"Access" Points

On Friday, the Department of Labor, as part of the White House’s Middle Class Task Force, formally unveiled a couple of initiatives.

The “new” one—and the one likely to capture the attention of the retirement plan community over the next several weeks—deals with investment advice for participants (see “DoL Proposes New Advice Rule”).

At a high level, the DoL has taken a major step back from the position it took in the final regulations on the subject put together—by the DoL—in 2008 before being halted, and then withdrawn last November by the new Administration (see “IMHO: Executive Order”). They also, IMHO, seem to have taken a step back from the admonitions of the Pension Protection Act of 2006 (PPA) to draft regulations that would craft an exemption to ERISA’s prohibited transaction rules that have long barred the ability to be compensated for advice on a basis that might vary according to the recommendations of the adviser1.

Withdrawal “Symptoms”

Now, many (including, apparently, some that signed that legislation) have always had an issue (to put it mildly) with this particular provision of the PPA, which they fear opens the door to “conflicted” advice (see “IMHO: Irreconcilable Differences”). Of course, proponents of the PPA’s interpretation have argued that part of the DoL’s charge was to build compliance and disclosure structures that would prevent that result. However, that apparently wasn’t possible—at least for the current DoL, which, after halting the publication of the rules and putting it back out for comment, decided last fall to withdraw its proposal “in response to concerns raised in public comment letters questioning the adequacy of the final class exemption's conditions to mitigate the potential for investment adviser self-dealing2.”

Let me be clear: I’m not faulting the DoL for essentially adopting the position that the solution that they had crafted under the leadership of one Administration was not workable under another. Greed is a corrupting force, and even the most able, honest, and forthright adviser could, on any given day, be tempted to offer advice that better fits his or her own needs than that of a participant (we also know that there are plenty of advisers out there who are neither able, honest, nor forthright). Let’s face it—the folks most in need of investment advice are most assuredly also the least likely to read (or to understand) the disclosures that are supposed to put them on notice that the advice they are about to receive could be tainted (note that, even with those opportunities muted by the new regulations, the proposed disclosure form runs FIVE pages). In large part, IMHO, requiring that compensation for investment advice be “level”—as the newly proposed regulations do—is no more than a return to the status quo.

That, of course, is also its limitation. After all, while the new regulations were touted as a means of “increasing access” to “high quality investment advice,” I think it’s fair to say that the practical result is an emphasis on “high quality” (read “not from a source whose compensation varies according to the advice provided”) rather than “access,” because I’m hard-pressed to see how the new regulations will do much to engender a real expansion of advice offerings3.

Shifting Gears

Mitigating the impact of this shift in position—and, make no mistake, it is a shift—is the reality that there are many more fee-based advisers serving this space today than there were even as recently as 2006. Perhaps some of these were motivated by the ability to offer participant advice, but I see little connection between that movement and these particular regulations. Another reality is that a growing number of participants are simply being defaulted into investment options without the “intervention” of the participant, much less an advised participant.

Additionally, the proposed regulations contain new restrictions on the design and deployment of the computer model (the selection must be made by a plan fiduciary unaffiliated with the adviser), and some intriguing questions about the applicability of specific investment theories4, as well as a determination that it is not only the adviser, but the adviser’s firm whose compensation impact must be considered. However well-intentioned, these new elements will almost certainly impede, rather than accelerate, the availability of these tools.

While the DoL made an effort to estimate the impact advice can have5, we have no such estimates on the impact of potentially conflicted counsel. Presumably, those conflicts could put participants in the clutches of a “Madoff wanna be,” but, frankly, I’m hard-pressed to understand the difference between the recommendations potentially incentivized by the personal interest of an adviser versus those of a plumber, real estate agent, used car salesman, or lawyer (though perhaps a rigid adherence to ERISA’s prohibited transaction rules provides the requisite justification).

No one—certainly not this writer—is in favor of promoting advice that isn’t good for participants. Ultimately, keeping the door closed on potentially conflicted advice may be the safest and most prudent course, though one might be inclined to think that the structures already in place (the selection of an adviser is a fiduciary duty, after all, and providing investment advice for a fee is a fiduciary act) would keep the worst at bay—and that new proposals could be crafted to weed out the rest. Or one might be inclined to insulate the participant from even potentially “good” advice, because that advice might also serve the adviser’s personal interest.

Regardless, the Labor Department has laid out a new course on how participant advice can be offered, and how advisers can be compensated for that service. They have asked for input on that new direction6—and I sincerely hope they get it.

—Nevin E. Adams, JD


1 “A final rule and related class exemption published in January 2009 were withdrawn in November 2010 in response to concerns raised in public comment letters questioning the adequacy of the final class exemption's conditions to mitigate the potential for investment adviser self-dealing.”

2 Not to be cynical about it, but those concerns were expressed by just 28 individuals/institutions (which the DoL has published at http://www.dol.gov/ebsa/regs/cmt-investmentadvicefinalrule.html). More accurately, there weren’t (even) 28 expressions of concern about the regulations themselves. Many, as you might suspect, were simply pointing out areas of needed clarification; several were just pointing out the need for final regulations, noting that the lack of certainty about the rules had created a legislative limbo in which nobody was doing anything, or at least anything different, regarding the provision of investment advice. That said, apparently somewhere in that relatively modest number of comments lay arguments compelling enough to persuade the Labor Department that there was no way to thread that particular needle.

3 The DoL would presumably take issue with my conclusion, since the regulations repeat the assumption associated with the prior—but very different—version that this approach would “extend investment advice to 21 million previously unadvised participants and beneficiaries.”

4 This may well be the “battleground” of commentators over the next several weeks. The DoL solicits comments “on the conditions applicable to investment advice arrangements that use computer models.” This is a far-ranging section of the proposed regulations, ranging everywhere from “what investment theories are generally accepted” and should this regulation not only specify them, but “require their application.” I suspect at some level that some may draw comfort from this apparent effort to bind in not only what process is appropriate for these models, but what inputs. One can’t help but wonder, however, if those findings might at some point be extrapolated (implicitly or explicitly) to other applications.

5 There are some interesting acknowledgements in the proposed regulation: that there is no requirement to “offer, provide, or otherwise make available any investment advice to a participant or beneficiary”; that in scoping the impact of the regulations, the DoL assumed that, on average, participants and beneficiaries who are advised make investment errors at one-half the rate of those who are not.

6 Written comments on the new investment advice proposal should be addressed to the Office of Regulations and Interpretation, Employee Benefits Security Administration, Room N-5665, U.S. Department of Labor, 200 Constitution Ave. NW, Washington, D.C. 20210, Attn: 2010 Investment Advice Proposed Rule. The public also may submit comments electronically by e-mail: e-ORI@dol.gov or through the federal e-rulemaking portal at http://www.regulations.gov.

Promises Premises

It was hard not to be struck this past week by that Pew Center on the States report titled “The Trillion Dollar Gap.”

That title was a reference to the apparent chasm between the potential obligations of the assorted pension and retiree health-care programs of the 50 states, and the money set aside to pay for them (see “States Face $1 Trillion Retirement Benefits Funding Gap”). In some respects, the portrayal was better than it might have been: For one thing, the analysis was based on plan year-ends that predated the Q4 2008 meltdown, and it focused only on state programs, rather than the assortment of local government programs.

On the other hand, it suffered—as many of these reviews do—from a lack of context. It combined the obligations represented by retiree health and pensions—and, while both surely are financial obligations, they are driven by different factors. More importantly, most of the public sector has, until very recently, treated retiree-health obligations as a pay-as-you-go obligation—just as the corporate sector did until the mid-1990s, when accounting rule changes mandated a different approach (one that, in short order, pretty much eviscerated the notion of retiree health-care coverage in that sector, certainly on a prospective basis). Thus, while the obligations are real, it’s hard to escape a certain “gotcha” sense in a report that presents a crisis so soon after the accounting rules have shifted so dramatically1.

“Bad” Timing

The news couldn’t come at a worse time for public pension programs. In recent months we’ve been treated to a series of stories of well-heeled attorneys and politicians effectively “scamming” the system by exchanging a modest amount of service for huge pension payoffs and the publication of $100,000 Pension Club lists in California (with searchable capabilities, no less), alongside the intimations that the insidiously titled “private placement agents” have been lining their pockets with ill-gotten gains from the public treasuries.

This at a time when the perception is that public-sector workers are paid “better”2, that the public sector accounts for most of the jobs “saved and/or created” by stimulus spending—oh, AND that “they” get the kind of pension and post-employment health-care coverage that most private-sector employers long ago eschewed. These concerns will certainly be exacerbated by the Pew study—which, lest we overlook the point, reminds us that “[u]ltimately, taxpayers could face higher taxes or cuts in essential public services.” However, IMHO, what goads the public most about the current situation is a sense that these decisions are taking place with “our” money.

