Live Long and Prosper?

I’ve been a huge “Star Trek” fan all the way back to when I had to watch the original episodes on a tiny black-and-white, 13-inch television set with rabbit ear antennas (and, yes, adorned with aluminium foil). Unlike most of my friends at the time, my favorite character was Mr. Spock, whose understated strength, brilliant mind, and quiet commitment to logic had an appeal to a young kid who fancied himself to have all those attributes (thankfully, my ears weren’t pointed).

Perhaps as a result, early on, I mastered the “infamous” Vulcan salute that many people struggle to perform unassisted (it consists of raising your hand and spreading your fingers apart between the middle and ring finger), and the Vulcan greeting/blessing that accompanied the gesture—“Live long and prosper”—always struck me as being as elegant as it was simple.

While we all hope to prosper and live long, a recent Issue Brief released by the Center for Retirement Research at Boston College reminds us of the financial challenges that are often attendant with living long, but that tend to be glossed over in retirement planning. That particular study claimed that those who are in good health heading into retirement had better brace themselves for higher, not lower, health-care costs in retirement—since the researchers determined that the expected present value of lifetime health-care costs for a couple turning 65 in 2009 in which one or both spouses suffer from a chronic disease (defined in that research as diabetes, cancer, lung disease, heart disease, or stroke) is $220,000, while the comparable tally for a healthy couple was projected to be—$260,000 (see “Being Healthy Could Cost You More in Retirement”). Now, as usual in such matters, there is a certain amount of interpolation and extrapolation at work. Still, without wandering into the statistical “weeds,” a primary reason for that somewhat counterintuitive finding is that people in good health can expect to live significantly longer than their less-healthy counterparts—and thus, according to the report, are at risk of incurring health-care costs over more years(1).

Now, the point of the report wasn’t to encourage an unhealthy lifestyle; rather, it seemed designed simply to underscore the need to set aside money (2)—and a significant amount of money at that—for health-care expenses in retirement, regardless of how healthy you are (or expect to be).

Healthy or not, all other things being equal, the longer we live, the longer we must rely on our retirement savings. Not surprisingly, confronted with the potential of outliving one’s retirement savings, participants frequently fall back on an assumption that they will simply work longer. Now, that’s a good solution, at least in theory; saving, rather than spending, for additional years can do wonders to shore up one’s financial security—as long as you can count on being able to actually remain employed, that is. Unfortunately, even those physically able and willing to do so don’t always have that option.

That’s a reality that participants don’t always appreciate—and, IMHO, one that is all too often shrugged off in the retirement planning process.

The better option, if one hopes to both live long AND prosper, is to prepare as though you won’t have the time or the luxury to do so; to take action here and now, rather than banking on the opportunity to “make good” later on.

Anything else would be—illogical.

—Nevin E. Adams, JD

1 The report also acknowledges that, over those longer lives, those relatively healthy individuals may, nonetheless, eventually contract one of those chronic diseases.
2 More precisely funding. The report notes that “Households that delay purchasing insurance until their health declines run the risk of facing higher premiums, or for long-term care insurance, being denied coverage altogether.”

Grecian 'Formula'

While the markets were in an apparent freefall last week, I could hear former Treasury Secretary Hank Paulsen on the TV in the next room telling (lecturing?) the Financial Crisis Inquiry Commission that the problems that led to the 2008 meltdown could, and should, have been dealt with sooner, and that we could, and should, have moved faster—and with more to stave off the crisis. The criticism then—as it was last week in Europe—was that this was a time to act, not to think; that if we didn’t act—act now, act decisively, and without question—well, the results would be catastrophic.

It is a theme that runs through Paulsen’s recent book, “On the Brink,” as he drags the reader from one impending crisis to another during those fateful weeks of 2008. In Paulsen’s retelling, those who back his “need for speed” are thoughtful and prescient; those who don’t, well, their motivations are generally painted as either blinded to the seriousness of the situation or hopelessly ideological. From the former Goldman Sachs CEO’s perspective, we weren’t bailing out Wall Street, we were saving the very financial system itself (though he was willing to let the politicians claim that they were saving jobs). And perhaps we were, so we set aside our doubts and concerns, gave the experts what they said they needed—and plenty of it—and hoped they knew what they were doing.

Now, in fairness, the financial system did stabilize and the markets did—eventually—return to some semblance of normality. Until ….

Now I, perhaps like many of you, am not yet quite sure what to make of the crisis bubbling in Greece, much less the response of the EU and the International Monetary Fund (IMF), and what that might mean to us. But the chorus—we must act, act now, act decisively, and without question, or else—well, it’s a little too familiar to those of us who thought we had already been there, done that. But, once again, we’re told that if we don’t, things will get worse, much worse—and we’re (again) afraid that’s not an exaggeration.

Déjà View

But make no mistake: There are some clear and disturbing parallels between this “rescue” and the ones that have gone before. Once again you have a sudden infusion of apparent wealth on paper that fueled a borrowing binge that fueled a spending spree that fueled more borrowing, until things reached a point where the system was no longer willing to loan money (despite lucrative fees)—at which point, the whole thing should fall apart. But at that point the outstanding debt is so large that that same system that empowered that situation now claims that failure is not an option. It’s not just that bank, or that automobile company, or that country…it’s all the other things that depend on them….

