what appears to the average participant (or congressman) to be an enduring reluctance to provide a straightforward answer to a perfectly legitimate question: “How much money are you talking from my account?”

If the retirement plan industry doesn’t come to terms with that reality—and quickly —well, “we can’t” might be someone’s famous last words.

—Nevin E. Adams, JD

The 60 Minutes segment is online HERE

(1) see “IMHO: ‘Broken’ Record”

(2) see “Vanishing Points?”

(3) see “IMHO: ‘Know’ Way”

(4) see “IMHO: No One (Else) To Blame”

(5) see “IMHO: What Will Participants Do?”

'Second' Opinions

ERISA’s 404(c) has long been held out by some as something of a magic talisman: Comply with its strictures, they claim, and you have an iron-clad defense against participant lawsuits —and, IMHO, the implication is a defense against ALL participant lawsuits. Of course, any number of ERISA experts will tell you that it is nearly impossible to satisfy those strictures, certainly not for every transaction (and mind you, 404(c) is transactional protection)—not that that seems to dissuade plan fiduciaries from trying, nor plan advisers from purporting to help them achieve that end. Nor are plan fiduciaries, or the participants and beneficiaries they support, ill-served by those efforts.

That said, I have long been surprised at how broadly the judiciary has been willing to extend those protections. Good news if you’re the plan sponsor getting sued, of course—but not-so-good if you’re a plan fiduciary looking for some consistency in the law.

The most recent example was Hecker v. Deere (see “Appellate Court Backs Deere Case Dismissal”), one of the litany of revenue-sharing lawsuits that have been brought (see “IMHO: Fighting Words”). This particular case has drawn the attention of the Department of Labor (DoL), and not for the first time. In fact, it was almost exactly a year ago that the DoL tried to help the appellate court do a better job applying the law than the District Court had (see “IMHO: The Letter of the Law”).

This time, the DoL said in a friend of the court filing that a “[p]anel rehearing is warranted to correct the panel’s mistakes of law and fact in misconstruing section 404(c ) of ERISA and declining to defer to the Secretary’s reasonable interpretation of her 404(c ) regulation.”

Besides the issue of deference to the Secretary of Labor, at issue in the DoL’s filing: “whether participants and beneficiaries exercise independent control,” but more specifically, did that exercise happen “in the manner described in the regulation,” because only then would the plan fiduciaries not be liable for any loss “that is the direct and necessary result” of that exercise of control.

The DoL cites language in 404(c)’s preamble that clearly puts the act of designating investment alternatives as well as the ongoing determination that those choices are “suitable and prudent” outside the shield of 404(c), and goes on to note footnote language that, IMHO, confirms the obvious—that the choice of those fund menu options is a task “over which the fiduciary, and not the participant has control”—and thus, even if the plan qualified as a 404( c) plan, those protections would not apply. Moreover, and at issue in the Deere case, the DoL notes, “[I]f on the other hand, the fiduciary maintains imprudent investment choices—such as investments with imprudently high fees (emphasis added)—then under the Secretary’s regulation, any resulting loss is not a ‘direct and necessary consequence of the participant’s exercise of control,’ and the fiduciary is not exempt from liability for that loss.”

The DoL notes that the court’s decision “appears to rest in large part on a mistaken impression that plaintiffs’ claims hinge on the fiduciaries’ failure to ‘scour the market to find and offer the cheapest possible fund,’ as well as the conclusion that the fees were necessarily prudent because the Plan’s array of investment funds were offered ‘to the general public’ at the same expense ratios that the Plans paid.” To the DoL’s point, it’s one thing to say that there is no obligation to find/obtain the cheapest fee, another altogether, IMHO, to claim that a multi-billion-dollar 401(k) plan has no fiduciary obligation to negotiate a better deal on behalf of its participants than they could do on their own account in a retail environment. To fail to do so is not necessarily a fiduciary transgression—but, IMHO, it surely is worth a proper hearing.

