Cost of Living "Adjustment"

A couple of weeks back, the Social Security Administration announced that, for the second year in a row—but only for the second time since 1975—there would be no cost of living adjustment (COLA) for Social Security recipients.

Of course, this close to an election, it should come as no surprise that some went scurrying to introduce legislation that would provide some kind of supplemental funding to the nation’s seniors; similar actions were undertaken a year ago, ostensibly in the interests of economic stimulus, as well as the importance of supporting those on fixed incomes. But this election year is one unlike most, perhaps any, in our memory—and concerns about the federal budget deficit have, thus far, overcome the political class’s natural inclinations in such matters.

Whether or not you are on a fixed income, it’s hard to credibly argue that prices aren’t rising on everything from food to gasoline to utilities; from real estate taxes (those reassessments never come as rapidly when prices decline, do they?) to the monthly cable bill. That said, there is a formula on which things are based, one that has, perhaps more often than not, worked to the benefit of those drawing Social Security benefits. It is a formula that, in 2009, provided those beneficiaries with a 5.8% increase in benefits, the largest in a quarter century. That’s right—did YOU get a 5.8% increase in 2009?


Now, some of this is the timing in the formula, which considers the period from September of one year to the next. For example, in the year that provided a 5.8% increase, if the formula had been applied from December to December (rather than September to September), the COLA would have been 0.8%, not 5.8%. Some of it is because the COLA is calculated on an index that considers the purchases that current workers make, rather than retirees1. And yes, some of it is because the Social Security benefit is never adjusted downwards—even when there is a decline in the cost index it tracks2. In fact, the real reason that Social Security recipients/beneficiaries 3 aren’t getting a cost of living adjustment next year is not because prices haven’t gone up, but rather because prices haven’t yet risen above the level of September 2008 (remember $4/gallon gasoline?).

However, for retirees accustomed to an annual, upward adjustment in their benefits, the lack of an increase surely came as something of a shock4, particularly after politicians found a way to smooth it over the previous year (and may yet again).

The good news for Social Security beneficiaries is that, at least under current law, their annual benefits do not decrease and retain the potential to increase based on adjustments, however imperfect, in a designated cost of living index5. Certainly, in a time when many have been asked to absorb a cut in pay or lost their jobs completely, with a family to support, there are worse things than living on a “fixed” income.

Still, it should serve as a reminder to us all that planning for retirement should look beyond the income we happen to be drawing when we leave the workforce. After all, if the income we have at retirement isn’t enough to adjust to the costs of living in retirement - It might well cost us an adjustment in how, or how well, we live through retirement.


—Nevin E. Adams, JD

1 There were no automatic COLAs in Social Security until 1975 (see http://www.ssa.gov/policy/docs/ssb/v70n3/v70n3p1.html)

2 Consider that, if costs were adjusted for downward as well as upward moves, last year benefits would have been cut by 2.7%.

3 Disabled workers and their dependents account for 19% of total benefits paid, according to the Social Security Administration (see http://www.socialsecurity.gov/pressoffice/basicfact.htm).

4 I never cease to be amazed at what a high percentage of retirement income Social Security provides—not because it was designed that way, mind you, but rather because it remains relatively constant in an otherwise variable pooling of retirement income sources. The Social Security Administration notes that Social Security provided at least 50% of total income for just over half (52%) of aged beneficiary couples and 73% of aged non-married beneficiaries. Moreover, it was 90% or more of income for more than one in five aged beneficiary couples and 43% of aged non-married beneficiaries, though “total income” in this calculation excludes withdrawals from savings and non-annuitized IRAs or 401(k) plans. Overall, the Social Security Administration says that Social Security benefits represent about 40% of the income of the elderly.

5 More information about the COLA is at http://www.socialsecurity.gov/cola/2011/factsheet.htm. An interesting 2009 webcast on the subject titled “What Happened to My Social Security COLA?” is viewable at http://www.blip.tv/file/2629162, and a transcript is available at http://assets.aarp.org/rgcenter/ppi/econ-sec/transcript_forum_090921.pdf For more information on some of the alternative COLA indexes, the AARP Public Policy Institute has published a fact sheet on the consumer price index and how it impacts Social Security Benefits at http://assets.aarp.org/rgcenter/ppi/econ-sec/fs160.pdf

"Interests" Bearing

Last week the Labor Department issued a proposal that would, by its reckoning, provide the first update to the definition of an ERISA fiduciary since shortly after the birth of the federal regulation (see DoL Broadens Fiduciary Net.

The move was much-anticipated and, in the eyes of many, long overdue. Clearly, the Labor Department wanted to narrow the exceptions to that definition (that were, somewhat ironically, put in place by the Labor Department of 1975) and, in the process, subject more advisers to ERISA’s fiduciary standards.

At a high level, the Labor Department is seeking to restore the two-part test for fiduciary status found in ERISA, one that was expanded to be a five-part test in the 1975 regulations. The proposal seeks to set aside the additional conditions that the advice be rendered “on a regular basis,” that the advice would serve as a “primary basis” for investment decisions with respect to plan assets, that the recommendations are individualized for the plan, and that the advice be provided pursuant to a mutual understanding of the parties. Instead, the new proposal would impose fiduciary status when a person renders investment advice with respect to any moneys or other property of a plan, or has any authority or responsibility to do so, and receives payment (direct or indirect) for that advice.




The Implications

That change is almost certainly going to drive some of those advisers (and their sponsoring organizations) away from these programs, though I am hard-pressed to mourn that loss (the proposal left intact the exemption for education, and if those lines are easily crossed, by now surely we all know where they are). Those who remain may well charge more for their services in compensation for the extra exposure, certainly in the short run. However, those who do so will be competing against organizations and advisers that made that commitment years ago and who appear to be competing quite successfully already. Consequently, if the newly “converted” seek to profit by a rapid escalation of their fees, I suspect they won’t find that to be a successful strategy.

Those responsible for closely held stock valuations are most likely to feel some pain in the short run. After all, they have long enjoyed a special dispensation from fiduciary status At this writing, I’m not altogether sure how one conducts a security valuation that is exclusively in the interests of the plan participants and beneficiaries—but I’m no more comfortable with the notion of a valuation that ignores the impact that those valuations could have on the exposure of the plan that takes on those assets based on that valuation.

One of the most interesting aspects of the proposal was the Labor Department’s expressed interest in reconsidering its position that a recommendation to a plan participant to take a permissible plan distribution would not constitute investment advice, even when combined with a recommendation as to how the distribution should be invested. Said another way, the DoL is now willing to consider that such encouragement could constitute advice at a level sufficient to trigger ERISA fiduciary status. In announcing its interest, the DoL noted that “[c]oncerns have been expressed that, as a result of this position, plan participants may not be adequately protected from advisers who provide distribution recommendations that subordinate participants’ interests to the advisers’ own interests.” In fact, there has already been litigation involving rollover advice—and there are any number of stories out there about advisers persuading participants to take advantage of early withdrawal provisions and pull their money out of the plan to put it in their hands. Not that that couldn’t be advantageous for the participant—but shouldn’t the adviser encouraging them to pull money from ERISA’s environs be held to that same standard of care?