Of course, reports of a “crisis” in underfunded pension plans is hardly an unusual occurrence—indeed, they are as regular as the market’s cycle itself (see “‘Over’ Blown”). Crooks, like Willie Sutton, are inexorably drawn to big piles of money—and promises that can be made today, but not fulfilled until later, are mother’s milk for the political class.

And, while the Pew report acknowledges that “many state officials grasp the depth of the funding challenges for their public sector retirement benefit systems and the need to respond,” it also cautions that “the pressure in an election year to channel money to competing priorities such as education may tempt lawmakers to neglect the problem.”

Still, at a time when it is clear (to me, anyway) that the nation could stand a good shot of fiscal prudence, and while all government expenditures seem fair game for review, it’s worth remembering the following about those public pensions to put those concerns in context:

(1) The median annual (national) pension is less than $20,000. There are abuses, but those are the exception, not the rule. Most aren’t getting rich off these payments.
(2) Most of the funding for those retirement benefits still comes from investment income, not contributions (from taxpayers).
(3) To some extent—and, in some cases, to a great extent—the funding problems presented are the result of changes in accounting rules, not a sign of mismanagement.
(4) Many public-sector workers contribute to those pension plans—putting their savings at risk, as well as their pensions, when the funds are mismanaged.
(5) Many public-sector workers contribute to those public pension plans at rates—and sometimes mandated rates—that are well above the average 401(k) deferral rates in the private sector.

Taxpayers—and that certainly includes public-sector workers—clearly have a stake in the management of these programs and the financial obligations they entail. For the very most part, those responsible for the systems reviewed in the Pew study have been good stewards of what they’ve been given. However, actions have consequences, and the impact of decisions delayed can compound over time. All too often, politicians have intercepted/redirected funds that should have fulfilled those commitments to causes more exigent to their current political or financial realities. As the Pew study reminds us, we must continue to be cognizant of the costs of those obligations. But more importantly, IMHO, we must be more mindful of the promises made—because they can become promises we have to keep.

- Nevin E. Adams, JD


1 Even on the pension side, while acknowledging that, in aggregate, the state systems were 84% funded (and, while that was before the worst of the market slide, it’s still an incredibly good number, IMHO—do YOU have 84% of the value of your mortgage sitting in your bank account?), the report’s authors couldn’t resist reminding us just how much money was represented by that remaining 16% (about $452 billion, in aggregate).

2 Care should be taken in drawing conclusions on pay levels since such “average” comparisons inevitably gloss over the realities of pay differences legitimately based on education, job title, and tenure.

Safety “Knot”

Two weeks ago, the Department of Labor and the U.S. Treasury turned to the retirement plan community for some input on how to “enhance retirement security for workers in employer-sponsored retirement plans through lifetime annuities or other arrangements that provide a stream of income after retiring.”

Now, part of what the DoL is trying to figure out (see Feds Call for Lifetime Income Product Public Comment) is why the take-up rate on annuities (technically “lifetime annuities or other arrangements that provide a stream of income after retiring”) is so dismal—not just because many see them as a superior way to ensure that “stream of income,” but because some are hoping that, if it can be made more available as a distribution option (perhaps even a default distribution option), more participants will take advantage of it.

There are good reasons for the inquiry. We all know that most participants with a non-retirement-related distributable event (such as a job termination) tend to have relatively small balances; that all too often they take that small balance as a cash distribution—and spend it (what’s left after taxes and penalties, anyway). We also know that many, perhaps most, defined contribution plans don’t provide an annuity distribution option. Not that it would likely matter, since defined benefit plan participants who, unlike their DC cousins, are frequently given that option routinely reject it in favor of a lump-sum option (when offered). Therefore, it doesn’t take much imagination to realize that merely having the option available won’t be enough to impact participant behaviors (and trust me, even as a default, when it comes to getting that distribution check, I suspect participants won’t be as pliant as they have been with other automatic design features).

Participants have, it seems, learned to distrust annuities. Stories abound of individuals who have been bamboozled by unscrupulous advisers (and sometimes by annuity providers themselves)—in terms of product, promise, and fees. While the concept of an annuity—giving your money to a firm that will, some years hence, provide you with a specific income stream—is relatively straightforward, the realities are anything but. The here-and-now money being surrendered inevitably seems larger than the promised income stream, and unless you have an actuarial bent, it’s nigh impossible to figure out how badly you’re being ripped off1—assuming that the firm you hand that money over to is still financially viable 20 years out. Moreover, the disclosures attendant with those purchases—certainly on the retail level—are enough to make you long for the brevity, simplicity, and coherence of a mutual fund prospectus. Sure, you can lose your shirt at the craps table, but at least you’ll have some fun doing it.

From an employer standpoint, the current reluctance is, IMHO, even easier to understand. First off, there are all the same issues and concerns that the participant has with regard to the complexity of the product and “disclosures” (and I use the term loosely)—and the ever-present sense that they are getting ripped off (though, at an institutional level, perhaps less so). Take all that, add to it the already-daunting obligations of a plan fiduciary, and extend those not only past employment, but potentially past the lifetime of the participant himself. While the Labor Department has made several efforts to ameliorate those concerns, they can’t really afford to let the fiduciary totally off the hook for making a prudent decision in choosing a provider/product—but let’s face it, whatever stance the DoL may take, litigators may well choose to apply a less stringent standard. However much that plan fiduciary would like to help the participant make the right choice(s), it’s hard to imagine why they would want—or be expected to want—to assume that kind of potential liability today, much less decades into the future.

So, what’s to be done? We are, in essence if not reality, talking about a structure that will allow workers to buy their own personal pension, and, IMHO, the questions that need to be answered aren’t really all that hard to understand.

People want a safe repository where their savings can be comfortably entrusted at the proper time, and from which a secure, predictable stream of lifetime income can eventually be drawn. That comfort will, in turn, require that it be relatively easy to communicate (and understand), and—like any retirement investment—that fees can be disclosed (and understood). It would be a program that, hopefully, plan sponsors can facilitate without becoming co-signers of the obligation. One, it should be said, that won’t put those savings at risk during the interim by imprudent speculation (as the private sector sometimes does) or misappropriation for other purposes (as politicians are wont to do). And one that, IMHO, remains a voluntary choice, not one imposed on participants (if you want to wipe out voluntary retirement savings, just tell people they won’t be able to get their money “out” EXCEPT as an annuity distribution).

Indeed, in my mind, the question about a retirement income solution isn’t so much about why plan sponsors have been reluctant to offer these options at present—and why even fewer participants take it—because I think that, once we give people the right kind of choice, they’ll make it.

- Nevin E. Adams, JD


The Labor Department’s request for information is online HERE


1 Another great rip-off fear: that you’ll hand over your life savings assuming that you’ll get it all back over the rest of your life, only to die prematurely and leave nothing to your heirs, is a very real concern (and one that never seems to be counterbalanced in most participants minds by the notion that you could live longer than anticipated and draw more than was put into your account.

Goal Lines

That report, published by Towers Watson (see “Towers Watson Finds DB Plans Outperformed DC Plans” at ), compared the differences in investment results between 401(k) plans and defined benefit (DB) plans—and, in a contest that you’d surely have trouble getting decent odds on in Vegas, defined benefit plans fared better.

That shouldn’t—and probably didn’t—surprise anyone, IMHO. Defined benefit plans have a lot of things going for them that 401(k)s don’t. First, most DB plans have someone in an official capacity paying attention to them. They are obligations of the employer, after all, and they have a direct—and increasingly visible—impact on the bottom line. Second, in view of the first consideration, those responsible for that bottom line impact of the DB plan generally have the good sense to engage the services of experts to help them make the right decisions. Finally, and perhaps most importantly when it comes to making investment decisions, DB plans have the benefit of time—and in many cases, a nearly indefinite time horizon—upon which to base and fund their commitments. They have, in football parlance, a solid ground game, well-honed defensive line, a quarterback who is getting solid play-making support from the sidelines, and control of the clock.

401(k) plans, on the other hand, rely on the investment prowess of an untrained, and in most cases, wholly uneducated participant-investor. A “quarterback,” if you will, who effectively strolls out on the field, drops back and—well, sometimes they just fall on the ball, sometimes they try to run with it (for a short distance, anyway) and, yes, sometimes they just—in pure “Hail Mary” fashion—hurl the ball downfield and hope for the best.

Little wonder that, in the time periods that were the focus of the Towers Watson update, DB plans did better. In fact, after fees were taken into account, Towers Watson estimated that DB plans outperformed 401(k) plans by roughly one percentage point in 2008, though both types of plans lost value.