We’ve seen this before—and more than once—from investment banking to the foreclosed house down the street.

Now, if this was your compulsive gambler of a brother-in-law on the wrong side of another “can’t miss” bet that put him (and perhaps your sister) in trouble with his bookie’s “collection agency,” you’d doubtless bail him out, and insist that he check into rehab (at least the first time). Indeed, that’s what the Greek “austerity plan” is all about: raising the retirement age to 63 (from 61), freezing pay and cancelling year-end bonuses for public-sector workers (no simple thing that, when something north of a third of the population works for the government), hiking the nation’s VAT to 23% from 21%, and cutting retirement pensions by 14% (by some accounts, those pensions currently provide an 80% replacement ratio, adjusted for wage inflation).

This, of course, is also what set off those riots in Greece last week—and the concerns about what that portends for the implementation of this new bailout, and its ability to stem the tide, took a bit of “austerity” out of all of our retirement security last week.

Once again politicians have been led (many willingly and happily) down the primrose path by so-called financial experts—told that there was, after all, a free lunch; lured into a sense of complacency and then, abruptly, told something else. It is a formula that has, again, taken us to what is being painted as a pivotal point, a crisis beyond which a chasm lies. We worry—that they are right, that it won’t be the last, that we’re not doing enough, or that we’re doing too much - again.

And then, somewhere in the dim reaches of consciousness perhaps, we realize that the folks telling us what we absolutely have to do now—without thinking, without questioning, without hesitation—look suspiciously like the folks who got us into this mess in the first place.

—Nevin E. Adams, JD

IMHO: Why Bother?

Here’s a question to ask your plan sponsor clients: “Why do you offer a 401(k) plan?”

I’m guessing that many, perhaps most, would say simply, perhaps without giving it much thought, “to attract and retain good employees.” That’s what more than half of the plan sponsors canvassed in a recent Wells Fargo survey said (see “Survey Suggests Gaps in Plan Sponsor Goals, Roles”), and it’s one of the top reasons cited by none other than the Department of Labor . I’m guessing a similarly high number would say that they “have” to offer the plan as part of their benefit offerings to be competitive.

In fact, I was surprised that 45% of the respondents to the Wells Fargo survey indicated that a primary goal of the program was to provider workers with the means to arrange for a financially sound retirement. Not that that isn’t in the back of plan sponsor minds; I just don’t think it looms large as a rationale for the time, energy, and expense of establishing and keeping these programs in place.

Still, I think for most employers, these programs remain a “take-it-or-leave-it” proposition. Oh, they want employees to take advantage of them—and participation rate remains a key metric for many programs. But I suspect that most employers think that, if they offer a program that allows workers to save efficiently and effectively (and at a reasonable price), well, I suspect they feel that they have lived up to their end of the bargain.

Of course, we all know that the employer plays a key role in the true success of these programs, and that an active and engaged plan sponsor is worth their weight in gold (literally) in terms of getting workers to participate, and to participate at levels that eventually can help ensure their financial independence.

We all know who they are. Generally speaking, they are the ones who go above and beyond the mere requirements of the law regarding plan information and communication. They are the ones who not only inspire confidence in their plan, but in the ability of their co-workers to take an active role in helping ensure their own financial well-being. They are the ones who adopted automatic enrollment before it was “cool” (or sanctioned via the Pension Protection Act); who probably know exactly how much their plan costs; and, yes, who probably, early on, saw the advantages in bringing the help of a financial adviser to their program. And, yes, odds are they are also the ones who have plans with higher participation and deferral rates, and a more motivated group of participant savers, to boot.

I’m sure many who don’t take those steps are nonetheless attentive to the requirements and obligations of their duty as a plan fiduciary—they simply lack the time, energy, or volition to make that kind of commitment. Some, I’m sure, worry that going beyond the law’s requirements places their firm—and them personally—at risk.

But, in my experience, employers who adopt a “take-it-or-leave-it” approach often find that that is exactly how their workers feel about their retirement plan.

—Nevin E. Adams, JD

Cynic’s “Cull”

I have always taken seriously the notion that news and information should be presented “straight”, and without commentary.

But there are times when it’s hard not to just scratch your head and say “huh?” or laugh out loud at some of the stuff that comes across our news desk.

Here’s a (somewhat cynical) sampling from just the past couple of weeks:

CONFIDENCE MIEN? A nationwide survey by Citi and conducted by Hart Research Associates found that 44% of investors report being confident in their ability to retire in financial security as they had planned (said another way, that’s nearly half who DO feel that confident) . More than a third (36%) said they might need to adjust their plans (so, do two-thirds not see any need to do so?), and (a mere) 16% said they are not confident in their ability to retire in financial security. Must be a lot of rich uncles out there…MORE

“NOTHING” DOING. Throughout one of the most stressful and volatile markets in memory, the vast majority of participants did exactly what they always do – nothing (though admittedly sometimes that’s the best thing to do). MORE

OUTSIDE INFLUENCES? Those with a workplace retirement plan are (also) more likely to be saving OUTSIDE of work (66% versus 57%, according to Transamerica). MORE

AVERAGE SAYS? Morningstar says that the 3.8% average target-maturity fund return in the first quarter was slightly below the 4% return during the fourth quarter of 2009 (what does an average of so many disparate offerings tell you, anyway?). Read MORE