Of course, at this point, the proposal is just that—though it will be interesting to see the comments that are made on this new definition over the next 90 days (1).

As for where this takes us, it has not always been clear that all plan sponsors fully appreciated the significance of working with advisers willing to put plan and participant interests ahead of their own. But they should; and, IMHO, this proposal will improve the chances that they—and their participants—will benefit from that protection, whether they seek it or not.

—Nevin E. Adams, JD

(1)Comments on the proposal can be submitted electronically by e-mail to e-ORI@dol.gov (enter into subject line: Definition of Fiduciary Proposed Rule) or by using the Federal eRulemaking portal at http://www.regulations.gov.

Paper “Trail”

Last week, the Department of Labor reissued its proposed regulation on participant fee disclosure.
Those familiar with the last proposal (put out by the prior Administration—see “EBSA Finishes Regulatory Package with Participant Disclosure Proposal”) will doubtless find this one to be a modest improvement (see “EBSA Releases Final 401(k) Fee Disclosure Rule”). Aside from the passage of time, this version incorporates additional input from the retirement plan community, financial services regulators, and even participant focus groups—most of it good, and all of it interesting.1

The rule itself is worth a read for, IMHO, it offers valuable insights not only into the suggestions made, but into the Labor Department’s reaction and response to those comments. As always, the devil lies in the final details, but one senses a strong interest in balancing the desire to give participants more information to make better decisions with the practical realities attendant in providing transparency and consistency of disclosure in an industry whose fee structure has become increasingly obtuse and intertwined.

That said, and while this is a marked improvement from the current state of affairs, IMHO, this regulation will still leave us a long way from producing what I think will actually show participants what they are paying for these retirement accounts.


Sure, they’ll get more frequent information on their investments, and sure, there will be more (and probably better) comparative information about those investments, both fees and performance. Yes, they will see fees expressed both as a percentage and as a dollar amount per $1,000 invested, and yes, they will get more information on account restrictions, annuity provisions, and revenue-sharing than many have probably ever received previously. And yet, for all this extra data that will be produced, provided, and distributed, I can’t quite shake the image of a participant’s eyes glazing over as they desperately try to make sense of what they have been given.

Of course, it’s possible that many won’t bother reading it at all, though a large part of the financial justification for these regulations is how much time the disclosures’ availability will spare participants searching for information about these investments. In fact, to my eye, perhaps one of the most significant revisions from the prior regulations was a reset in the estimation of just how many participants are expected to benefit from these reams of paper. The prior proposed regulation estimated that 29% of participants in these programs would realize some kind of time-savings, but the Labor Department, responding to a suggestion from a commentator, has upped that—to an eye-popping 70%-76%!2

Now, that determination isn’t, IMHO, essential to the importance of this effort. Personally, the 29% figure is much more in line with my experience, mostly because what I see, time and again, is that the more paper we sling at participants, the less attention they pay. And, make no mistake, with this new proposal, we will be slinging a lot more paper at participants, and more frequently. Despite the effort to alleviate the complexity of basis points and revenue-sharing, it’s hard to shake the sense that this well-intentioned effort will simply overwhelm participants, while at the same time placing a large and growing burden on the backs of those who must provide, administer, and explain it.

It’s clear to me that the information is needed, and as I read the proposal, it’s clear to me that the regulators have made a good-faith effort to strike a balance in providing it.

That said, I doubt very much that it will make much difference in participant behavior, nor am I optimistic that it will actually enlighten many, certainly not the three of four cited in the Labor Department’s projections. This is not a shortcoming of the DoL’s attempt here—frankly, in view of the tangled web that has become 401(k) retirement fee calculations, I think they are to be lauded for their vigorous and balanced efforts.

However, what participants really want and, IMHO, what they need to really understand what is going on here is to have that single figure on the statement—even if produced only once a year—that tells them what their retirement plan costs.

This new regulation may hasten that day’s arrival. But until it comes, I fear we may be doing little more than papering over the real problems.

—Nevin E. Adams, JD

1 There is another interesting inclusion in this proposal—one that has to do with disclosures, but perhaps not participant fee disclosures, per se. With this proposal, which merges the 404(c) disclosure regulations with those of non-404(c) plans, the Labor Department added a provision to the 404(c) regulation, stating plainly what those of us in the industry have long understood; that, even where ERISA 404(c) protection applies, it does not shield fiduciaries from the duty to prudently select and monitor investments. However, this statement was only referenced in the preamble to those regulations rather than in the body—and thus, some courts had seen fit to disregard its implication in a series of revenue-sharing suit dismissals (see “IMHO: Second Opinions"). That, of course, is fodder for another day.

2 The recommendation was based on a finding from the Employee Benefit Research Institute’s (EBRI) 2007 Retirement Confidence Survey, which indicated that 73% (plus or minus 3%) of workers saving for retirement used written materials received at work as a source of information when making retirement savings and investment decisions.

The regulation is online HERE

A fact sheet summary is online HERE

A model of the information chart is online HERE

“Pressure” Point

Last week, I got an early morning call from my daughter. This, of course, is not an everyday occurrence, and since she had driven MY car to work that morning, it didn’t bode well as a start to the day for either of us.

Turns out, she had noticed an unusual warning light as she pulled into her workplace—and she had even taken the time to determine its meaning. The good news is, the light indicated nothing more serious than low pressure in one (or more) of the tires. Now, my vehicle routinely prompts me for certain scheduled maintenance visits—many of which I ignore/postpone since they seem mostly designed to keep me spending money at the dealer. Unfortunately, the last time this particular light came on, it was a somewhat belated acknowledgement that one of my tires was flat. Consequently, on this particular occasion, I immediately jumped to the conclusion that we were dealing with a flat tire.

By the time I got to the car (fortunately, it was sitting in a parking lot on a brilliant sunny morning and not along some busy highway in the rain), it was clear that my initial assumption was incorrect. Not only were none of the tires flat, they didn’t even look “low.” Nonetheless, I cautiously drove to the nearest gas station (at a speed commensurate with a fear that the tire would slip off the rim at any minute) and checked the tires. Working with a more precise measuring device than mere visualization, it seemed that one of the tires was “low.” Not critically low, mind you (in my estimation, anyway), but apparently low enough that the manufacturer thought it should be called to someone’s attention.

Initially, I was aggravated—after all, the owner’s manual didn’t specify at what level that indicator kicked on, and while the physical disruption to my day was minimal, the emotional toll was considerably higher. Ultimately, however, I felt pretty good about the whole thing—glad that it hadn’t turned out to be as bad as I had feared, glad that my daughter hadn’t been stranded in the middle of nowhere with a flat tire, and, yes, glad that I hadn’t been driving to work when that light came on. Personally, I think the manufacturer set the warning a little high—but then, I reminded myself, it was designed to alert you while there was still time to remedy the situation. And, while my morning had been somewhat disrupted, I kept thinking about the situation that warning averted (I tried not to think about the “discussions” I had with my kids just three weeks earlier about the importance of regularly checking the air pressure in their car’s tires).