That said, when you look at the full Towers Watson analysis, the result is more nuanced. Over the decade and change it has been conducting this analysis, Towers Watson noted that DB plans do better (on a relative basis to 401(k)s) when the markets are bearish—and yet, 401(k) results, with all their faults and shortcomings, tend to fare better (at least at a plan average) when the bulls are in charge.

In fact, the Towers Watson report draws the following conclusion:

“After stronger performances by DB plans during the 2000-2002 bear market, 401(k) plans outperformed DB plans from 2003 through 2005, as measured by plan-level medians. DB plans and DC plans realized equal returns in 2006, with 401(k) plans taking the lead again in 2007. But, over the 13-year period, which captures both bull and bear cycles, DB plans outperformed 401(k)s by an average of 23 basis points.”

Read that last sentence again. That’s right—despite all their advantages, over one of the most tumultuous market cycles in memory (1995 to 2007), DB plans did better than their 401(k) brethren—by just 23 basis points.

Now, there are issues whenever you try to come up with something like an “average”(1) result in any evaluation, much less an “average” 401(k) plan investment result. For example, that “average” 401(k) plan might have a group of participants that gravitate toward more-conservative investments counter-weighted with a group of “shoot-the-moon” gamblers, yielding an “average” return that winds up being pretty diversified at the group level(2). Moreover, some of the plans in the Towers Watson evaluation had both a DB and a DC program and, at least in theory, participants covered by both programs might—and certainly should—invest differently than those with only a DC plan to rely on.

The bottom line: The presentation of a DB “average,” regardless of the care taken in presenting the data, may be something of a stretch; but, IMHO, while there may be an arithmetic “average” for 401(k) plan returns, it sheds little light on what is really going on at the level where such decisions matter—the not-so-average individual participant.

And, as many Super Bowl losers can attest, it isn’t about how many yards you gain on the ground, how many interceptions you’ve thrown, or how many sacks—it’s the score on the board at the end of the game that counts.

—Nevin E. Adams, JD

The Towers Watson study is online at http://www.towerswatson.com/research/845

(1) For another perspective on averages, see “IMHO: The Mean-ing of Average”

(2) The Towers Watson analysis noted that, over time, 401(k) plans do, in fact, have a wider distribution of returns than DB plans, and that, with the exceptions of 2002 and 2003, 401(k) plans had a wider distribution of investment returns in all years in the analysis.

Projection Screen

More than the subtleties of the law, the nuances of crafting a cogent legal brief, and the humiliations that often accompany the public exercise of the Socratic method, surely the most intimidating aspect of my law school experience—certainly in the first year—was the grading. In the vast majority of my classes, there were no papers, no mid-term, no pop quizzes; in fact, no tangible means of measuring progress vis-à-vis the expectations of the course. Indeed, in the vast majority of courses, it came down to a single final exam (and an essay exam at that).

Now, there were regular (and, as I recall, fairly prodigious) reading assignments—and there was the omnipresent “fear” of being called on to explain the legal intricacies of a particular case—but, for the very most part, lacking any specific interim evaluations, there were weeks when the press of external events intruded. It was, for some of my classmates, particularly in that critical first year, easy to postpone their preparation until a later day.

Procrastination, of course, is an all-too-common failing of human beings, particularly when it comes to complex financial matters. Indeed, IMHO, too many retirement savers (and certainly most retirement nonsavers) save based on what they think they can afford or on what their employer matches, rather than on the income that savings will generate when they are no longer drawing a paycheck.

While there are any number of innovative calculators and communication devices available at present, they still seem to work best for participants who are willing to take the time to use them. But late last year, lawmakers (specifically, Senators Jeff Bingaman (D-New Mexico), Johnny Isakson (R-Georgia), and Herb Kohl (D-Wisconsin)) introduced legislation that would require defined contribution plan sponsors to inform plan participants of the projected monthly income they could expect at retirement, based on their current account balance (see Bill Would Require Disclosure of Participants' Expected Retirement Income).

Now, as a general rule, I’m leery about government-mandated disclosures, which tend to cost more and inform less than their erstwhile sponsors surely intend (“of the lawyers, by the lawyers, for the lawyers” is how they usually seem to turn out, IMHO). But this could well be an exception.

The sponsors of the Lifetime Income Disclosure Act have directed the Department of Labor to issue tables that employers may use in calculating an annuity equivalent, as well as a model disclosure—and they have provided that employers and service providers who rely on those materials would be insulated from liability arising from those disclosures.

There will, of course, be some issues. The legislation outlines assumptions that include payment as a joint and survivor annuity, and that each participant has a spouse of their same age—assumptions that certainly won’t apply in every case. It may well be that the model disclosure—though the legislation directs that it be able to be “understood by the average plan participant”—will wind up being an unintelligible morass of caveats and conditions (yes, “of the lawyers, by the lawyers, for the lawyers”). It is possible that the costs of preparing and producing that communication will countermand their benefit. It is even conceivable that seeing that particular number in black and white will only serve to undermine, not inspire, a greater appreciation for these programs (projections in a similar vein years ago didn’t do much to inspire an appreciation for my pension benefits).

That said, decades of saving for retirement is for naught if it fails to provide income for retirement, and the challenge of getting to retirement on a limited budget surely pales in comparison to the challenges of trying to get through retirement with those strictures. Knowing how much your current savings level might actually produce in retirement income dollars may only be part of that equation, but, IMHO, it’s a critically important component. Like any meaningful long-term savings goal—a house, a car, a college education—you need to know the target if you are to have a chance of hitting it. And seeing a clear, consistent estimate of what your current savings will amount to post-retirement seems to be a positive step in that direction.

To paraphrase Yogi Berra, if you don't know where you are going, you might wind up someplace else. And for tomorrow’s retirees, that could be a failing grade.

—Nevin E. Adams, JD

More information on the Lifetime Income Disclosure Act is available at http://www.plansponsor.com/Bill_Would_Require_Disclosure_of_Participants_Expected_Retirement_Income.aspx

http://bingaman.senate.gov/policy/erisa.pdf

Facts In Circumstances

One of the things I have always enjoyed most about this job is the access to information—not only from our own research, but from any number of academic and professional organizations. It’s a lot to keep up with, of course, but it’s a great tapestry from which to construct a sense of where things are going, and what things need to get going.

There are, of course, things to be wary of. For example, surveys conducted on behalf of organizations supportive of a particular view—that suggest that most people agree with that view—are an obvious eyebrow raiser. Studies based on samplings that are limited in size or scope aren’t inherently flawed, but should always be taken with a grain of salt (for example, a survey of large plans isn’t always illustrative or predictive of the behaviors of smaller programs). My personal favorite: “studies” by the purveyor of a particular good or service that indicate that what people really want is—more of that particular good or service.

But there’s another kind of survey that can sneak up on even the most discerning—the survey that confirms what you already believe.

There was an example of that just about a month ago when Urban Institute researchers Mauricio Soto and Barbara A. Butrica, who did the study for the Center for Retirement Research at Boston College, reported that employers with auto-enrollment had match rates about 7% below their non-auto-enrolling counterparts (see “Auto Enrollment Could Lead to Reduced Match”)--and from that finding, drew a not-unreasonable conclusion—that automatic enrollment could lead to situations where employers reduced their matching contributions.

And so it might. Generally speaking, automatic enrollment leads to more participants and, generally speaking, more participants leads to more matching dollars and, particularly for cash-strapped employers, more matching dollars can be a problem—a problem that could certainly result in a reduced (or suspended) match. Moreover, while matching contributions have often served as valuable participation incentives, in an era of automatic enrollment, those incentives might well play a different role, a role at a different level or, in the most extreme case, no role at all(1).

Now, it really doesn’t require a leap of faith to accept the premise of the study. And, if you’re like most people in our business, you probably saw the headline, skimmed over the results, and filed it under unintended plan-design consequences—or maybe even “bad things about auto-enrollment.” However, there’s a problem: Last week, the Employee Benefit Research Institute (EBRI) put out a report that claimed exactly the opposite; that, in fact, automatic enrollment has led to a HIGHER rate of match, at least among large plan sponsors (see “Study Finds Auto-Enrollment/Higher Match Link Among Large Plans”) (2).

In ordinary circumstances, we might be left to draw our own conclusions about two studies from reputable sources that seemed to draw two such widely disparate conclusions. This time, however, the folks at EBRI not only acknowledged the disparity, they offered insights into those differences. According to EBRI, the CRR/Urban Institute data was based on match rates constructed by the researchers, not actual rates of match—and then, this inferred rate was matched (no pun intended) against a separate listing of plans to determine which had, at some point, adopted automatic enrollment—though when that had been adopted vis-à-vis the match changes (if any) was not identified.