FAMILIAR PHASES? MetLife reports that just over a third of plan sponsors say they are unfamiliar with at least some of the particular mechanics of how stable value works. (So apparently two-thirds are familiar with ALL of the mechanics?). Read MORE

CONTROL GROPE? Controlling benefits costs is now the top benefits objective for employers, edging out employee retention for the first time since 2006, according to MetLife. (Is that because costs are so high, or because these days folks aren’t worried about keeping workers?) MORE

WORK “OUT?” A recent report from Hearts & Wallets suggests a growing number of Americans now think of retirement not as when their portfolio reaches a certain level of assets, but when they are no longer able to find full-time employment (here’s hoping the former doesn’t come up before the latter is able to support that “decision.”). MORE


“FREE” FALL? (Still) leaving money on the table; Hewitt Associates notes that more than quarter of participants did not contribute enough to their 401(k) to receive their full employer match in 2009. MORE

STABLE, VALUED? Who needs diversified; While Hewitt Associates notes that premixed portfolios (including target-date and target-risk funds) now (finally) make up the largest portion of employees’ asset allocations (24.7%). The second-largest allocation was in GIC/stable-value funds (17.1%). MORE

KID "STUFF". More than four in 10 so-called “sandwich generation” parents (41%) continue to provide at least some financial support to their young adult children, according to the 2010 Families & Money Survey by Charles Schwab & Co., Inc. The biggest worries for mid-life parents are not being able to retire (29%), outliving their retirement money (22%) as well as not saving enough (22%). A distant fourth - the worry that their children won’t become financially independent (11%). (Personally, I’d be worried about not being able to retire BECAUSE my kids might not become financially independent). MORE

“UNDER” COVERED. A Centers for Medicare & Medicaid Services (CMS) report on the new health care reform law released Friday estimated that 1.4 million fewer Americans will be enrolled in employer coverage as a result. That’s a net number, by the way. The report goes on to note that about 14 million people may lose employer-provided coverage due to a variety of reasons, including more low-wage workers moving to an expanded Medicaid program and some employers, especially smaller companies and those with low average salaries, being “inclined to terminate” coverage (of course, no one knows exactly how this will play out (I suspect this is a conservative estimate), but IMHO 14 million losing their current employer-based coverage, while (ostensibly other) employers will be picking up (another) 13 million seems like a lot of disruption). MORE

So – what do you think? Did I miss any?

- Nevin E. Adams, JD

“Different” Strokes

Having been born in the Midwest, lived a quarter of my life in the South, and now another sixth in the Northeast, I can tell you—people are different. However, having worked for huge firms and considerably smaller ones, I can also tell you that, when people come together in groups, they are not as different as you might think (or hope, as the case may be).

There is a “common wisdom” in our business that suggests that all plan sponsors are, more or less, alike; that large plans are the inevitable early adopters of trends that, sooner or later, trickle down to plans of all sizes. Consequently, those who make their living trying to discern trends and patterns frequently focus on the behaviors in evidence at larger programs—figuring that, in three years or so, those same characteristics will emerge across the spectrum.

There’s some logic to that perspective, IMHO. Plan fiduciaries frequently draw comfort and solace from the experience of others, and smaller programs can hardly be faulted for adopting plan designs and approaches that have been “vetted” by programs with more copious resources. Moreover, providers frequently introduce innovations with price tags that initially discourage smaller-program adoption (at least until later iterations are included as part of the “package”).

That said, I have always found it dangerously simplistic to assume that small plans will, inevitably, follow along eventually in the footsteps of their larger cousins.

"Less" Likely

Consider that smaller programs—let’s use $5 million in assets and less (though some would carve even that in half)—are significantly less likely to have adopted automatic enrollment than those with more than $200 million; in PLANSPONSOR’s DC survey, only about one in five small plans had done so, compared with more than half of larger plans. Now, a goodly number of those smaller plans already had safe harbor designs in place, so had no “need” of automatic enrollment. In fact, one could argue that the safe harbor design is a kind of automatic enrollment. Smaller programs were also much less likely to have a contribution acceleration design in place (just 8.7% compared with about a third of larger programs).

PLANSPONSOR’s Annual DC Survey, which captures the perspectives of some 6,000 plans, found that smaller programs were more likely to make participants wait to vest in employer contributions, and only half as likely to have embraced immediate vesting—differences that admittedly might be predicated on economic considerations.

Only about half of smaller programs had an investment policy statement (IPS) in place, compared with nearly nine of 10 among larger programs. Perhaps not surprisingly, smaller plans reviewed their plan investments much less frequently (49% said annually, the most common response, while more than half of larger plans did so quarterly). They were also less likely to review fees regularly—and much more likely to “never” review them (one in 10).

Consider also that smaller programs were less likely to have adopted a target-date (TDF) solution as a default (28.6% versus roughly two-thirds among larger plans); though, even among smaller programs, target-dates were the predominant default fund choice. They were, however, more likely to be unsure that TDFs were the “best” QDIA option (44%), and more likely to doubt that their recordkeeper was offering the “most appropriate” TDF option.