These days, there are many measures of what we’ll need to enjoy a financially secure retirement. The problem, IMHO, is that the more precise those measures, the more obscure they are to the participants we expect to respond to them. You can quibble (and some do) about the need to garner savings sufficient to replace 70% or 80% of pre-retirement income. You can argue (and a growing number do) that Social Security shouldn’t be factored in, that retiree medical costs are too often given short shrift in projections, that inflation will reemerge with a vengeance (though I think most projection tools already provide a generous apportionment on that front), or that the inexorable application of regular, annual salary increases to those projections no longer comports with business realities.

You can argue, as some have (and do), that these projections are all wildly distorted as some kind of scare-mongering tactic by the money management industry to coerce the investing public into over-saving. Heck, you can even rationalize an aversion to undertaking these types of projections on the simple basis that there are far too many variables to consider to produce an accurate result.

Indeed, when it comes to retirement planning, IMHO, too many dismiss those warning signs of inadequate savings as idiot lights: an arbitrary setting by a product manufacturer that they can dismiss and/or defer until a time when it is more convenient for them to deal with it.

However, when it comes to trying to actually live in retirement on the funds we have been able to accumulate for that purpose, it seems to me that it’s better to err on the side of caution; to see the warning sign as an opportunity to do something small when it’s relatively easy—instead of being forced to do something hard when it’s not.

—Nevin E. Adams, JD

Scale "Model"

I’ve long had an issue with weight scales, for the perhaps obvious reason that, these days, they frequently deliver a message I’d just as soon not receive. See, even when I’m feeling pretty good about the way I look and feel, those scales generally remind me that is at a weight that I know is not “appropriate” for my height.

Over the years, I have rationalized that gap in any number of ways; that those scales are frequently inaccurate, that the definitions of “appropriate” are skewed, even that I’m wearing clothes (or shoes) at the moment that are throwing things off (hey, I’ve got pretty big feet). But since I know, deep down, that those are, after all, mere rationalizations for avoiding the truth, these days I pretty much just treat stepping on scales as I would stepping on a rusty nail—which is to say, I avoid them at all costs…at least until I manage to get back on a regular exercise regimen.

My sense has long been that that is how participants approach the issue of figuring out how much they need to save for retirement. It’s not that they don’t know they should know that number, and not always that they just don’t have time to deal with it. Mostly, they have a sense that the number will be larger than they would like it to be, and that, coupled with a sense that the savings they have accumulated will be smaller than it is “supposed” to be—well, let’s just say they don’t want to be reminded that their retirement plan health isn’t good.

There was some of that in the “National 401(k) Evaluation” published by Financial Engines (see Report Highlights Savings Gaps, Ways To Close Them). The report was, in fact, replete with signs that most participants in the sampling are not in very good shape when it comes to retirement, with roughly three-fourths not on track to replace 70% of their pre-retirement income at age 65. When you consider that about a third have badly allocated portfolios (the report somewhat euphemistically terms these “inefficient”), and that nearly 40% are not contributing enough to receive the full match—well, let’s just say that there are some obvious reasons for the gap.

IMHO, it’s more than a bit ironic that studies routinely show that participants who take the time to make that retirement assessment feel better—and are more confident—about their retirement preparations than those who don’t. Of course, it could be that the only ones taking the time to check things out are those who are already reasonably confident that they’ll get a good result; unfortunately, I don’t recall ever seeing a connection between pre-assessment confidence and post-assessment (nor, for that matter, do these confidence assessments typically correlate confidence with savings that justify that sentiment).

Still, I like to think that those who take the time to do the assessment find out that things are perhaps not as hopeless as they had thought—and that, following the assessment, they walk away with a specific action plan for either staying on track, or closing the gap between needs and reality.

Inside the Financial Engines report there are a couple of examples that illustrate the point. One is a 45-year-old participant making $50,000/year who currently has a $50,000 account balance and who is deferring 4% in a portfolio that is overly risky—a combination that the report says will leave him 27% below his idea goal (if the market performs “typically”). But the report notes that if this participant reallocates at an “appropriate” risk level, they can narrow the gap to 23%; if they do that AND save 2% more per year, they can cut the gap to 14%; and if they do both AND delay retirement two years—well, they’re on track. Or, this participant could simply save 8% more a year to achieve the same gap-closing result.

Now, like with my bathroom scale, you can quibble with the assumptions, but the important thing, IMHO, isn’t taking the time to figure out you have a gap—most of us probably have that sense before we ever sit down with our retirement plan statement. Rather, it’s the plan that comes out of that process—the plan that helps us get back where we need to be—that not only helps us feel better, but gives us a reason for that feeling. And, like that bathroom scale model, the longer you put that off, the longer that “recovery” will take – and the harder it will be.

—Nevin E. Adams, JD

"Status" Quo?

Last week, during our PLANADVISER National Conference, I asked a panel of four plan sponsors if their current adviser was a fiduciary—and if that status mattered to them.

It’s not the first time I’ve asked that question; in fact, I have asked it of these plan sponsor panels at each of our four such conferences to date (although the plan sponsors were, of course, different). I ask it for one simple reason: While I sense a certain unanimity of opinion on the matter in retirement plan adviser circles, plan sponsors frequently have a more nuanced view.

Sure enough, this year a plan sponsor panelist not only said that his adviser wasn’t a fiduciary, but that he wasn’t at all sure why that mattered. In fact, he wondered aloud why an adviser would want to go to jail with him if something went awry.

Now, you could tell that many of the advisers in the room were surprised, perhaps stunned, by that statement. And yet, IMHO, that plan sponsor demonstrated what I felt was a pretty insightful appreciation for the litigation shield—or lack thereof—afforded him in hiring a fiduciary. For my money, far too many plan sponsors think that when they hire a plan adviser who is a fiduciary (or a provider who touts itself as a “co-fiduciary”), they have, in fact, supplanted their own fiduciary obligations to the program. But here was a plan sponsor who understood that if something “went wrong,” even if his adviser were a fiduciary, he was still on the hook.

That said, this plan sponsor’s answer was the kind of response that should surely give pause to an industry that spends so much time and energy “angsting” over the fiduciary issue.

The truth is, hiring a fiduciary is no magic talisman against litigation for the plan sponsor—and those who think (or who are mislead into thinking) so are ill-advised, to put it kindly. So why should fiduciary status matter?

Consider for a minute, when you bought your last car, who was that salesman looking out for—even as he ostensibly went to lobby his manager on your behalf? What about that clerk that was so helpful as you considered that PC or big-screen TV purchase? How about that commission-based realtor? Did they really have your best interests in mind?