The bottom line: The conclusion drawn in the CRR/Urban Institute report (3) wasn’t illogical, but it was apparently based on such an oddly concocted methodology that, IMHO, it wasn’t worth the paper it was printed on. Consequently, when all is said and done, it doesn’t really add much to our insights about matching contributions and employer decisions—but it surely reminds us that we must always be careful not to jump to factual conclusions that, however reasonable, aren’t supported by the facts.

—Nevin E. Adams, JD

(1) See “Miss Match,” PLANSPONSOR Magazine

(2) The plans in the EBRI sampling weren’t exactly just increasing their 401(k) match, of course. They were also making changes to the defined benefit plans, and in some cases freezing their defined benefit plans while increasing their 401(k) match. More information is available HERE

(3) In their defense, the CRR/Urban Institute qualified their conclusion by saying that their study “suggested,” rather than established, a relationship between automatic enrollment and the matching level. That, however, is a nuance that is almost surely lost on most who read the report, including those who write about their conclusions for a broader audience.

"Talking" Points

A little different take this week - or at least different medium.

This talking points podcast is with me, where I talk about the results of our annual Defined Contribution Survey – and the things to keep an eye on for 2010.

You can listen to it HERE

Goals Oriented

As the New Year begins, we are often of a mind to think about making a fresh start. Working with your plan sponsor clients, you may well have established new goals for your retirement plans this year—a new threshold for participation, perhaps—or maybe you’ve just rolled out a new fund menu for your participants.

But whether those programs have undergone change or not, it seems like a good time of year to help participants reexamine their savings goals—and perhaps even some of their “bad” retirement savings habits. Here’s a short list of “resolutions” that you can share with your plan sponsor clients—and discuss with their participants.

___ Resolve to participate in your workplace retirement savings plan.

If you are not already saving for your retirement in your workplace program, you are missing out on one of the most important—and easiest—ways of making sure that you are on track for a financially secure retirement. Unless, of course, you have a rich (old) uncle.

___ Resolve not to miss out on the company match.

Odds are your employer matches your contributions to your retirement savings account up to a certain level, say 5% of 6% of your pay. Whatever that level is, if you do not contribute up to that point, you are letting “free” money slip through your fingers.

___ Resolve to increase your savings rate in your workplace retirement savings plan by at least 1%.

If you are already saving, are you saving enough? Have you ever made an attempt—with some kind of planning tool or the assistance of a financial adviser—to figure out how much you will need? Even if you have, it is remarkably easy to increase your current rate of savings by as little 1%--and you might be surprised just how much difference that will make!

___ Resolve to consider rebalancing investments at least once this year.

Your retirement savings account is being rebalanced all the time—by the investment markets. You can start out the year with half of your account balance in stocks and the rest in bonds, and a month later find that 70% is now in stocks and just 30% in bonds, or the reverse. How much and how fast depends on how your balance is allocated, and what is happening in the market. The bottom line: Once you have taken the time to put together a thoughtful allocation, you need to keep an eye on things. Once a month is good, once a quarter is probably enough, and once a year—well, that’s a minimum. Try picking a day that you won’t forget—your birthday, an anniversary…. Or any three-day weekend.

___ Resolve to use target-date investments properly.

Target-date funds are a pre-mixed investment solution—and most are designed in such a way that they assume that you are investing all of your retirement savings in that one investment. If you mix and match that with other funds on your retirement savings menu—or split your savings between two (or more) target-date funds—you will probably wind up with a mess. Just pick one. It’s the basket you SHOULD put all your eggs into.

- Nevin E. Adams, JD

'Hind" Sighted

A year ago, with the financial world feeling still very much on the precipice, and with the 2008 election results still ringing in our ears, I noted that “the impact on much-improved defined benefit plan funding levels—and on the confidence of retirement savings plan participants—has been severe, and potentially serious. We are all inclined to wonder (hope?) if, like 1987, the market will find its way back to solid footing before year-end—and worried that 1929 will be the better analogy.”

Well, as we head into 2010, it seems fair to say that this is not a repeat of 1987 and—not yet, anyway—a second Great Depression. Here’s a look at the trends that were on our mind this past year – and are just over the horizon.

Doctor Bill? Curing Health Care

Where we are: Aside from the financial crisis and unemployment, health care has been the great issue of the past year and remains so as we go to press. That the current system needs reform is scarcely an issue for debate anymore—but what constitutes “reform,” and whether or not it can (or should) be paid for, is another matter altogether.

What’s ahead: Even at this stage, it is nearly impossible to guess how this one turns out—and what it will mean for employers. It is still hard to believe that the Senate and House positions on any number of key issues can be reconciled—but then, there was a point in the summer of 2006 when many felt the same way about the Pension Protection Act. But if it does pass—or if it does not—it seems safe to say that the issue is not going away any time soon. What remains to be seen is if the “cure” is worse than what it aims to remedy.

Fee Fie? Revenue-Sharing Litigation

What we said: Deep pockets continue to be the apparent target of revenue-sharing litigation. The early signs have been promising for employers, with most jurisdictions holding that revenue-sharing, per se, was not a problem, and that disclosure of those arrangements to participants was not required.

Where we are: The courts have, by most measures, continued to be willing to give the employers the benefit of the doubt in nearly every case. A recent decision by Caterpillar to settle its litigation might be seen by some to be a crack in that otherwise unspoiled landscape, but that seems unlikely (Caterpillar was an unusual case in that an internal division actually managed money for the 401(k) for a number of years). Though a revenue-sharing case filed in June in a case involved a much smaller plan, the fact pattern seems unusual enough, and the contingent fees so limited, that it seems unlikely to portend a big shift in focus to smaller plans.

What’s ahead: Barring a smoking gun discovery among the cases already filed, it seems likely that the laws—and disclosures—will change before the litigation has any real impact. On the other hand, it is entirely possible that the mere existence of that litigation—and the ever-present litigation threat—will serve to reform the system in a way, and on a schedule, that would not otherwise have been possible.

Auto-Premonition—Doing It for Participants

What we said: It is entirely possible that an Obama administration will, as mentioned during the campaign (see “Political Pairings,” PLANSPONSOR, June 2008), advocate workplace automatic enrollment IRAs. More significantly, there is a growing suggestion that the automatic design—having been successfully deployed for enrollment and investing—might work equally well at distribution, forestalling the tendency of participants to take—and spend—those lump sums. .

Where we are: This has been a tough year for participants and plan sponsors alike, and among some 6,000 plan sponsor respondents to PLANSPONSOR’s annual Defined Contribution Survey, the pace of automatic enrollment basically flatlined, with just under a third having embraced the design (more than half of the largest plans have, however). More significantly, just 16.2% of respondents had embraced it in the past year, roughly half the pace in 2008. Meanwhile, though the appeal of the concept of a more broad-based automatic enrollment retirement savings initiative has been touted, including by those in the Obama Administration, those efforts have taken a back seat to other matters.

What’s Ahead: Automatic enrollment may have taken something of a “holiday,” but it seems unlikely to be “over” as a trend. Look for it to pick up the pace again in 2010—and for the Obama Administration to turn its attention to the issue in the next year (or two).

Default Lines—Targeting Target-Dates

What we said: We ended 2008 with a growing awareness that all date-based solutions are not created equal. In a very real sense, we are in the first year of a new generation of participants who have not only been defaulted “in,” they have been defaulted into these funds—and just in time for the most tumultuous market in memory. It will be interesting to see how participants—and plan sponsors—respond.

Where we are: Congress has held hearings, and the Department of Labor and Securities and Exchange Commission are not only on the case, they are on the case together. The market rebound has served to restore some of the damage, but the scars remain. However, the target-date manufacturers have become more explicit about their glide path designs, and the notion that a fund family is oriented to take you “to” or “through” retirement is now an open dialogue.

What’s ahead: We don’t know yet what regulators may try to do to help ensure that investors—particularly near-retirees—are not misled by the simplicity of a fund title and marketing pitch. Plan sponsors are on notice that there are differences here, and with luck, will continue to ask pointed questions. Because, after all, when you’re selling “you don’t have to worry about it”, somebody has to.

Conflicts of Interests—Advice Regulations

Where we are: One of the last acts of the outgoing Bush Administration was the publishing of a set of final rules governing the provision of investment advice to participants—regulations for which the foundation was laid in the Pension Protection Act (PPA), but whose origins can be found in a series of legislative initiatives championed by Congressman John Boehner (R-Ohio) for more than a decade. Proponents had long said that participants clearly needed (and wanted) the advice, but that there needed to be a way in which advisers could be paid enough to want to take on the task. Opponents were just as concerned that the provision merely seemed to codify the provision of “conflicted” advice by setting out terms by which advisers could receive compensation that varied depending on the funds recommended.