"More" So

Investment performance was significantly more important to smaller plans, and fee transparency was also noticeably, if modestly, so. Things like financial strength, market image/reputation, and recognizable “brand name” funds stood out in their ranking of preferred provider attributes. However, when it came to things like participant service, reasonable fees, and provider Web site, there was no apparent difference at all.

Smaller programs were more likely to offer advice, and MUCH more likely to offer advice via an adviser outside the plan. Smaller plan sponsors were significantly more focused on the quality of advice to plan participants than larger programs, more worried about the reasonableness of fees, and placed less emphasis on adviser independence but greater emphasis on the ability to negotiate on behalf of the plan than did larger programs.

Of course, the service criteria are expressed in relative, not absolute, terms. That certain aspects were more important to smaller plans does not mean that others were unimportant. However, for those who work with and/or focus on smaller programs, those differences can be significant.

After all, we may all be alike—but that doesn’t mean we’re all the same.

—Nevin E. Adams, JD

Trends "Setting"

Change is a reality of life.

Establishing and maintaining benefit programs that are competitive and distinctive requires an awareness of trends in the marketplace, in the population, in the legislative and regulatory worlds, and in the needs of the workers that your plan sponsor clients hope to attract and retain. While product development and enhancements can certainly play a role, there are also the overarching issues that drive and shape those developments.

Here are 10 of which you should be aware.

Sandwich “Spread”?

Much has been written about the impact of the retirement of the Baby Boomers, the so-called Silver Tsunami. Every day, hundreds—even thousands—in that generational bloc do indeed leave the ranks of the employed, though not always by choice. Still, many are staying—or making plans to stay—longer than they might have chosen in less-stressful times. Indeed, the Boomers increasingly find themselves with a new labeling—the “sandwich” generation—in which they are not only focused on their own financial concerns, but those of their parents and children as well. This may give participants longer to save for retirement (and less time to spend in retirement), providing those still-meager accumulations a much needed cushioning, and it may also ameliorate some of the nascent concerns about talent transitions. But it’s not like that was part of “the plan.”

The “To Versus Through” Debate

Target-date funds have long offered an apparent simplicity of design and implementation that have made them appealing to plan sponsors and plan participants alike, a unique combination that allowed participants to do the “right” thing (letting professionals manage their money and rebalance it on a regular basis) while, for the very most part, doing nothing at all. Ditto plan sponsors, who stood to benefit from the application of the protective umbrella of the Pension Protection Act’s qualified default investment alternative (QDIA) status for an investment option that required no special participant education, involvement, or attention.

Of course, the 2008 market brought to light vast differences in the philosophies underpinning these designs in terms of asset allocation and glide path (in fairness, those were in evidence in 2006/2007 when more-conservative models were ridiculed for their lagging returns). Much of that difference was later explained as a function of whether the glide path was designed to take the investor to their anticipated retirement date—or past it (ostensibly till death).

The debate is not yet resolved, nor perhaps can (or should) it be. Still, ahead of changes on the regulatory front, fund manufacturers appear to be making a concerted effort to be clearer about those assumptions; and, if that does not make for an easier decision, it nonetheless makes it more obvious that a “decision” must be made.

The Match “Catch”

One of the more troubling trends of the past year was an apparent uptick in the number of employers cutting or suspending their 401(k) match. Coupled with the toll that the financial crisis had already taken on many defined contribution accounts, the retirement security of many participants (who were doubtless happy to have a job, even without a 401(k) match) was certainly under pressure.

Of course, it was never as bad as the headlines suggested. In fact, nearly 80% of the nearly 6,000 respondents to PLANSPONSOR’s annual Defined Contribution Survey said they had no plans to reduce, suspend, or eliminate their match, and, of the few who did say they were considering reducing their match, most were planning to reinstate it this year. Perhaps workers will no longer take such things for granted because, after all, “free” money really isn’t.

‘Share Alikes?

While company-stock-related lawsuits still seem to be the most common, that initial series of revenue-sharing suits is still “out there.” For the very most part, the plaintiffs have not fared well, but two widely publicized cases—one a $16.5 million settlement by Caterpillar, and a second involving Wal-Mart, where last December the 8th U.S. Circuit Court of Appeals found triable issues of fact in the case—are likely to keep plan fiduciaries “jumpy.”

Now, there are plenty of unique aspects to the Caterpillar settlement to differentiate it (see Tractor “Trailer”) the firm’s investment management arm was running the funds in question); and while the allegations against Wal-Mart were not dismissed, they have not yet been adjudicated (see The Benefits of the Doubt). Still, the omnipresent threat of litigation, coupled with new Form 5500 disclosures, are sure to keep things stirred up.

“Tell” Tales

Ah, yes—those new Form 5500 disclosures. Out of sight may have been out of mind, but beginning with the 2009 plan-year filings, the Labor Department has broadly expanded the requirements for reporting compensation earned by plan service providers on Schedule C of the Form 5500 to explicitly require the reporting of both “direct” and “indirect” compensation earned by plan service providers. And it is clear that the DoL views compliance with the Schedule C reporting requirements as part of a fiduciary’s obligation to evaluate the reasonableness of a service provider’s total compensation—at the same time that it stands to gain a better ability to use this data, which is now also to be filed electronically.