Advisers that have adopted fiduciary status routinely talk about how their fee-for-service approach insulates them from bias in making fund recommendations; note that it allows them to bring THEIR very best judgment to the fore. What is, however, IMHO, too often glossed over is that it’s not just their best judgment, even an unbiased judgment, that is the essential benefit to hiring an ERISA fiduciary. Rather, it’s that judgment applied, and applied solely, in the best interests of the plan and its participants.

And that matters most—or, IMHO, should matter most—to those who are themselves charged with making decisions that adhere to those standards

—Nevin E. Adams, JD

“Forever” More?

Last week, the Treasury Department and Department of Labor held two days of joint hearings on the subject of retirement income (see Lifetime Income Hearing Witnesses Demand Fiduciary Shield).

There was discussion about the need for product design enhancement (though much of the focus seemed to be on better explaining what was already available); better (i.e. cheaper) pricing for the kinds of institutional purchases these plans might provide (though I’m hard-pressed to see how you get any kind of aggregation benefit in terms of product just because the buyers all work for the same employer); and the challenges of portability, both when a plan changes providers and a participant changes employers.

There was also talk about misunderstandings about annuities that no amount of communication or education seems able to dispel (my guess is the hearings won’t alter that dynamic, either), and there was concern about differences in gender-specific annuity tables (and, let’s be honest, gender-specific savings habits and longevity experiences). And, of course, there was a LOT of talk about things that would encourage employers to embrace these options as an integral element of their plan design. To my ears, those recommendations tended to fall into two basic themes: some kind of QDIA-like default safe harbor, and/or some kind of fiduciary safe harbor for annuity selection by the plan fiduciary.

IMHO, you can’t not address those concerns. While there are any number of operational impediments to incorporating a retirement-income option, I still find that the big challenge remains plan sponsors’ concern about being on the hook for a bad annuity provider choice—not today, or a year from now, or even 10 years from now, but forever. And while, as with investment advice, the Labor Department has tried to offer guidance in the interests of encouraging higher adoption rates, so far as I can tell, it hasn’t budged the needle at all.

I don’t fault the Labor Department for this; after all, there is a fine line between offering the level of protection that will actually change fiduciary behavior and just giving the store away. Clearly, the plan sponsor/fiduciary’s decision will have a significant impact not only on the choices available to, but the choices taken by, participants—and somebody knowledgeable needs to be accountable. That same rationale, though it’s often glossed over, is why the plan sponsor retains its customary level of prudent-expert responsibility for the choice of an investment advice provider, even if some protection is afforded them on the particulars of that advice; and why they are still on the hook for the prudent selection of a qualified default investment alternative (QDIA), even though they gain a great deal of protection from potential participant lawsuits so long as they comply with the safe harbor requirements.

That said, IMHO, there’s a world of difference between making a point-in-time choice of an advice or investment provider—a decision that can be monitored, reasonably readily benchmarked, and changed—and that involved in selecting a retirement-income option where the untangling can be considerably more “involved.”

It’s more than a little ironic that the very thing that makes it possible for those providers to offer those kinds of lifetime income guarantees also makes for a certain sense of irrevocability in the decision. Now, I realize that it doesn’t have to be irrevocable, certainly not in a forever sense (though there are generally financial penalties attendant with that decision). But that, I think, remains the real problem with annuity selection, not just for plan fiduciaries, but for plan participants as well. You not only have to weigh a lot of considerations that people generally aren’t comfortable weighing, you wind up making a call that seems like it not only has to be right for now, but “right” forever.

It is, quite simply, a decision that still seems perfectly suited to guarantee that no decision will be made for as long as it can possibly be postponed.

Ultimately, in fact, what we may need to help plan sponsors make these options more available is not a better way to help participants get into annuities—but a better way to help them get out.

—Nevin E. Adams, JD

Listening Post

With our PLANADVISER National Conference just one week away, I found myself turning back to my notes from the PLANSPONSOR National Conference in June.

Some of these came from presentations, others originated from the audience, and still others arose in the dozens of side conversations at breaks and such in between the official conference sessions. Some, honestly, are something of a synergy among the three. See if they don’t get YOU thinking…


You may not be responsible for the outcomes of your retirement plan designs, but someone should be.

How you spend your weekend is a microcosm of retirement.

“Free money” isn’t.

Retirement income is a lot less of a problem when you have saved a pile of money.

You can lead a horse to water, after all—but you can’t make him think.

No one expects taxes to be lower in retirement any more.

Auto-enrollment is still viewed as a very paternalistic type of event.

When it comes to fee comparisons, eventually there will be better sources of information, but right now it’s still a bit mystical.

Providing revenue-sharing information to participants is like giving car keys and whiskey to teenage boys.

If you don’t know how much you’re paying, you can’t know if it’s reasonable.

You want your provider to be profitable, not go out of business.

Retirement income is a challenge to solve, not a product to build.

If you’re having trouble connecting with an employee group, find—or create—a missionary within that group.

When selecting plan investments, keep in mind the 80-10-10 rule: 80% of participants are not investment savvy, 10% are, and the other 10% think they know enough—and usually chase returns.

While it’s a good idea to have fiduciary insurance in place to cover a loss, you should have a well-documented fiduciary process in place to avoid claims in the first place.

Now is a good time to renegotiate fees.

When advisers are examined, their plan clients usually are also.

Never ignore a letter from the IRS.

Left to their own devices, participants still don’t do anything.

Tax payers effectively subsidize the benefits of 401(k)s. Of course, they also subsidize the ability of many Americans to no longer pay federal income taxes.

A corollary: The tax benefits of 401(k)s are tiered toward those who actually pay taxes.

The best way to stay out of court is to avoid situations where participants lose money. The second best way is to have a well-documented prudent process.

Annuitization of defined contribution balances only makes sense if those balances are big enough to annuitize.

Some participants do opt out of automatic enrollment.

“Free money” is still a powerful incentive for participants.

The biggest mistake a plan fiduciary can make is not seeking the help of experts.

You can be in favor of fee disclosure and transparency and still think that legislation telling you how to do it is misguided.

The single most effective way for individuals to ensure that they have sufficient income in retirement is to accumulate more wealth; the amount of their savings before retirement defines their options in retirement.


I’m often asked how we come up with our conference and magazine topics, how we manage to keep our pulse not only on what’s coming down the road, but what people are focused on in the here and now.

The simple answer is—we listen. And when we listen, we all learn.

—Nevin E. Adams, JD

“Miss” Perceptions?

Next week we will launch our eighth annual search for the nation’s best retirement plan advisers.

Each year, we receive a number of inquiries from advisers about the awards, many that fall into a category I tend to think of as “exploratory”—feelers as to what we are looking for.

Well, at its core, what we hope to acknowledge—and, thus, what we are looking for—hasn’t changed at all from when we first launched the award in 2005: advisers who make a difference by enhancing the nation’s retirement security, through their support of plan sponsor and plan participant information, support, and education. And, since its inception, we’ve focused on advisers who do so through quantifiable measures: increased participation, higher deferral rates, better plan and participant asset allocation, and delivering expanded service and/or better expense management.