To its credit, the DoL didn’t just take issue with the fact that the court basically ignored its earlier counsel, nor did it focus strictly on its belief that the court just plain got it wrong, though it did say that “[t]he court also may not have fully understood the potentially far-reaching ramifications of its decision, which permits fiduciaries to evade accountability for the imprudent selection and maintenance of funds in defined contribution plans.”

The DoL also looked out to the future to see where a judicial misapplication of the law might take us and, I’m pleased to say, they cited this column (1). “These implications have not gone unnoticed,” the DoL said. “For instance, a commentator in PLANSPONSOR notes that if he were advising an employer with a 401(k) plan based on this decision he would ‘advocate giving participants LOTS of fund choices—via a brokerage window if possible,’ and would advise the employer that it ‘won’t have to worry about being prudent in the selection of the fund options for the plan because, according to [this Court’s] ruling, that [404(c)] safe harbor applies to that decision.’” The DoL then notes that “[e]ven if this Court meant to limit its holding to plans that offer a brokerage window of the type offered by the Deere plans…it is not hard to imagine that plan designers will advocate including this feature for all plans in order to immunize fiduciaries from any liability with respect to the selection of the plan’s option.”

Of course, the “counsel” I offered in that column was somewhat tongue in cheek. To me, it’s evident on the face of the matter that that would be an inappropriate result—and yet, as the DoL acknowledged by including the comment, you don’t need to reach very far from the court’s articulated rationale to arrive at that result.

In fact, the DoL has, consistently to my ears, and across administrations, said that, in the absence of 404(c)’s protection, plan fiduciaries are responsible for all plan investment decisions, even those made by well-informed, active, and engaged participants, even if that is further than many plan sponsors are willing to acknowledge.

That makes those protections all the more precious—and, with all due respect to the judges who consider these situations, all the more important that they get it right.

—Nevin E. Adams, JD


(1) IMHO: “Winning” Ways?

See also: IMHO: Letter of the Law

"After" Thoughts

Last week, I attended a media briefing sponsored by BGI titled “Restoring Confidence: Saving the Future of Retirement.” That session featured insights from some new participant research, some perspectives about the current plan-trends landscape, some thoughts on annuitization in 401(k)s, and even some thoughts from a congressman who knows more than a little about pensions and 401(k)s.

Some random thoughts from, and stimulated by, that session:

• Research conducted by the Boston Research Group (BRG) (and sponsored by BGI) indicates that 33% of participants have put off looking at their statements because of the recent financial turmoil. I’m betting a like number never looks at their statements anyway.

• No news is actually bad news. Not only can participant statements provide some much needed motivation to do (more of) the right things, people might be surprised to see how well their accounts have held up.

• People have seen so many reports about how poorly indexes like the Dow and S&P 500 have performed that they probably overestimate their personal losses. Many, perhaps most, probably haven’t lost that much. Of course, some of those “too much in company stock” accounts may have fared worse.

• Data from the Employee Benefit Research Institute (EBRI) suggest that, in a “mere” two years, younger participants (who have smaller balances, on average) could be back to where they were last fall. It still feels like we’ve “lost” two years in three months—and most of that “recovery” is going to be funded from our own pockets.

• Disclosure is not (necessarily) clarity, and more disclosure is not (necessarily) more clarity. However, it beats the alternative.

• Two-thirds of participants in the BRG study who were previously confident that they would have enough to live comfortably say their confidence level was unchanged, and 18% said their confidence had actually increased. No word on whether that confidence was justified or not.

• Nobody is in favor of conflicted advice—there remains, however, disagreement as to when that potential conflict actually creates bias, and whether that conflict can (ever) be sufficiently disclosed.

• During the discussion, Congressman Andrews referenced a recent GAO report that purports to show that “biased” advice actually yields poorer investment results than unbiased advice. However, that recent (March 2009) GAO report is actually a report about a not-so-recent (2005) SEC analysis of (just) 24 defined benefit pension consulting firms registered as investment advisers, (just) 13 of which allegedly “failed to disclose significant conflicts.” The GAO report cautioned that “[b]ecause many factors can affect returns, and data as well as modeling limitations limit the ability to generalize and interpret the results, this finding should not be considered as proof of causality between conflicts and lower rates of return….” However, that distinction is NOT being made by those (including Congressman Andrews) who want to rely on the GAO report as saying exactly that.