Pension Penchants

While many continue to talk about the wisdom of modifying defined contribution designs to more closely resemble the better attributes of their pension predecessors, trillions of dollars (and future benefits) still reside in those traditional defined benefit plans. Caught in the cross-hairs of the financial crisis, more stringent accounting rules, and tighter funding requirements, these programs are responding in a variety of creative ways: some outsourcing more, others less, some taking a more active stance in asset allocation, others opting for a stronger focus on liabilities. But, regardless, most are asking for—and by most accounts, receiving—fresh insights and inputs from the marketplace. That could be an opportunity for enterprising advisers willing to make the commitment.

The End in Mind

For years the retirement plan industry has focused on trying to help participants save as much as they could—all the way acknowledging that the real challenge was likely to be helping them live on that accumulated savings. As it turns out, a new generation of products has emerged that not only will help them do that, but will help them begin making those investments/preparations while they are still in that accumulation “phase.”

Issues in product design (or perceptions about issues in product design) remain, but those gaps are closing (including the gap in perceptions), and the prospects for future market turmoil seem likely to keep these offerings high on plan sponsor radar screens. And let’s not forget that the DoL has been asking for information on “arrangements that provide income after retiring.” (see IMHO: Safety "Knot?")

Conflict Ed?

What constitutes advice—and how those who can offer it can get paid for doing so—has long been a controversial issue. Earlier this year, the DoL took a 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. The new proposed regulations largely seem to restore the status quo in favor of level-fee advice only. It’s not clear that is the end of things, nor is it (yet) clear that that will expand access to advice by participants. But it is clear that there is a “new” direction on advice (see IMHO: “Access” Points).

Executive “Order”

The 2008 elections brought in more than a new President and big majorities in Congress for his party; it also brought in new leadership at various agencies that have a large impact on retirement plans. That has already brought about shifts in direction on things like participant advice as well as a renewed interest in retirement income, while the financial crisis has reinforced the need for better disclosures on offerings like target-date funds.

Healthcare, Reformed?

By most accounts, much of the “oxygen” in Washington for the past year has been sucked up (out?) by health-care talk and proposals. With a bill now signed, employers can begin to focus on what that means for their programs—and their workers. What that will mean over the next decade is, however, anybody’s guess.

—Nevin E. Adams, JD

"Out" Spoken

About two months ago, the Department of Labor asked the public for some insights on retirement income via a request for information, or RFI.

The RFI sought input on what it termed a “broad range” of topics, including the pros and cons of distributing benefits as a lifestream of income, why lump sums are chosen more often, what kind of information participants need to make informed decisions on retirement income products, their ideas about participant disclosures of retirement income, and developments in the marketplace (1).

The comment period is just about two months old now, and with 30 days left, I thought it might be interesting to see what kinds of comments have come in (the Labor Department posts these comments on their Web site (2)).

The good news—nearly 500 comments!

The not-so-good news—as broad as the DoL’s scope of inquiry was, very few of the comments really seemed to be on point.

Now, in point of fact, I saw very few comments (yet) from providers, industry organizations, or even advisers (did see a couple of familiar names); doubtless those are in process. I’ve little doubt that on an issue this important—and with trillions of dollars at stake—there will be additional comments in both the quantity and quality that this issue surely deserves (3).

It was nonetheless interesting, IMHO, to see so many contributions from “regular” people—401(k) participants (and ex-participants) of every age from across the country. In addition to the voIume of responses, I was similarly taken by their passion and, from what I could discern, a certain singularity of purpose.

Based on my Good Friday perusal, the most common sentiment expressed was “keep the government away from my 401(k).” Now, there were flavors of that, of course, but it was a clear, consistent, and vibrant message, nonetheless. Most of these seemed to be from individuals concerned that the DoL’s RFI was little more than a stalking horse for the proposal put forth by Teresa Ghilarducci that suggested that the federal government should give people a chance to convert their 401(k)s into a government-sponsored annuity (see “The Plot to Kill the 401(k)”).

Another sub-group pointed to the fiscal challenges looming over Social Security, and, in no uncertain terms, told those reading their comments that the federal government should put its own house in order before trying to “fix” 401(k)s. Some were simply frustrated with the level of government debt, others the (apparently) growing level of government involvement in their lives (4). Many were simply worried that, having worked hard and saved diligently, the federal government now stood ready to step in and “take” theirs in order to spread it around to others who hadn’t been as prudent (5). (It should also be noted that a distinct minority liked the notion of some kind of government intervention to shield their retirement savings against the turmoil to which their balances had been subjected.)

Now, it would be easy to discount those responses. After all, there was nothing in the Labor Department’s request for information to suggest that the groundwork was being laid for some kind of government takeover; no reason to conclude that seeking insights on why more don’t voluntarily opt for annuities is tantamount to plotting to force people to do so. At best, some might say, these are misplaced ventings against things that have nothing to do with the issue at hand.

However, IMHO, it seems to me to be a sign of something more. I’m struck by the fact that individuals, spurred perhaps by some as-yet-unidentified provocation, took the time to take a public stand in support of their 401(k) and their willingness to take personal responsibility. Nor is it just words alone—that level of commitment has been borne out in any number of surveys that show workers, even in these trying economic times, increasing deferral rates to fill those depleted account balances.

Even so, it’s nice to see a bunch of dedicated participants still willing to put their “mouth” where their money is.