Now, we’ve always tried to be very transparent about the award, and the process that underlies the selection. That said, I know that some have questions—and perhaps misperceptions—about the award and how it is administered. So, based on conversations I have had with some of you over time, not to mention the general inquiries that emerge around an award that garners this much attention, here are five things you should know about PLANSPONSOR’s Retirement Plan Adviser of the Year award:

(1) It’s NOT a personality contest. Sure, advisers who are nominated by 30 of their closest friends and wholesalers stand out (though only after you’ve passed the quantitative round). But even then you get no extra points for having support in the “community.”

(2) You will have to provide actual data about the impact your firm is making on things that really matter. We look at participation rates, deferral increases, participant asset allocations, and even fee negotiations. And we will talk to your plan sponsor clients (and expect them to confirm your data). If you don’t have, or aren’t monitoring, those kinds of data, you probably aren’t ready for this award.

(3) Award semi-finalists and finalists are chosen based on a blind review of qualification data. Our process selects semi-finalists and finalists based solely on data and screened reference checks. Only after the finalists have been selected are their names known to the judges.

(4) Our judges sign nondisclosure agreements. Yes, we have judges for this award—judges who not only know the space, but know how to evaluate the data. Two of the five judges for each award are advisers; prior winners of the award, in fact. We have always thought their perspective was important as a “real world” check on the award criteria. That said, we understand that some advisers might be reluctant about sharing data about their practice1 with potential competitors—and our judges agree, in writing, to respect the confidentiality of that information.

(5) Those who don’t participate don’t win. It may be an honor “just to be nominated,” but those who don’t respond completely and accurately to the aforementioned requests for information don’t make it past the nomination round.

May the best adviser(s) win—and, based on our prior winners,they generally do.

—Nevin E. Adams, JD

Editor’s Note: Those who have additional questions should feel free to e-mail me at nevin.adams@assetinternational.com, or Alison Cooke-Mintzer at acooke@assetinternational.com

More background information on the award is available HERE
Additional information is available here


1 We’re not talking about client lists here; average rates of deferral and savings across your client base, your average client size, that kind of thing.

Double Dipping?

Last week, Fidelity published some data from their quarterly analysis of participant activity.

For the very most part, the data (see Fidelity Finds Q2 Uptick in 401(k) Withdrawals) revealed what we have come to expect from such reviews: Participants continue to stay the course, deferral rates are largely unchanged (average was 8%), and more increased their rate of deferral (5.3%) than decreased it (2.9%) in the most recent quarter. Additionally, the balance recovery continues apace, with the average account balance up 15% (though for this good news, you have to reach for a year-over-year comparison, because Q2 figures to be a pretty rough one for participant accounts—down 7.6% in Fidelity’s database).

However, this report drew more than the customary amount of coverage for its finding that rates of hardship withdrawals and loans were higher—and by some measures, significantly higher—than they were a year ago.1

My initial reaction was that this latter finding was something of an outlier; after all, in recent weeks we have seen other, similar reports from other providers that indicate that withdrawal volumes were down, certainly compared with the dark early days of 2009. But then, this was more recent data, and with the report of weekly jobless claims back up to half a million, well, let’s just say that it didn’t require much imagination to see a link between more people out of work and an uptick in “premature” distributions.

But later, as I considered the data, the findings didn’t seem so out of line. While the Fidelity survey found that 11% of participants took out a loan this quarter (9% did a quarter earlier), neither the average initial loan amount ($8,650) nor the loan term (3.5 years) seemed out of line. The report did, however, contain at least two alarming statistics. First, 22% of participants recordkept by Fidelity now have an outstanding loan, and while that isn’t much beyond the one in five that did a year ago, it nonetheless represented a decade-long record for Fidelity’s database. Indeed, this was the item that most media outlets qravitated toward (based on the calls I got).

In fact, IMHO, a more troubling trend lies in the fact that nearly half (45%) of participants who took hardship withdrawals one year prior also took a hardship withdrawal in the 12-month period ending in the second quarter of this year.

While participant loans are (too) frequently touted as borrowing from yourself, they put the participant in the position of having to replace—on an after-tax basis—the contributions you’ve withdrawn and a rate of “return” in the form of interest on the loan. Still, at least you’re on a schedule to replace the money you’ve withdrawn.

Now, properly administered, it’s not easy to obtain a hardship withdrawal. You actually have to be experiencing a financial hardship, for one thing, and you often not only have to prove that, but also that you have exhausted other sources. Worse, that hardship withdrawal is reduced not only by the need to pay taxes on the pre-tax monies you’ve now tapped, you have to fork over another 10% as a penalty to Uncle Sam (unless, of course, you’re older than 59 ½). What that means, of course, is that what you think you are seeing isn’t exactly what you are going to “get.”2 In fact, it could easily be just half what the requesting participant might be expecting.

The reality is that people are surely hurting, and if the money they have set aside in their 401(k) helps them through this period, puts food on the table, or keeps the family in their home, that’s, IMHO, a good thing. After all, there’s not much point in taking out a loan when you don’t have a source of income to repay it.

But what concerns me about the trends in the Fidelity report, aside from the implications that so many are struggling financially, is that, in my experience, hardship withdrawals, unlike loans, are not only gone for a while, they are savings that are often “gone” forever.

—Nevin E. Adams, JD

1Loans initiated over the past 12 months grew to 11% of total active participants from about 9% one year prior. The portion of participants with loans outstanding also increased two full percentage points in the second quarter to 22%. The average initial loan amount as of the end of the second quarter was $8,650, with an average loan duration of three and half years, according to Fidelity.

According to Fidelity’s data, 62,000 of the participants recordkept by the firm initiated a hardship withdrawal in the second quarter, compared with 45,000 participants who did so the quarter before. As of the end of Q2, 2.2% of Fidelity’s active participants took a hardship withdrawal, compared with 2.0% a year earlier.

2 Those taxes aren’t always obvious at the point of distribution, unfortunately, but due at the individual’s next tax filing.

'Mandatory' Sentences

We have long lamented the reality that only about half of this nation’s workers have access to some kind of workplace-based retirement vehicle, and with good reason.

Well, we now have bills introduced in the Congress, both House and Senate, that will, eventually, require that every American business that hires 10 or more workers offer them the ability to save for retirement (see Auto-IRA Bill Introduced With Employer Mandates, Auto IRA Bill Introduced in the House).

Now, my first reaction was “it’s about time.” After all, we can talk about inadequate savings rates, inefficient asset-allocation decisions, and egregious revenue-sharing arrangements—but workers with access to the opportunity to save are surely better-served than those without. And any number of studies have shown that those without access to those programs save less—when they save at all—than those who have the opportunity to participate.

But honestly, the more I read through the bill1 summary (and that’s MUCH easier than the legislative language), the more I was struck by the potential complications. Workers, of course, can opt out—but under the legislation, employers are stuck with having to set the programs up.

Not that those workers will necessarily be saving much, nor is it likely to be “enough.” The default deferral rate will be 3%, with no escalation (though the worker can bump up the rate), nor is an employer match permitted. Workers have the choice of saving on a pre- or post-tax (Roth) basis, though the default is post-tax.