• Interestingly enough, the GAO report, while only 16 pages long, is nonetheless twice as long as the SEC analysis it was based on (see “IMHO: Disclose Sure?” ).

• According to the BRG research, among participants whose 401(k) balances had declined over the past 12 months, 28% said they planned to delay retirement, while 20% said they planned to “work until they die.” Unfortunately, we don’t always have that option.

• Nearly half (45%) of all 1,000 participants surveyed said they would "save more” to replenish their 401(k) losses - though Warren Cormier noted that studies have shown that kind of good intention tends to be akin to people who, on New Year's Day, say they are going to go to the gym regularly.

• Nearly three-quarters (73%) of the BRG respondents said that "knowing I would have a consistent, guaranteed monthly income in retirement other than Social Security" would boost their retirement confidence. What’s up with the remaining 27%? Or is it simply that “consistent, guaranteed” is not the same as “consistent, guaranteed, and ENOUGH?”

• “Knowing how much money I would need to retire comfortably” was cited as a positive factor by just 61% of survey respondents. Doubtless the rest already have a sense that what they need and what they actually have are at variance.

• The BRG survey data indicated that 90% of survey respondents would be interested in a 401(k) plan option that would provide a means of securing guaranteed monthly retirement income. However, based on the (lack of) take-up rates in the real world, an acceptable source of “guaranteed monthly retirement income” wouldn’t appear to include an annuity.

• People confident about their retirement prospects behave differently (and generally, at least when it comes to saving for retirement, “better”) than those who aren’t. But are they more confident because they behave differently, or do they behave differently because they are more confident?

—Nevin E. Adams, JD

You can read the coverage of the session; Turmoil Dents Participant Confidence , Andrews: Dumping the 401(k) Would be a “Mistake”, Is the 401(k) Ready for Change? at http://www.plansponsor.com/pi_type11?RECORD_ID=45683.

Tweet Spots

Those who try to figure out when certain trends reach a tipping point—who try to figure out when things have crested, the beginning of the end of the beginning—should note that we may have reached that point about three weeks ago—when I started “tweeting.”

And, no, I wasn’t commemorating the arrival of spring by making bird calls. “Tweeting,” if you haven’t heard, is reportedly now all the rage as a means of communication.

Well, sort of.

See, you “tweet” by establishing an account on twitter.com (it’s free). And, once there, you can keep everybody up to date on what you’re doing.

Well, sort of.

What you actually do is update everybody who has signed up for your updates (“followers”). And, by update, what I mean is that you can tell those following your activities what you’re doing…in 140 characters (or less). Not 140 words…140 CHARACTERS. About half the length of this paragraph….

Now, I’ve been aware of Twitter and its capabilities for some time now. But, for a guy who long ago eschewed putting up creative status messages on AOL’s Instant Messenger, and who still finds Facebook’s “what are you doing now” box an annoying reminder of unfinished business (not to mention a mundane existence), the notion of incessantly updating the world on the trivialities of one’s daily existence just seemed—well, trivial.

Having said that, over the past several weeks I have found Twitter to be an interesting way to keep up with breaking news from a wide variety of sources (including politicians, many of whom are now “tweeting,” apparently), has already helped me find a good book, allows you to connect with people you wouldn’t normally be able to even find, much less interact with (although that cuts both ways), won’t tie up your e-mail, and has the potential, believe it or not, to actually help you find information and promote your professional activities.

Well, sort of.

As long as you can do so in that 140 character space—and only, to state the obvious, if somebody’s “listening.”

In point of fact, while for the moment it’s “fun,” I’m not yet sure how effective tools like Twitter will be in the long run, nor how its “soundbytes” will work for complex areas such as retirement planning. Not that I’m not intrigued by how Newt Gingrich spent his Friday evening (I’m more intrigued that he’d be willing to share that information), or how a “professional Wal-Mart shopping cart” finds the time (or Internet connection) to keep up with my postings, but there’s a great deal of this medium’s “information” that really isn’t worthy of that name. Still, it’s been interesting to meet the challenge of creating a message that (literally) fits the medium, and one that I’m sure I will improve on over time.