—Nevin E. Adams, JD


(1) A couple of weeks later, I dedicated a column to that effort (see “Safety ‘Knot’” at ), in which I outlined what was, effectively, 30 years’ worth of experience working with retirement plans—and nearly as long listening to plan sponsors and plan participants. In truth, I wasn’t doing so with an eye toward contributing to the DoL’s efforts directly, more or less viewing my role as trying to inspire those of you who work with these structures on the front lines to do so.

(2) You can check out the comments for yourself at http://www.dol.gov/ebsa/regs/cmt-1210-AB33.html

(3) Editor’s Note: It’s not too late to weigh in: Comments must be submitted on or before May 3, 2010. Members of the public can submit their input to the Department of Labor, RIN 1210-AB33, by one of the following methods:

Web: Federal eRulemaking Portal at www.regulations.gov. Follow the instructions for submitting comments.
E-mail: e-ORI@dol.gov. Include RIN 1210-AB33 in the subject line of the message.
Mail: Office of Regulations and Interpretations, Employee Benefits Security Administration, Room N-5655, U.S. Department of Labor, 200 Constitution Avenue, NW, Washington, DC 20210, Attention: Lifetime Income RFI.

(4) One commenter went so far as to sign his comment as a “Citizen Who actually saves, Living below my means Currently being punished for Wall Street's errors.”

(5) See also “IMHO: The Ant and the Grasshopper” at

Court 'Case'

For all the fuss about fees, a recent friend of the court filing by the Department of Labor reminds us that it’s not just what you pay, it’s what you get for what you pay.

The amicus brief had the DoL once again weighing in on another in the series of revenue-sharing suits that have kept the industry stirred up since the first wave was filed in 2006. Once again, the DoL was expressing its sense that there were real, and triable, issues in the case, this one involving Exelon Corporation (see “Solis Asks Court to Overturn Exelon Excessive Fee Case Decision”).

The DoL had previously expressed similar concerns about a similar dismissal in the same judicial district in a case involving Deere & Co. (see “Hecker Fee Case Prompts Exelon Suit Dismissal”)—a dismissal that was affirmed by the appellate court, and that the U.S. Supreme Court has refused to reconsider.

Those concerns weren’t enough to influence the appellate court in the Hecker case, though it did result in a judicial addendum that sought to limit the broader applicability of its reasoning to cases outside the specific facts in the Hecker case (see “7th Circuit Panel Limits Ruling's 404(c) Effects”). That said, the same court rejected the plaintiff’s arguments in Loomis v. Exelon Corp. as being nearly identical to those in Hecker—and dismissed it just as summarily.

Retail Fail?

In its most recent filing, the Labor Department sought to distinguish the two cases, noting that it wasn’t just the mere allegation that a large plan was offering mutual funds with “retail level fees,” but that—since those participants weren’t receiving services beyond those of any retail customer—those fees were, at least arguably, excessive(1). In fact, the DoL’s amicus brief noted that “[b]y continually returning to the point that the panel's opinion was limited to the particular facts as alleged, Hecker clearly and deliberately left the door open for other cases like this one in which the allegations about fees are tied directly to allegations about services.”

The Labor Department also took issue with the court’s admonitions that fiduciaries had no obligation to “scour the market” for the cheapest fees. “[T]he holding that fiduciaries are not duty-bound to ‘scour the market’ to find the lowest possible fees should not be read to mean they are free to pay any fee the market bears, without making a diligent effort to assure that they are getting reasonable services for the fees comparable to what prudently managed plans of similar size and type plans also pay.”

And the DoL also said that the district court made a mistake by “ruling instead, without inquiry, that the mere existence of fee ratios comparable to those in Hecker (.03 to .96% in this case) meant that the fees must be reasonable and prudently selected....” Indeed, the DoL noted that “[n]othing in ERISA or Hecker establishes that a particular numerical range of fees is either per se prudent or per se imprudent, or authorizes the courts to fashion a simple numerical test, without regard to what the evidence actually shows after the plaintiffs have been given an opportunity to present their case at trial or on summary judgment.” While the court’s reliance on Hecker as a basis for dismissal drew most of the DoL’s focus, it also pointed out that “[i]n an ERISA case alleging excessive fees in terms very similar to the allegations at issue here, the Eighth Circuit, reversing the district court's grant of a motion to dismiss, recently recognized the presumptive inappropriateness of dismissing a prudence claim at the pleadings stage.”(2)

However, at the heart of the DoL’s stance is, as it has been before, that the plaintiffs in the Exelon case had presented a case sufficient to be entitled to their day in court—and that the court’s dismissal of those claims was too preemptory(3), (4), too willing (though not perhaps in so many words) to apply a presumption of prudence to the decisions of the fiduciaries.(5)

What we don’t know yet, of course, is how much extra in types or number of services might be required to justify the payment of retail-level fees by a retirement program (especially a large one)(6), what kind of differential in penalties a court might apply if it found a “reasonable” gap—or if the 7th Circuit will reconsider its threshold for making that case.

However, what we can reasonably infer from the amicus filing is that the Labor Department thinks it should—and that the fiduciary threshold for a plan, certainly a large plan(7), is and, IMHO, should be, more than merely paying retail-level fees for retail-level service.