A default investment structure is outlined—basically, a principal preservation fund for balances under $5,000, with a lifecycle fund for larger balances—but the employer will still have to choose a provider, and could still wind up with fiduciary liability for that choice, unless the employer picks a provider on the approved list (from an online database that the government will establish). The bill summary suggests that an employer will fill in some basic information about its workforce, be provided with a list of suitable providers, click on one, and be connected2.

Moreover, there are eligibility standards to be monitored (those employed for at least three months and who have attained age 18 as of the beginning of the year), payroll deposit deadlines to be met (and an excise tax if they are not), a requirement to provide employees with some kind of standardized form explaining the program and investment decisions (though this could be part of the W-4), and a $100 excise tax per employee who is not properly covered by the program.

Oh—and to offset the costs of implementing and running this program, the employer will get a tax credit of…$250.

Will it Matter?

So, will this legislation live up to its promise? Will it provide 42 million more Americans with an “easy, effective way to take responsibility for their fiscal futures and plan for a secure retirement”? The truth is, I’m not sure.

We can only hope that regulators are as attentive to the fees assessed on these accounts, and on the investment structures created—accounts that are sure to be miniscule on an individual basis, but which will almost certainly in their entirety be an enormous pile of temptation.3 As for its impact on participant savings—well, it is perhaps a step in the right direction, certainly in terms of getting those who have jobs to begin putting some of that income aside for retirement. Surely the additional incremental cost and burden to the employer won’t by itself be enough to dissuade a hiring decision—though in tandem with other mandates and the promise of higher taxes, to boot, it might well.

There is, of course, always the possibility that a realization that a retirement plan mandate is coming will spur those who have been holding off on setting up a 401(k) to do so now—though, IMHO, it’s every bit as likely, and perhaps more likely, that they will simply set aside those plans and wait for the “government’s” version (which, even with all its requirements and costs, is surely less onerous).

To their credit, those pushing the bills are trying to plug a retirement savings hole that has too long been ignored. There is every indication that they have been thoughtful in their analysis, and have sought to minimize both the cost and the effort imposed on businesses.

That said, there is a cost—in time, effort, and focus—attendant with setting these programs in place (and it feels like more than $250 worth to me). While, in better times, this might be a laudable initiative4, it strikes me as oddly inappropriate at a time when concerns about additional government mandates appear to be restraining hiring and business growth.

Timing, it is said, is everything. Unfortunately, I think this mandatory IRA bill may well be a good idea at a bad time—and that, IMHO, could make it a bad idea.

—Nevin E. Adams, JD

(1) For simplicity, this column focuses on the bill introduced in the Senate, which was the first to be introduced, though the two appear similar, if not identical.

(2) From the Bingaman bill summary: “The website will be designed to assist employers in choosing a provider. The employer will enter a small amount of information about itself and its employees in a starting screen. Then, employers will be directed to a page listing providers willing to serve as trustee for employees’ Automatic IRA accounts. Once the employer makes a choice, it will be directly connected to the provider.”

(3) The Bingaman bill summary explains the phased implementation approach not as an accommodation to employers, but so that retirement service providers can “prepare for a significant expansion in the number of IRA accounts (through product innovation and marketing) and regulators to address enforcement and other regulatory issues.”

(4) The bill wouldn’t kick in for everyone right away: In the first year after enactment, the provision will apply only to firms with 100 or more employees (counting employees who earned more than $5,000 in the prior year); in the second year, 50 or more; in the third, 25 or more; and in the fourth, 10 or more. So, perhaps by the time it is effective, the “timing” will be better. However, employers may well focus on the future implications when they make current hiring decisions.

IMHO: "Wrong" Headed?—Part 2

Last week’s column presented half of a list that I titled “10 things you’re probably STILL doing wrong as a plan fiduciary.” As I mentioned then, this is a compilation based on my experience, the experiences of a group of experts who conducted a panel by the same title at the PLANSPONSOR National Conference in June, and a list of “Common Plan Mistakes” from none other than the Internal Revenue Service itself.

Here’s the rest of the list:

6. Not providing required notices to participants (e.g., safe harbor notices or QDIA notices).

The law provides plan fiduciaries with certain protections conditioned on the timely provision of notices deemed sufficient to alert participants to their rights and the obligations of the plan fiduciaries. This holds true with so-called “safe harbor” plan designs as well as the selection of qualified default investment alternatives (QDIAs), or the implementation of automatic enrollment, where the participant could opt out of deferrals, select a different deferral amount, or select another investment option.

While the implications of failing to provide a timely notice vary depending on the purpose of the notice, generally speaking, a failure to provide the notice invalidates the protections afforded the fiduciary.

7. Failing to obtain spousal consent.

The IRS notes that a common plan mistake submitted for correction under the Voluntary Correction Program (VCP) is the distribution to a participant of a benefit in a form other than the required QJSA (e.g., a single lump sum) without securing proper consent from the spouse. This often happens when the sponsor’s human resources accounting system incorrectly classifies a participant as not married (or when the participant was not married at one point and subsequently got married—or remarried). The failure to provide proper spousal consent is an operational qualification mistake that would cause the plan to lose its tax-qualified status.

8. Paying expenses from the plan that are not eligible to be paid from plan assets.

Plan sponsors are frequently interested in what expenses can be paid from plan assets. The first step in that determination involves making sure that the plan document allows the payment of any expenses from plan assets.

Assuming that the plan allows it, the Department of Labor has divided plan expenses into two types: so-called “settlor expenses,” which must be borne by the employer; and administrative expenses, which—if they are reasonable—may be paid from plan assets. In general, settlor expenses include the cost of any services provided to establish, terminate, or design the plan. These are the types of services that generally are seen as benefiting the employer, rather than the plan beneficiaries.

Administrative expenses include fees and costs associated with things like amending the plan to keep it in compliance with tax laws, conducting nondiscrimination testing, performing participant recordkeeping services, or providing plan information to participants.

9. Not knowing (or making an effort to ascertain) if your plan fees are reasonable.

As a plan fiduciary, you have several key responsibilities, one of which is to make sure that the fees paid by, and the services rendered to, the plan be reasonable. Fulfilling that responsibility would seem to require that you know the services that are being rendered, and that you know the fees paid for those services.

Determining that the combination is reasonable may seem as much art as science, but if you do not have the answers to those two key variables, it is hard to imagine how you can satisfy your obligation as a fiduciary.

10. Not seeking the help of experts when you lack the expertise to make fiduciary decisions impacting the plan.

ERISA imposes a duty of prudence on plan fiduciaries that is often referred to as one of the highest duties known to law—and for good reason. Those fiduciaries must act “with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.” The “familiar with such matters” is the sticking point for those who might otherwise be inclined to simply adopt a “do unto others as you would have others do unto you” approach. Similarly, those who might be naturally predisposed toward a kind of Hippocratic “first, do no harm” stance are afforded no such discretion under ERISA’s strictures.