Experts have long expressed amazement that the provisions survived the conference committee’s reconciliation of the PPA—but there they were. However, the controversy swirling around those regulations never subsided—and, thus, it was no huge surprise when the incoming Administration tabled, postponed, postponed again, and then officially withdrew the proposed final regulations, as it announced its intention to publish separately a proposed rule that it believes more closely conforms to the Pension Protection Act statutory exemption relating to investment advice.

What’s ahead: Will we ever get final advice regulations? Almost certainly, though almost certainly regulations very different from the ones put forth a year ago. Or perhaps they will not come until after the concepts embodied in the PPA have been recrafted by legislators, such as Congressman Rob Andrews (D-New Jersey), who has already introduced legislation (the aptly named “The Conflicted Investment Advice Prohibition Act of 2009”) that would do just that. Between now and then, participants will continue to get advice the way they always have—or have not.

Stop Gaps: Closing the Pension Funding Gap

What we said last year: The market’s tumult has taken its toll on pension portfolios and, in remarkably short order, managed to undo what had been a diligent, steady progress toward restoring the funding health of many programs. Of course, it also has served to favorably impact liability calculations, somewhat muting the damage. All in all, those workers covered by the promises represented by those programs must surely appreciate their position vis-à-vis those solely depending on defined contribution plans—but how will employers feel about those promises?

Where we are: Pension portfolios took their lumps from the investment markets last year, to put it mildly. That they were better diversified—and likely more insulated—from those travails than most defined contribution portfolios was surely a matter of some comfort, as has been their steady recovery in 2009. Still, there was a lot of damage to be undone, and for most it is still a work in progress—even as the press of more restrictive accounting and funding rules takes its toll. Fortunately, Congress has been receptive to calls for extensions that have provided some much-needed breathing room for these programs.

What’s ahead: It remains more expensive—and complicated—to walk away from pension commitments than most realize, though many employers remain committed to their pension plans for reasons that transcend those financial considerations. Still, it seems likely that freezes, both hard and soft, will continue to be applied, certainly in the private sector. The public sector’s commitment to pensions remains largely unabated—and yet, a sense remains that it may only be a matter of time before fiscal realities bring about a different result.

Tying Up “Loose” Ends—Full Disclosures

What we said: There’s little question that our industry would benefit from better disclosure about the fees paid for the services rendered to retirement plans and their beneficiaries. The proposal to expand/enhance reporting to plan fiduciaries, if imperfect, still seems to be headed in the right direction. Doubtless, some providers will adopt different business models to “duck” those disclosures just a little bit longer, but it seems clear that plan sponsors will want—and deserve—a full and fair accounting. It is less clear that participants will be as well served by an incomplete, and perhaps unbalanced, reporting of fees paid in their accounts—particularly if, as is currently proposed, the disclosures could add a dozen pages (and millions in expense across the industry) to their annual statements. It is also unclear just how much of this the current Administration will be able and willing to press into service in the short time remaining.

Where we are: In just a few short months, the 2009 Form 5500 will escort in a whole new level of plan sponsor fee disclosure, though the proposed participant disclosures are not yet on the radar screen.

What’s ahead: It is nearly impossible to argue against the critical importance of full fee disclosure, certainly to plan fiduciaries. Whether the current requirements truly constitute “full” disclosure remains a matter of some debate—but it is a start. On the participant side, the short-term implications are less clear; but then, we have some time—and a new Administration—to work through those issues.


— Nevin E. Adams, JD

IMHO: Health “Care”

Like most Americans who have health insurance (and most do), I’m reasonably happy with what I already have. And like many Americans, I’m willing to take the President at his word from the campaign trail—that if you like the insurance you have, you’ll get to keep it. But as I study the text in the two bills that will have to be merged to create legislation to fulfill that promise—well, I have to tell you, I’m not sure how that’s going to happen(1).

That matters, IMHO, not only in the here-and-now world of paying for health care versus saving for retirement (and there’s plenty of evidence to suggest that many participants are making those trade-offs), but even more so in the post-retirement world where those burgeoning health-care costs stand to siphon so much from nest eggs that are perhaps already insufficient.

But make no mistake—I’m all for health-care reform, just not for what is currently proposed under that banner in Washington.

“For” Score

I’m all for some kind of safety net for those with preexisting conditions, more equitable treatment (and costs) for those who don’t have access to employer-sponsored plans, the ability to buy insurance across state lines (as we do with car insurance), and, yes, some kind of tort reform.

I think we all need some kinds of protections against bearing the cost of “insuring” those who can afford, but choose not, to buy insurance (by some estimates, half of the 30 million that the Senate bill purports to extend coverage to fall into that category)—and, heartless as it may seem to some, I do not see why we must bear the cost burdens for those who are not legally entitled to be here (the “you’re already paying for it” argument doesn’t wash with me). I also think that a lot of our current cost problems with health care aren’t necessarily a product of a bloated healthcare system or profit-mongering insurance companies – but are a function of what state law(s) require that insurance cover; things like hair plugs, Viagra, etc. And, yes, I think there should be a difference between procedures performed by a doctor that are truly medically necessary and those that are, at least effectively, “cosmetic.”

However, one cannot credibly say that the current system is “working.” Everyone who wants health insurance can’t get it, those with preexisting conditions have trouble obtaining—and keeping—the coverage they have, and the current cost trends are unsustainable for us all. IMHO, Americans with health insurance are too well-insulated from the cost consequences of their choices(2)—and doctors are more worried about the litigious aspects of their proscriptions than they are the costs of their prescriptions. Until those dynamics change, I see little hope for bending, much less breaking, the cost line trends in health care.

That said, I don’t see anything to address any of that in the bill that has passed the House, or in what I have thus far been able to discern in the bill that, just last week, passed the Senate. This is serious business—and it deserves better than the process that stands ready to undermine the protections that the vast majority of Americans enjoy with their health care for a distinct minority that do not.

That’s why I’m hoping that this current effort stalls out—to give us a chance to step back, and truly examine the things that need redress as we try to fix what’s broken (and not everything is), and keep what works (though not everything does). That, as we do so, we acknowledge and respect the breadth of impact that these decisions will have on our nation and our lives—and that lawmakers consider the interests of the many, as well as the few.

In short, I’m hoping that this current effort comes up short—not because we don’t need health-care reform, but because we do.

Nevin E. Adams, JD

(1) For those who see a role for the federal government in bringing about change as a competing force (the so-called “public option”), I’m not yet able to see the benefits that that not-so-invisible hand has exerted as a force for change in the 48% of the nation’s health-care costs it already influences (via Medicare/Medicaid). For those who see an opportunity in expanding those already-strained programs as a means of dealing with the current “crisis,” I wonder about their ability to take on an even larger responsibility. For those who champion the opportunities to be afforded by wringing “waste and inefficiency” from the system, I say—why wait?

(2) As I changed employers a decade ago, I learned a couple of key lessons about health care and health-care insurance. First, I gained a whole new level of appreciation for the costs of health-care insurance—even costs buffered by the provisions of COBRA (ever since, I have maintained that every employee ought to “go on COBRA” for 30 days). However, my second insight came from an encounter at our local physician. My wife took our kids for the regular wellness checkups she had been doing routinely for years—and when the time came to pay, she informed the clerk that we no longer had the insurance card/coverage, but that we’d be writing a check for the services. With no additional explanation, that dear clerk basically ripped up the invoice that would have been paid by our insurer—and presented us with a bill that was a fraction of the “standard” cost. This, despite my wife’s assurances that I was still employed, and that we could afford to pay the standard rate; there was, apparently, a different charge for those that had insurance, and those who didn’t.

Naughty or Nice?

Editor’s Note: There’s so much going on in the world of retirement saving and investing that I never feel the need (or feel like I have the opportunity) to recycle old columns – but this one has a certain “evergreen” consistency of message that always seems appropriate – particularly at this time of year.


A few years back—when my kids still believed in the reality of Santa Claus—we discovered an ingenious Web site that purported to offer a real-time assessment of their "naughty or nice" status.

Now, as Christmas approached, it was not uncommon for us to caution our occasionally misbehaving brood that they had best be attentive to how those actions might be viewed by the big guy at the North Pole. But nothing ever had the impact of that Web site - if not on their behaviors (they're kids, after all), then certainly on the level of their concern about the consequences. In fact, in one of his final years as a "believer," my son (who, it must be acknowledged, had been PARTICULARLY naughty) was on the verge of tears, worried that he'd find nothing under the Christmas tree but the coal and bundle of switches he surely deserved.

Naughty Behaviors?

One might plausibly argue that many participants act as though some kind of benevolent elf will drop down their chimney with a bag full of cold cash from the North Pole. They behave as though, somehow, their bad savings behaviors throughout the year(s) notwithstanding, they'll be able to pull the wool over the eyes of a myopic, portly gentleman in a red snow suit. Not that they actually believe in a retirement version of St. Nick, but that's essentially how they behave, even though, like my son, a growing number evidence concern about the consequences of their "naughty" behaviors. Also, like my son, they tend to worry about it too late to influence the outcome—and don't change their behaviors in any meaningful way.