—Nevin E. Adams, JD


(1) Unlike the Hecker plaintiffs, the Exelon plaintiffs make very clear that they have not received more services for the same amount of money, and therefore the fees are not appropriate for an institutional investor.”

“The participants' amended complaint distinguished it from the one in Hecker by specifically alleging that the challenged fees were too high, not just in the abstract, but in relation to the services received.”

(2) “In Braden v. Wal-Mart, 588 F.3d 585, 595 (8th Cir. 2009), the court held that the plaintiff met the pleading requirements of Twombly and Iqbal, and was not required to plead additional facts explaining precisely how the fiduciaries' conduct was unlawful.” (see “8th Circuit Says Wal-Mart 401(k) Suit Requires Further Discussion”)

(3) “Considering the fact-intensive nature of most ERISA fiduciary-breach claims, and the near monopoly defendants often have over many of the determinative facts, the statutory scheme militates against dismissal at the pleadings stage in the ordinary fiduciary-breach case.”

(4)” It was therefore error for the district court to decide at this stage that under any plausible inference based on the facts as alleged, the defendants could not possibly have acted imprudently when they selected investment options charging retail-level fees and providing retail-level services without, according to the allegations, attempting to obtain the fees (or services) that plans of comparable size are expected to secure in the institutional-fund market.”

(5)” For the reasons stated above, the dismissal was error, not only because it was based on a misreading of Hecker, but because it misapplied the established pleading standards and gave the benefit of the doubt to the wrong party.”

(6) While the DoL’s amicus brief was technically in support of giving the plaintiffs an opportunity to plead their case, it also tipped its hand on what those findings might mean: “It (the plaintiff suit) alleges that the Plan fiduciaries breached their statutory duties by imprudently selecting Plan investment options that were unreasonably expensive for the plan's size and bargaining power and did not provide services commensurate with their high fees.

(7) Such conduct, if true, would constitute a breach of fiduciary duty under ERISA and would make the responsible fiduciaries liable for any resulting losses.”

See also “IMHO: The ‘Burden’ of Proof”

"Afford" Abilities

There are in this--or perhaps any—business certain moments of epiphany that shed light and clarity,

Moments where complexity becomes simplicity, where the shining light of comprehension illuminates what had, until that very moment, been hopelessly “confuddled”.

On the subject of retirement income, my moment of clarity came at the end of a conversation with my then soon-to-be-retiring father who was trying to sort through his options regarding his various savings programs and distribution options. At the end of what I hoped was an educational and enlightening discussion of his options and trade-offs, their upsides and potential downsides, when I was sure that I had been able to unwind and demystify the maze and presented him with a straightforward presentation of alternatives, there was this long pause—and then, he turned to me and, as politely as he could, said, “I just want to know how much money I’ll have to live on every month.”

It’s been many years since that conversation, but, IMHO, the question my Dad wanted answered is the question we all want answered—certainly the closer we get to retirement (younger savers are, of course, more likely to be asking other questions).

In recent weeks, I have been giving a lot of thought to the concept of retirement income. Aside from the relentless march of time, and the still-painful shake-up call from the markets, in recent weeks there have been a series of interesting—and surprisingly different—retirement income offerings coming to market (and some interesting innovations in the ones that have been out there). Legislation has been introduced in the Senate that would put the answer to my Dad’s question right on that 401(k) statement. Moreover, the Labor Department’s recent RFI on the topic has given a new visibility to this critical issue.

But as I wrote about a month ago (see Safety "Knot"), while I think that both plan sponsors and participants want—and are looking for—a product that can answer that question, even the most committed advocate of these programs will tell you that, while there is a LOT of interest, the take-up rate is, well, somewhat less.

There were elements of that on display in last week’s Retirement Confidence Survey (see Retirement Confidence Stabilized, but Preparations Still Lacking). Just 14% of current retirees reported that they “purchased a financial product or selected a retirement plan option that pays them guaranteed income each month for the rest of their life,” and a mere one in 10 (11%) of current workers indicated they were “very likely” to purchase a guaranteed-income product or select a guaranteed-income option from a retirement plan when they retire. In fact, a full one in five said they were “not at likely to do so.”

Even more intriguing: The RCS noted that, while workers/retirees offered a variety of reasons for their reluctance to make this purchase, the most frequently cited reason was that they didn’t feel that they could afford it (26% of workers, 24% of retirees)(1).

Now, considering how little understood these products likely are by most people, IMHO, this seemed an extraordinarily large number to be so astute about the costs.

Additionally, the report noted that workers’ stated likelihood of obtaining this type of product decreases sharply as age rises, and also decreases as assets increase. Intrigued, I followed up with Matt Greenwald (whose firm produces the report) and EBRI for some additional insights. Turns out that, among those who had accumulated less than $25,000, fully 42% say they would not purchase because they cannot afford it. But that number dropped dramatically (to 26%) among those that had saved $25,000-$99,999--and even more dramatically (to 6%) among those with financial assets of $100,000 or more (this group had other objections; generally, that they had a separate pension or preferred other options. IMHO, they probably just didn’t want to surrender the money (2). Moreover, when you dig inside what those lower income workers likely meant by “afford,” Greenwald and EBRI believe it is a combination of two factors: The first is that many people have accumulated very little and feel they cannot afford to tie up this money; the second, a lack of understanding about the products.