There’s a reason good advisers have an “elevator speech”—a “reason I should be hired to help you” explanation that can be delivered in the space of time an elevator ride consumes. Ditto the ability to share the essentials of participation and investing in a group setting in what are frequently “less-than-optimal” settings. Sometimes, perhaps most times, you simply don’t have all the time you’d like to explain things the way you’d like to explain them.

There is a science to being heard amidst all the clutter, IMHO. It’s all about attracting followers, and, from what I have discerned on Twitter, at least initially, you must follow to be followed (unless, of course, you’ve already attracted a following). You also have a much better chance of being heard, IMHO, if you’ve been referred/followed by someone they are already listening to.

Success in this “new” medium (it’s about three years old) seems to be about listening at least as much as you talk, sharing timely information that is useful (and entertaining), and doing so at a time—and in a setting—that is convenient for those whom you want to reach.

And in my experience—regardless of medium, message, or audience demographic—that’s always been the best way.

—Nevin E. Adams, JD

You can follow me on twitter at http://twitter.com/nevinesq

The Mean-ing of Average

As if retirement savers didn’t have enough problems, last week Fidelity Investments reminded us how much money we’re going to need for health care.

According to Fidelity’s annual estimate, an average couple retiring in 2009 would need $240,000 set aside by age 65 in order to pay for health-care expenses in retirement (see “Retiree Health Care Estimate Jumps 6.7%”). Worse, that’s up from $225,000 in 2008—and even worse, the 2009 figure is 50% higher than the $160,000 Fidelity estimated in 2002 would be required.

Even those workers who still have employment-based retiree health benefits to supplement Medicare, but who must pay their own premiums, need to set aside a hefty amount, according to a 2008 EBRI report; men would need between $102,000 and $196,000 in current savings (50th and 90th percentiles, respectively), while women would need between $137,000 and $224,000, respectively, due to their greater longevity, according to the report (see “EBRI Pinpoints Retiree Health Expenses”.

That 2009 Fidelity estimate continues to assume individuals do not have employer-provided retiree health-care coverage, but it does take into account coverage by Medicare, while assuming life expectancies of 17 years for a male and 20 years for a female.

Now, those estimates are actuarially sound. EBRI notes that, on average, women age 65 live to age 85, while men will live to age 82. However, as Dallas Salisbury, EBRI’s CEO, has reminded me more than once, most of the population is not average. In fact, by the very definition of the term, “average” means that about one-half of men and women will die before they reach average life expectancy—and the rest will live longer.

EBRI research has shown that a couple retiring at age 65 in 2008 could need as “little” as $194,000 to cover health insurance costs and health-care expenses not covered by Medicare. However, if that couple happens to live far beyond average life expectancy, say to that experienced by the 90th percentile, and at the same time needs to use a lot of prescription drugs during retirement (again, the level out at the 90th percentile), EBRI notes that the couple could need as much as $635,000 in savings when entering retirement.

Indeed, setting aside the financial viability concerns surrounding the Medicare program (it’s actually in far more precarious financial shape than Social Security), that coverage attends to only a little more than one-half of the Medicare population’s health-care needs, according to EBRI. Not that most Americans are aware of those limitations, IMHO. In fact, I’d be willing to bet that many, perhaps most, assume that Medicare is all the post-retirement insurance they need. Of course, I’m equally sure that many assume that those Social Security checks will provide all the income they need¬ – only to discover too late that it is all they have.

Ultimately, these projections serve to remind us of a couple of key considerations. First, health-care costs need to be contemplated as a part of retirement savings—both because those costs can quickly wipe out funds set aside for living expenses, and because not purchasing the proper amount/kind of health care can have a deleterious affect on your quality of life. Second, one shouldn’t assume that Medicare will address every medical need, any more than you would assume Social Security will comfortably address every living expense. And finally, and perhaps most significantly, “average” is only one point of reality, and one that few of us actually live—or retire—in.

—Nevin E. Adams, JD

See also see “The Lure of Averages”

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