Ultimately, the volume of presents under our Christmas tree never really had anything to do with our kids' behavior, of course. As parents, we nurtured their belief in Santa Claus as long as we thought we could (without subjecting them to the ridicule of their classmates), not because we expected it to modify their behavior (though we hoped, from time to time), but because, IMHO, kids should have a chance to believe, if only for a little while, in those kinds of possibilities.

We all live in a world of possibilities, of course. But as adults we realize—or should realize—that those possibilities are frequently bounded in by the reality of our behaviors. This is a season of giving, of coming together, of sharing with others. However, it is also a time of year when we should all be making a list and checking it twice—taking note, and making changes to what is naughty and nice about our savings behaviors.

Yes, Virginia, there is a Santa Claus—but he looks a lot like you, assisted by "helpers" like the employer match, your financial adviser, investment markets, and tax incentives.

Happy Holidays!

Nevin E. Adams, JD

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The Naughty or Nice site is still online (at http://www.claus.com/naughtyornice/index.php.htm). An improved site and much better internet connection speeds produce a lightning fast response – more’s the pity. I used to like the sense that a computer was actually having to crank through the data!

'Holding' Patterns

In one of the more challenging economic years in memory, it is not surprising that the pace of change set in motion in defined contribution plans by the Pension Protection Act slackened. If anything, IMHO, it is remarkable that the adoption of devices such as automatic enrollment and contribution acceleration did not decline.

That said, among a record number of respondents to PLANSPONSOR’s annual Defined Contribution Survey, the pace of automatic enrollment basically flatlined—just 30.8% of plan sponsor respondents said they now employ that approach (though more than half of the largest plans now do), compared with 29.8% a year ago. And, even after the encouragement afforded by the PPA, among those that have adopted automatic enrollment, only about four in 10 extended that to all workers (the rest applied it to newly hired workers only). Perhaps as a result, the average participation rate declined—slightly—to 72.3% this year from 73.8% a year ago, but was nearly unchanged from the 72.7% in the 2007 results.

Despite all the headlines about a variety of firms’ 401(k) match suspension, only about 5% of this year’s respondents had reduced the company match/contribution, with a like number saying that they had eliminated it. Another 5% each were contemplating either cutting or suspending the match. The most encouraging news was that nearly eight of 10 had no plans to reduce, suspend, or eliminate the match, and that, even among those that had, nearly one in four planned to restore it for 2010, while roughly 60% said they planned to remain at the cut or suspended level next year.

Is change in the air? Some, apparently—and for the very most part, it is about “more,” not less: 15.5% have already added investment funds, and 17% have increased the frequency of their participant education. Roughly 9% had changed their qualified default investment alternative or QDIA (likely to a target-date fund), and nearly as many had increased their investment manager due diligence, slightly more than the 7% that had hired, fired, or changed their investment consultant. As for plans for change in the remaining months of this year (the survey was taken over the summer), the trends were much the same—though IMHO not surprisingly, in view of the recent attention focused on target-date funds, an intention to increase due diligence on their target-date option’s glide path registered much higher on the “to do” list.

Speaking of target-date funds, historical performance may not be a guarantee of future results, but for plan sponsors, that was nonetheless the highest-ranked criterion (6.07 on a 7.0 scale). However, advisers can take heart from the finding that the second-most valued criterion was the recommendation of a financial adviser (trumping fund-family reputation, risk profile, glide path, and fees).

Interestingly enough, the lowest-ranked criterion was the recommendation of their DC provider. That doubt showed up in another telling statistic: Nearly 28% of this year’s respondents said they were “not sure” if the target-date funds offered by their provider were the most appropriate (that was, however, down from the 35% that expressed that opinion a year earlier—BEFORE the market plunge).

Without question, the past 12 months have brought much in the way of change to our industry—and much of that not change for the better. And yet, all in all, it is, IMHO, amazing how resilient employers and their plan designs have proven to be. We have perhaps not made much forward progress in the past year—but there’s something to be said for being able to hold the line.


—Nevin E. Adams, JD

Question Errs?

Several years back, we decided that our family was ready to upgrade to a high-definition TV (in fairness, that “decision” was in no small part predicated on the untimely “death” of the big-screen projection TV that we had purchased not too long after we married).

So, I did what any reasonable consumer would do— – I went to my local appliance warehouse to see what was available. In short order, I was able to enlist the support of a trained professional (a “professional,”, it should be noted, who turned out to be younger than the TV that we were replacing). Not that he wasn’t helpful, after a fashion. But there in that “showroom,”, it was hard for me to see (or appreciate) all the subtle differences that purported to explain the occasionally significant variances in price. Moreover, he spoke in alien terms that were clearly something I was supposed to understand— – but didn’t. And, while I don’t mind probing for explanations, after a while, even the most diligent shopper gets tired of sounding – stupid. Ultimately, he was telling me the things that he (or the TV manufacturer) thought were important, – but I had no context for what those meant to me. Furthermore, while he seemed perfectly willing to answer any questions I had, - I didn’t even know the right questions to ask.

Like my broken projection-screen TV, when it comes to workplace retirement plans, – problems— – or, more accurately, a desire to remedy them— – all too often are the driving force behind making a provider change. But, while that “necessity” may force that shopping excursion (rousing many a too-busy plan sponsor from their daily challenges), it is precisely the wrong environment in which to make a thoughtful, reasoned, and, dare I say, prudent choice.

But, in the search/evaluation process, it’s worth noting that, IMHO, there is no "best" provider. There is, however, a best provider for each plan. That said, no matter how good a match you make today, odds are there will come a time when you will want—or need—to validate that decision. The reasons are myriad: circumstances change, people leave, programs grow, budgets fluctuate, and expectations expand. Oh, and if common sense alone were an insufficient reason, the Department of Labor itself reminds us that fiduciaries “should establish and follow a formal review process at reasonable intervals to decide if it wants to continue using the current service providers or look for replacements.”

But before you rush into the search process, it is imperative that you first understand what you are looking for.

IMHO, that process starts by understanding and evaluating the services you currently receive— – and knowing what you like and wish to preserve, – as well as what areas you’d like to improve and/or expand on. It starts by understanding and evaluating what you are currently paying for those services you currently receive, and deciding how much more you’d be willing (and perhaps able) to pay to expand those offerings.

And, yes, it starts by knowing what choices might now be available to you, – perhaps at little or no cost; – choices that you might not even think to ask about, choices that you might think are— – and perhaps once were— - beyond your price range.

It starts, as did my “search” for a new TV, with a sense of the right questions to ask.

Because knowing the right questions to ask is, IMHO, essential to getting the right answers.

- —Nevin E. Adams, JD

The Benefits of the Doubt

Those who were wondering when—or perhaps if—the issues raised in those revenue-sharing lawsuits would ever actually be tried got a strong, affirmative response last week.

This time, the 8th U.S. Circuit Court of Appeals found triable issues of fact in a case involving Wal-Mart’s 401(k) plan (“8th Circuit Says Wal-Mart 401(k) Suit Requires Further Discussion”), sending the case back for another hearing by the trial court that had dismissed issues raised in the lawsuit, while also taking the time (at least in a footnote) to distinguish some of its findings from a similar case (Hecker v. Deere) that had failed to clear the bar in another circuit (see "The 'Burden' of Proof").

But, IMHO, what distinguishes the ruling in Braden v. Wal-Mart Stores Inc. from all the revenue-sharing cases that have been adjudicated thus far is that the 8th Circuit judges were willing to concede that the plaintiff had alleged facts that, at least on the surface, were sufficient to support a potential claim.

Now, in fairness, the court applied a fairly traditional standard of review in evaluating the motion to dismiss; to give the benefit of the doubt, if you will, to the perspective of the party who has not made a motion to dismiss the case without moving to trial—and it admonished the lower court for not doing so in plain language. In its ruling, the 8th Circuit not only said that the lower court “ignored reasonable inferences supported by the facts alleged,” it went on to criticize that court for not only drawing inferences in favor of the party (Wal-Mart) that had made the motion to dismiss, but for criticizing the plaintiff for “failing to plead facts tending to contradict those inferences.”

What's Different?

So, what did the court find compelling enough to give this case a fuller hearing? The “relatively limited” (10) menu of fund options “selected by Wal-Mart executives despite the ready availability of better options”—“better” in this case including the fact that they were retail rather than institutional class mutual fund shares (there are other, and IMHO weaker, allegations about performance relative to benchmarks and the use of actively managed funds, rather than index alternatives). And then, perhaps by way of “explaining” the use of these allegedly inferior options, plaintiff Braden notes that the Wal-Mart plan funds “made revenue sharing payments to the trustee, Merrill Lynch, and that these payments were not made in exchange for services rendered, but rather were a quid pro quo for inclusion in the Plan.”