Now, in fairness, those with very small balances don’t really have much to spend--or annuitize, for that matter. And, if you only have $25,000 saved at retirement, well, no amount of annuitization can “save” you from that. Unfortunately, those who think they can’t afford these kinds of solutions may well be the very folks who can’t afford to be without them.

--Nevin E. Adams, JD


1 Other reasons mentioned include already having a pension, investments, or income (13 percent of workers, 15 percent of retirees), not knowing enough about the product (12 percent of workers, 3 percent of retirees), feeling they could do better managing the money themselves (10 percent of workers, 4 percent of retirees), not knowing it was an option (5 percent of workers, 9 percent of retirees), not trusting or believing in them (8 percent of workers, 2 percent of retirees), lack of interest (6 percent of workers, 4 percent of retirees), and not being offered one at work (2 percent of workers, 8 percent of retirees).

2 Those findings actually dovetailed pretty squarely with another report out last week—this one, Cogent Research’s In-Retirement Income 2010 report. That report was based on an online survey among a representative sample of 961 retirees and pre-retirees with a minimum of $100,000 in investable assets--the upper end of the spectrum. Citing the “incredibly high expectations of today’s retirees and pre-retirees,” Cogent Principal and co-founder Christy White noted, “In theory, pre-retirees love the idea of a guaranteed paycheck, but in reality they are unwilling to give up control of their principal for too long—and certainly not forever.”

Income Tacts

I don’t know if you’ve gotten to this point in your year yet, but we’ve started doing taxes in our household.

Now, tax season’s not quite the arduous experience it once was—not since that fateful “encounter” with the AMT a couple of years back, along with a year replete with a variety of “special” events, that finally persuaded me that it was a better use of my time to enlist the services of an expert. Still, there is the process of gathering the requisite information from which that expert can do his thing (aided in no small part by the order in which my better half keeps our financial house), and it provides a good opportunity to get a 30,000 foot perspective on how we spend (and invest) our money.

This year—as in most years—I was astounded at how much of our household income is absorbed by various taxes—federal, state, local/property, and, yes, FICA (which I consider a tax—but that’s a subject for another day). Indeed, while I have an opportunity to see most of these reduce my take-home every pay day, that never has quite the same impact as seeing what it adds up to over a year’s time. After all, it’s one thing to hear people talk about tax rates and tax brackets, credits, deductions, and allowances—or even to see those interim deductions on those payroll stubs. It is another altogether to see, all in one place, how much of one’s household income is “rendered unto Caesar.” This may be a free country, after all, but that doesn’t mean it’s cheap.

For all the angst and drama about fee disclosure, most plan participants are already given a fair amount of information about the costs of their retirement plan accounts. Of course, it’s generally in tiny little numbers in tiny little print—numbers that look like pennies (fractions of pennies, actually) and are expressed not in dollars and cents, but basis points, or bps (1). That doesn’t change the fact that most participants could, if they were so inclined, figure out how much their 401(k) costs. All they would have to do is sit down with their year-end statement and the prospectuses associated with the funds they have invested in, and—setting aside for a second potential “distortions” like interfund transfers (of which there generally aren’t many), the timing of contributions deposited, and the fluctuating value of the fund over the course of the year, and ignoring the impact of things like trading costs within the fund—they could get a respectable, if not completely precise, sense of how much they are paying.

Of course, what they’d also get, if they took the time to do that, is a single figure that would show them what they paid for their 401(k) last year.

Now, like many of those government taxes, those 401(k) fees are a toll that is taken along the way. For years this industry has fretted about the difficulties of producing that single number at a participant level—and, the way those fees are currently structured, that concern is not without merit (2). Some have suggested that producing that figure would produce an unhealthy focus on fees alone, rather than the broader context of a total return; others, that the additional costs of producing that figure would be prohibitive (3), and that participants wouldn’t be able to fully appreciate the array of services they are receiving for those expenditures.

That said, as “easy” as the largely imbedded nature of retirement plan fees makes it to extract them for the investment fund community, it also renders them largely invisible to the investing public.

As a consumer, when it comes to buying things like a car, I may not care (or need to care) how much commission that car salesman gets, how much the manufacturer paid for the tires, or even how much profit the dealership makes. But, at the end of the day, I expect—and have a right to expect—to know how much I am paying for the vehicle I drive off the lot. As a taxpayer, I may not know or fully appreciate just how much of my taxes go to support what services (and I may disagree with some that I do), but, at least once a year, I’ve got an opportunity to know how much I am paying in aggregate (and, generally on a somewhat less frequent basis, I have an opportunity to do something about it).

Unfortunately, as a 401(k) investor, I’m still largely in the dark—and, IMHO, the sooner participants know how much they are paying, the better off we’ll all be.

—Nevin E. Adams, JD

1 In my experience, most “regular” people don’t know what a basis point is (many don’t quite seem to understand what a mutual fund is), and many don’t read the prospectus where such things are explained.

2 One might cynically suggest that perhaps a methodology that would be easier to communicate might be more appropriate.

3 Frankly, IMHO, some of the proposals that have been made to present this information to participants would kill a lot of trees AND shed little in the way of clarity.

"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