Simply stated, if you lack the, skill, prudence, and diligence of an expert in such matters—you are expected to get help.

—Nevin E. Adams, JD

Last year’s list of “10 Things You’re (Probably) Doing Wrong” is HERE

The list of Common Plan Mistakes from the IRS is available HERE

As for correcting those mistakes, see the IRS’ 401(k) Fix-It Guide

You can find more information on fulfilling your fiduciary responsibilities at the Employee Benefits Security Administration’s (EBSA) Web site

'Wrong' Headed?

In this as, perhaps, many professional endeavors, it seems that the more you know, the more you know you don’t know. Moreover, the standards imposed on plan fiduciaries by the Employee Retirement Income Security Act (ERISA) are not only demanding, they may be the highest found in law—and with personal liability imposed, to boot.

About a year ago, I compiled a list of “10 things you're (probably) doing wrong as a plan fiduciary.” By all accounts, it was well-read, much forwarded, and useful in terms of helping plan sponsors and retirement plan advisers highlight areas of possible improvement with your plan sponsor clients.

The list that follows – think of it as “10 things you’re probably STILL doing wrong as a plan fiduciary” - is a compilation based on my experience, the experiences of a group of experts who conducted a panel by the same title at the PLANSPONSOR National Conference in June, and a list of “Common Plan Mistakes” from none other than the Internal Revenue Service itself. Once again, I hope you find this list informative—and that you draw insight and comfort from its contents.

1. Not following the terms of your plan document regarding the administration of loan provisions (maximum amounts, repayment schedules, etc.) or hardship withdrawals.

Plan documents routinely provide that hardship distributions can only be obtained for certain very specific reasons, and that participants first avail themselves of all other sources of financing before applying for hardship distributions (these conditions often are incorporated directly from the requirements of the law). Similarly, loans are permissible from these programs only when they comply with certain standards regarding the amount, purpose, and repayment terms.

Failure to ensure that these legal requirements are met can, of course, most obviously result in a distribution not authorized under the terms of the plan document—and, since these types of distributions are frequently quickly spent by participants (and thus not readily recoverable), it can be complicated and time-consuming to set the situation right.

2. Failure to follow plan document eligibility and vesting provisions

An employee’s rights to retirement benefits are determined by the correct application of service and/or age requirements of the plan regarding eligibility for participation, and also may be influenced by the proper application of the plan’s vesting schedule.

To properly comply with those requirements, you need to maintain accurate service records for all employees. If these records are incorrect, the benefits provided may be incorrect—either in excess of what is permissible or less than what was due to the participant. Note that the failure to properly follow the plan’s provisions can cause the plan to lose its qualified status.

The plan document serves as the foundation for plan operations; it is, quite simply, the operating manual for your program. Sometimes, particularly if you are relying on a document that has been prepared by a third-party service provider, certain “gaps” can emerge between what the document allows and how the plan is actually administered. As a result, it is a good idea to conduct a document/process “audit” every couple of years—don’t assume that “the way we’ve always done things” is supported by the legal document governing your plan.

3. Improperly managing forfeiture accounts

Many defined contribution plans require participants to complete a period of service before becoming fully vested in matching or non-elective employer contributions, and when a participant leaves the play before they are fully vested, their unvested account balance may be forfeited. Some plan administrators place these forfeited amounts into a plan suspense account, allowing them to accumulate over several years. However, the Internal Revenue Code does not allow this practice. Forfeitures must be used or allocated in the plan year incurred.

Revenue Ruling 80-155 states that a defined contribution plan will not be qualified unless all funds are allocated to participants’ accounts in accordance with a definite formula defined in the plan, and the IRS notes that this would preclude a plan from carrying over plan forfeitures to subsequent plan years, as doing so would defy the rule requiring all monies in a defined contribution plan to be allocated annually to plan participants. The plan document’s terms should have provisions detailing how and when a plan will exhaust plan forfeitures.

4. Not starting required minimum distributions (RMD) on time

A minimum payment must be made to the participant by the required beginning date (RBD) and for each following year. Normally, the RBD for a participant who is not a 5% owner is April 1 following the end of the calendar year in which the latter of two events occurs: either the participant reaches age 70½ or the participant retires (for 5% owners, the RBD is April 1 following the end of the calendar year in which they attain age 70½ regardless of their retirement date).

Plan sponsors often discover that required minimum payments either have not been paid timely or at all, especially when a non-5% owner continues working after reaching age 70½. Failure to follow the minimum payment rules as written in the plan document can lead to the loss of the plan’s tax-qualified status. If participants or beneficiaries do not receive their minimum distribution on time, they (not the plan) are subject to a 50% additional tax on the underpayment.

5. Not depositing contributions on a timely basis

The legal requirements for depositing contributions to the plan are perhaps the most widely misunderstood elements of plan administration. A delay in contribution deposits is also one of the most common flags that an employer is in financial trouble—and that the Labor Department is likely to investigate.

Note that the law requires that participant contributions be deposited in the plan as soon as it is reasonably possible to segregate them from the company’s assets, but no later than the 15th business day of the month following the payday. If employers can reasonably make the deposits sooner, they need to do so. Many have read the worst-case situation (the 15th business day of the month following) to be the legal requirement. It is not.

Editor’s Note: the other five things will appear in next week’s column.

The Duty To Ask

Last week I mentioned a revenue-sharing case that could have far-reaching implications.

That case, Tibble v. Edison International, was decided earlier this month (see “Court Buys Retail vs. Institutional Share Fee Claims”) and, IMHO, is a very interesting case for several reasons: First, most of these cases have been tossed before they actually got to trial; second, this one was decided in the plaintiff/participant’s favor (and that’s a rarer occurrence than much of the coverage and “chatter” would indicate). Moreover, here the court was far less deferential to the plan fiduciary decisions than other districts have been1.

But what I found most interesting about this case wasn’t the decision or the court’s rationale, though both will certainly have ramifications beyond this case. Nor, in large part, were the plaintiffs’ arguments any more compelling than in previous actions. In fact, like many of the revenue-sharing/excessive-fee cases filed since 2006, the plaintiffs here made a LOT of accusations—most of which were, as they have been in other cases (and rightfully, IMHO), summarily dismissed2. In this case, that included the selection of sector funds for the plan, having a money market fund on the menu rather than a stable value offering, and structuring the company stock fund as a unitized fund, rather than using share accounting.

Short Falls

Where this court did hold the plan fiduciaries3 liable was their decision to invest in retail shares rather than institutional shares of the same funds. But what I found most striking about the case wasn’t the allegations or the adjudication, but rather that what was, by outward appearances anyway, a thoughtful and sophisticated plan review structure would manage to overlook such a basic opportunity.

Here you have a large ($2-plus billion) plan that not only has an investment committee, but one separate from the benefits administration function. Moreover, that investment committee has access to, and uses the services of, an investment adviser (Hewitt’s investment consulting arm) to review/select/monitor funds. That’s a reasonably sophisticated set-up, and certainly what one might expect for a plan of this size.