Now, IMHO, the plaintiff’s case isn’t ironclad. Even in its ruling sending the case back for another shot, the 8th Circuit noted that “there may well be lawful reasons appellees chose the challenged investment options.” However, that court also pointed out it was not the plaintiff’s job to rule out those alternatives—nor was it, in the appellate court’s view, appropriate for the trial court to basically assume that because there might be alternative explanations, no further inquiry was warranted.

The Duty to Disclose

There is another interesting aspect to the case, IMHO—and it has to do with the duty to disclose revenue-sharing arrangements. While I believe all of the cases presented to date have claimed that such a duty exists—and that every court that has heard that argument to date has just as readily refuted it—the 8th Circuit had a different take. “In the context of this case, materiality turns on the effect information would have on a reasonable participant's decisions about how to allocate his or her investments among the options in the Plan,” the court noted.

The impact of that materiality was heightened by allegations that “those payments corrupted the fund selection process—that each fund was selected for inclusion in the Plan because it made payments to the trustee, and not because it was a prudent investment,” according to the court. And “[i]f true, this information could influence a reasonable participant in evaluating his or her options under the Plan,” the court said – even as it acknowledged that there is no per se duty to disclose these arrangements.

Finally, the 8th Circuit took the lower court to task for basically insisting that the plaintiff prove that the revenue-sharing payments were unreasonable before trial (a threshold that it notes would have been impossible, even if legitimate, since the arrangement between Wal-Mart and Merrill Lynch was confidential).

The 8th Circuit’s actions here don’t necessarily portend a shift in result for these cases, nor should it suggest that there is anything about this particular case that is markedly distinctive from similar cases brought in other jurisdictions. That said, to this point, the courts have, IMHO, been extraordinarily willing to give the employer/fiduciaries the benefit of the doubt in these revenue-sharing cases.

It will be interesting to see how the allegations hold up to a full adjudication of the facts.

—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 2009:

First off, I’m thankful that the financial markets have stepped back from the precipice we were surely standing at a year ago. I’m thankful that the investment markets have recovered from the worst of the losses of 2008, even if we still have a long way to go. I’m thankful that so many Americans seem to be concerned about the nation’s fiscal health—and hopeful that those concerns will resonate with those who make decisions that affect it.

I’m thankful that relatively few employers felt the need (or took the opportunity) to cut matching contributions this year—and even more thankful to see so many of those who did cut the match restore it.

I’m thankful that so many employers have remained committed to their defined benefit plans and—often despite media reporting to the contrary—continue to make serious, consistent efforts to meet funding requirements that are quite different than when most initially decided to offer these programs. I’m thankful that a core group of lawmakers in Washington continues to be attentive to the very real challenges imposed by those rules, and continue to be proactive in responding to rational relief measures during this difficult economic period.

I’m thankful that so many participants now seem to have a greater appreciation for the importance of prudent, diversified investing—and thankful, though it was a painful lesson for some, that the deep differences in philosophy that underlie target-date investments are being better communicated and understood. I’m thankful that so many participants took it upon themselves to increase their contribution levels during the downturn, and that so few dipped into those retirement plan accounts to tide them through the rough patches.

I’m thankful that plan sponsors will soon have access to more information about the expenses paid by their plans—and optimistic that it won’t be as bad as they fear. I’m thankful that we’re no longer talking about whether fees should be disclosed to participants, but are now trying to figure out how to do it.

I’m thankful for the intelligence, experience, and professionalism of the folks that regulate our industry—and who do so consistently, despite the occasional changes in “the guard.”

I’m thankful to be part of a growing company in an important industry at a critical time. I’m thankful to be able to, in some small way, make a difference on a daily basis.

And, of course, I’m thankful that so many good and capable advisers were available to participants during the worst of the downturn.

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 10 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, even in a year that has been tough for so many.

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

IMHO: Tractor “Trailer”

About a week ago, Caterpillar agreed to a $16.5 million settlement of one of those allegedly excessive fee/revenue-sharing lawsuits.

It was the first of these suits—launched in September 2006—to come to some sort of “resolution” though, IMHO, it hardly qualifies as such (see “Caterpillar Ready to Ink $16.5M Fee Suit Settlement”).

That said, the settlement’s terms were not just financial; it also included a series of changes in how Caterpillar agreed to administer the plan and monitor its investments. First off, during a two-year settlement period, Caterpillar agreed to "increase and enhance communication with employees about 401(k) investment options and associated fees,” as well as hiring an independent fiduciary (at least during that same two-year period)—and it has also apparently said that it would detail specific fees charged to participants. Caterpillar says it will avoid retail mutual funds as core investment options for the plans, and that the plan’s recordkeeping fees would be “limited,” specifically calculated on a flat or per-participant basis, rather than drawn from asset-based fees (which can go up—or down—with, IMHO, little correlation to the recordkeeping services associated with those asset values).

Caterpillar also committed to not allowing investment consultants to also serve as investment managers and to not receiving compensation from plan investments. Note that from 1992 to 2006 (actually up till about four months before the revenue-sharing suit was brought), the company offered plan investors a group of mutual funds that were advised by a wholly owned subsidiary (that subsidiary now sold off).

So, who are the winners—and losers—here?

Well, while it surely will be categorized as a “win” by those pursuing these suits, and it’s certainly not a loss for them, IMHO, it’s more accurately described as the other party saying “uncle.” In fairness, these suits haven’t fared too well in court—actually, they have had a hard time getting past the hearing stage (see "IMHO:The "Burden" of Proof"). That doesn’t mean they don’t cost the firms being sued time and money; as a mentor of mine once cautioned, “You can spend a lot of money in court being right.” Doubtless, Caterpillar, whatever it saw as the merits of pursuing its defense (admittedly, because for a long period of time, the firm’s money management unit oversaw some of the funds in question, it might have been more vulnerable to charges of excessive fees) eventually figured there were better ways to spend its time and money.

Presumably the Caterpillar participants will benefit as well—from whatever part of the monetary settlement doesn’t go to the lawyers, as well as from the changes in operation agreed to by Caterpillar. Some will no doubt argue that the terms agreed to by this employer will hereafter become something of a talisman for other firms to contemplate, if not adopt, in their own programs. And, talisman status notwithstanding, that wouldn’t necessarily be a bad thing.

However, for those of us on the outside, a settlement is something of a disappointment. Whatever the basis in fact of these lawsuits, they have now, IMHO, put in play legitimate issues of concern for plan sponsors, advisers, and providers—issues that extend well beyond the “starter set” of firms currently involved in this litigation. Issues that, admittedly, the courts have largely dismissed to date, but issues that one senses (if only because the Department of Labor seems not to fully concur with the judicial renderings to date) remain an unsettled area—and one therefore still ripe for litigation. Litigation that, ironically, might later point to plan changes adopted in the wake of these developments as some kind of “smoking gun” admission of impropriety.

So, while the decision to settle may well mark the end of uncertainty for one employer in such matters, it seems to me that it leaves the situation even more UNsettled for the rest of us.

—Nevin E. Adams, JD

The settlement announcement is online HERE

See also Case Sensitive, “Limit” Ed

"Worth" Whiles

I’m sure you’ve seen that commercial where a series of more-or-less everyday events and their price tags are presented, building to larger and more exotic events (and price tags) until they culminate with some extraordinary event—one that the announcer declares is “priceless.”

As an industry, we have long worried about the plight of the average retirement plan participant who doesn’t know much (if anything) about investing, who doesn’t have time to deal with issues about their retirement investments, and who, perhaps as a result, would really just prefer that someone else take care of it, though it’s not always clear how much they value that effort.

What gets less attention—but is just as real a phenomenon—is how many plan sponsors don’t know anything about investments, don’t have time to deal with issues about their retirement plan investments, and who, perhaps as a result, would also really just prefer that someone else take care of it. But how much will they pay for that?

Now, there’s a difference between choosing investments and selecting a trusted adviser to do so. However, as complicated as the former can be, there are certain touchstones that even an amateur can rely on, IMHO: developing a menu that encompasses a broad array of choices, that fill out a style box grid, that factor in performance results, and/or fund rankings. I’m not saying it’s “easy,” or should be entrusted to amateurs (particularly when issues of fiduciary liability are involved), but it’s certainly manageable.

Quantify Able?

Contrast that with the myriad challenges attendant to selecting an adviser—particularly when you consider that PLANSPONSOR’s surveys routinely show that plan sponsors choose an adviser primarily based on the quality of the advice they provide (primarily to committees, but a close second is the advice rendered to plan participants). One can’t help but wonder how that advice is quantified (certainly not in the same way that investment funds can be). Doubtless, that helps explain why so many advisers are hired not on what they know, but on WHO they know.

But for many plan fiduciaries, the obstacle to hiring a retirement plan adviser is financial, not intellectual. Particularly for a plan sponsor who has not previously employed those services—or, more ominously, in the case of one who has hired an adviser that didn’t hold up their end of the bargain—the additional costs of hiring an adviser can be problematic. The question that is frequently asked is, “Why should I hire you?” But, IMHO, the question that is really being asked is “Why should I pay you that much?”

There are ways, of course, to quantify the value of your services, ways that quantify not only what you are worth, but why your fees are what they are. In the most obvious case, you come in and demonstrate the ability to save a plan money. That’s clearly added value, and value that is readily measured (that, of course, only lasts a year, maybe two; after that, the baseline has been reset in terms of savings expectations).

Similarly, your ability to increase plan levels of participation, deferral, and investment diversification also adds value—but value that, IMHO, like the value of retaining qualified talent, is harder to quantify. Many advisers promote their services as a shield against litigation, or at least some kind of buffer against the financial impact of such an event, but in my experience, while most employers are glad to get/take the “warranty” (implied or explicit), they generally aren’t willing to pay very much extra for it.

Where else can you make a difference? You’ve no doubt seen surveys that show that, in the course of a year, most participants spend more time thinking about—and planning for—their vacation than about their retirement plan investments. Ask any plan sponsor client or prospect how much time they spend working on, or worrying about, their retirement plan, and you’ll probably find a similar imbalance. Of course, plan sponsors, like plan participants, know that they should be spending more time on such matters—and most will admit that, no matter how much time they are spending, they should be spending more.

So, how much time are they spending? How much more do they wish they were spending? How can your involvement reduce the time they spend and/or improve the quality of the attention they give their retirement program? You have the ability to share with them insights—from your other clients, from industry surveys that you gain from attending industry conferences; you can help them make better decisions quicker because your experience offers insights to which they wouldn’t otherwise have access.

So, save them money if you can, save them aggravation if you have to, but in this crazy, hectic period, if you can save them time—well, IMHO, that’s truly “priceless.”

—Nevin E. Adams, JD

See also “IMHO: ’Right’ Minded” at

IMHO: Change of “Hearth”

We made a provider change last week.

We really hadn’t been focused on making a change, though the subject had come up from time to time. In fact, considering how long we had been thinking about making a change without actually doing anything about it, the change itself felt almost accidental in its suddenness. So sudden, in fact, that, in hindsight, I found myself wondering if we were “hasty”—perhaps too hasty.

Make no mistake—we had been happy enough with our current provider, certainly at first. In fact, we had been with them for a number of years and had, over time, expanded that relationship to include a fully bundled package of services. That made certain aspects simpler, of course—though we discovered pretty quickly that the “bundle” presented more seamlessly than it actually was delivered. Still, net/net, we were ahead of the game financially, and certainly no worse on the delivery side; we were just a bit disappointed in the disconnect between the sale and the service levels.

And all was fine for a while—or so it seemed. Looking back, there were signs of trouble that we could have seen—if we had been looking. There were unexpected charges on the invoices, and services that we were sure had been described as being part of the bundle that turned out not to be. There was the monitoring service that was supposed to be in place that we found out wasn’t—quite by accident, and months later. Over time we cut back on the services included, but the prices just kept going up. We were, quite simply, getting less and paying more, and getting less than we thought we were paying for. And it grated on us.

In hindsight, I wish we had been more vocal about our discontent. That we had called up and questioned those invoice charges. But, in the overall scheme of things, the charges weren’t large, just not what we expected. We figured that perhaps we had been the ones to misunderstand—and didn’t want to look “stupid” by calling to complain about a charge that some fine print in some document somewhere said was perfectly legitimate. Meaning always to go check that out sometime, the time to do so never materialized. Instead, we talked about how aggravating it was—and how we should do something about it…sometime.

Unfortunately, change is painful and time-consuming. The emotional and fiscal toll these changes took, while annoying, simply wasn’t enough to put change at the top of the to-do list. So, we talked about a change—and every so often asked friends and acquaintances about their experience(s). Of course, it was hard to find someone else who was in exactly the same situation—and a surprising number simply empathized with our plight, being stuck in much the same situation themselves. All of which conveyed—to us, anyway—a sense that, uncomfortable as we might be with the service package, we were probably about as well-positioned as we could be.

Then, one day, out of the blue, an opportunity presented itself. We weren’t looking for it, as I said earlier, but the months of frustration left us open to a casual message from an enterprising salesman—who not only knew his product, he clearly knew the problems that others like us had with the provider we were with. He did more than empathize with our situation. He did not pump me for information about what I was looking for, or what I didn’t like about my current situation. Rather, he was able to speak about the features/benefits that his firm offered…and, to my ears anyway, essentially ran through the list of concerns I had—but had not articulated—with our current situation. In fact, before our conversation was done, he had pointed out to me things that his firm offered as a matter of course that my current provider hadn’t even mentioned to me in all the years we had been associated—things I had assumed we couldn’t get, or couldn’t get without paying a lot more.

We made the change this past weekend—and while it’s early yet, I’m thrilled with the results.

Now, I realize I never gave my current provider the option of retaining my business. Moreover, I know that, had I simply made a call to tell them about the package/price we were getting from the new provider, they would have matched, if not bettered, the deal. Ironically, both points were made—and made somewhat obnoxiously, IMHO—when we called to tell our former provider about their change in status (ironically, by being a jerk about the whole thing, it only served to affirm our decision).

Ultimately, our former provider set themselves up by taking our business for granted, for (apparently) caring more about attracting new customers than in attending to our concerns, and for (apparently) assuming that “quiet” meant satisfied.

Are YOUR customers happy, content, and “quiet”? Or have they just quit complaining?

—Nevin E. Adams, JD

Editor’s Note: For the record, the provider change recounted above involves my cable company.

Conference 'Calls'

As I was listening to, and participating in, panels at our Future of Asset Allocated Funds conference in California this past week, I was struck again by how much things have changed in the past year.

For example, at this conference a year ago, when we broached the notion of marrying a risk-based approach with a target-date offering, the general feeling seemed to be that that would be tantamount to taking a perfectly good, clean, and simple concept—and ruining it. This year, the room was not only ready for the idea, there was widespread enthusiasm for it.

Similarly, a year ago, when we asked folks about the wisdom of putting a family of risk-based and date-based funds on the same retirement plan menu, well, the consensus would have been that you would be playing with fire in terms of confusing participants. This year, the notion not only seemed to be that it could be managed—but that it would be a real enhancement to the program.

A year ago, the importance of understanding and being able to benchmark the glide path of a target-fund family was front and center, and the “debate” was all about how much of that 2010 fund should be in stocks. This year, that allocation discussion had “evolved” - into a vigorous debate around whether those glide paths were—or should be—designed to take participants “to” or “through” the stated target date (see “IMHO: When You Assume…” ).

What Plan Sponsors Want

Considering what has transpired over the past 12 months, it’s hardly surprising, IMHO, that we’ve all got a somewhat different perspective. And, when PLANSPONSOR’s annual Defined Contribution Survey is published next month, you’ll see further evidence—strong majorities (among thousands of plan sponsors) expressing an interest in getting more detailed descriptions of glide path AND end date, a greater explanation of underlying funds and asset classes, and a clearer explanation of fund expenses.

You’ll also see a surprisingly robust minority continuing to express doubt that the target-date option available through their recordkeeper is the “most appropriate.” Despite that, I also found it interesting that very few (at least by show of hands) in last week’s audience were enthusiastic about the prospect of a government/regulator-imposed target-date “standard” for these vehicles.

One thing that wasn’t in evidence at our conference: a sense that plan sponsors were giving up on the asset-allocation solutions, or a sense that participants are any better equipped to deal with those investment decisions now than they have ever been. If anything, the events of the past several months seem to have engendered a sense that professionally managed investment solutions are more important than ever. Indeed, the clear sense of those in attendance was that, while some participants may have been surprised—perhaps shocked—at what the market’s slide did to the “target” investments of those nearing retirement, most were still better off in those “one-size-fits-most” vehicles than if they had been left to their own investment devices.

That said, there was a clear sense among those in attendance that participants needed more than just to be “dumped” in a solution, even if it was one “good enough’ to provide qualified default investment alternative (QDIA) protection.

There was, IMHO, a strong sense that there was benefit in an asset-allocated solution that took the individual into account, one that was willing to provide the participant-investor with the opportunity to understand what they were getting into, and to be able to make a conscientious choice about how, and when—and yes, perhaps even “if”—to get out.


- Nevin E. Adams, JD



See also “End” Points?

12 Things You need to Know about Target Date Funds