Now, the plan decision-makers are aware of revenue-sharing but consistently make decisions that support the notion that they do not take that into account. In fact, the court noted that in 33 of 39 instances during the period in question, the employer made mutual fund replacements that actually decreased the revenue-sharing received by the plan, leaving the court to note, “This overall pattern is not consistent with a motive to increase revenue sharing.” In fact, the court noted that “[t]he Plan fiduciaries did not make fund selections with an eye toward increasing revenue sharing and did not put the interests of SCE above those of the Plan participants.”4

So, what do they fail to do?

Well, apparently they did not even ASK the investment fund providers to waive the minimums for investment in institutional class shares. That’s right, they never asked if those minimums could be waived—so, of course, they weren’t (particularly damning was the testimony of the employer’s expert that such waivers were routinely granted, and for plans of much smaller size). Think of it as “the duty to ask.”

As you read the court’s description of the process, you get a sense that the investment committee was attentive to an investment policy statement (IPS) that was carefully prepared and to which the committee adhered; that they met regularly, and thoughtfully conducted their review with the assistance of a professional investment consultant. The court even described a situation5 where the investment committee considered—and specifically chose—an institutional share class for a fund over a retail offering, because the institutional class met the criteria established by the IPS, whereas the retail class did not.

Yet, for all of this good structure and process, there was one thing that this particular plan sponsor failed to do: They apparently failed to ask if a “better” share class was available.

In the words of the court, “The only way a fiduciary can obtain a waiver of the investment minimum is to call and ask for one. Yet none of the Edison fiduciaries nor anyone acting on their behalf (including HFS) ever requested that the William Blair Fund waive the minimum investment so that the Plan could invest in the institutional share class. Had someone called on behalf of the Plan and requested a waiver of the investment minimum, the William Blair Fund almost certainly would have granted the waiver.”6

Retail “Sale?”

Not that using retail, rather than institutional shares was inherently wrong, even in this situation7. The court acknowledged that in defending the retail-share decision, witnesses for the defendant/employers offered three possible rationales: If the retail share class of a certain mutual fund had significant performance history and a Morningstar rating, but the institutional share class did not; to avoid confusion among participants resulting from frequent changes in the fund; or if there were certain minimum investment requirements, it might preclude the plan from investing in the institutional share classes. Judge Stephen V. Wilson didn’t say whether he would have found those arguments compelling—but then, he didn’t need to bother because, as he noted in the ruling, “None of these explanations is supported by the facts in this case.”

Rather, he noted that “[t]he Investments Staff simply recommended adding the retail share classes of these three funds without any consideration of whether the institutional share classes offered greater benefits to the Plan participants. Thus, the Plan fiduciaries responsible for selecting the mutual funds (the Investment Committees) were not informed about the institutional share classes and did not conduct a thorough investigation.”

Nor was it sufficient that the plan fiduciaries employed the services of an investment adviser. As the court noted: “While securing independent advice from HFS is some evidence of a thorough investigation, it is not a complete defense to a charge of imprudence. At the very least, the Plan fiduciaries must make certain that reliance on the expert’s advice is reasonably justified.”

It is nearly incomprehensible to me—and I would guess to most of you—that in this day and age, a plan fiduciary could be aware of the distinctions of an institutional share class7, and not take advantage of them.

Perhaps, since participants were paying the freight, the fee differential was simply out of sight and thus out of mind. But I’m guessing that the investment committee saw its duty as restricted to the selection and review of the most appropriate investment options under the terms of the IPS, regardless of cost. I wouldn’t be surprised if they saw expense management as the responsibility of the administrative committee—which, doubtless, either assumed that the investment committee’s deliberation included a consideration of fees, or didn’t feel equipped and/or empowered to inquire as to the availability of a less expensive class of shares. Perhaps both felt that their investment adviser was taking those factors into consideration. Ironically, it may well be that this program had so much structure and process that everybody thought somebody else was dealing with the one thing that now seems so obvious, it’s hard to imagine it was overlooked for so long.

Whatever the explanation, it’s clear that nobody was asking the right questions8, and thus, nobody—including the plan participants—was getting the right answer.

—Nevin E. Adams, JD

1 This writer—and the Department of Labor—have had issues with the approach embraced by the courts in more than one of these revenue-sharing suits (see “IMHO: Court “Case”, “IMHO: The ‘Burden’ of Proof”, “IMHO: Second Opinions”, “IMHO: Winning Ways”, “IMHO: The Letter of the Law”).

2 see “IMHO: Fighting Words” at

3 Plaintiffs filed the suit as a class action on August 16, 2007, against Defendants Edison International, Southern California Edison Company, the Southern California Edison Company Benefits Committee, the Edison International Trust Investment Committee, the Secretary of the SCE Benefits Committee, SCE’s Vice President of Human Resources, and the Manager of SCE’s Human Resources Service Center.

4 Nor was the revenue-sharing arrangement hidden. The use of revenue-sharing to offset recordkeeping fees was not only discussed with employee unions, the court noted that the arrangement was disclosed to participants on approximately 17 occasions after the practice began in 1999.

5 In the course of that review, Ertel realized that the institutional share class of the PIMCO Fund had a significant performance history and a Morningstar rating, whereas the retail share class did not. Ertel also realized that the institutional share class charged less 12b-1 fees to the Plan participants. Thus, the Investments Staff recommended, and the Investment Committees adopted the recommendation, that the retail shares of the PIMCO Fund should be transferred into the institutional share class. These facts are very telling: In the one instance in which the Plan fiduciaries actually reviewed the different share classes of one of these three funds, the fiduciaries realized that it would be prudent to invest in the institutional share class rather than the retail share class. Had they done this diligence earlier, the same conclusion would have been apparent with regard to all three funds, and the Plan participants would have saved thousands of dollars in fees.

6 It surely didn’t help matters any that the expert witness hired by the employer-defendants testified that he had obtained waivers for plans as small as $50 million in total assets, and from the same funds as those in question here.

7 Lest some try to rely on this decision as absolute proof that the use of retail class funds is inherently imprudent in 401(k) plans, the court acknowledged in a footnote that “[p]laintiffs are not contending, and the Court has not found, that the mere inclusion of some retail share classes in the Plan constituted a violation of the duty of prudence. The only issue here is whether it was a breach of the duty of prudence to select retail shares rather than institutional shares of the same mutual fund where the only difference between the two share classes was that the retail share class charged a higher fee.”

8 Perhaps including this court. Though there were six funds in question, only three were the focus of the ruling, and for which the plan fiduciaries were held to account for the difference in costs between the retail and institutional shares. The other three were added to the fund menu earlier, apparently outside the applicable statute of limitations, but otherwise seemed to have the same institutional/retail class issues—yet the court rebuffed those claims.

What was the difference? Well, it seems that the plaintiffs didn’t challenge the initial decision to invest (my guess would be because they knew it was outside the statute of limitations), but they did argue that there were subsequent events (change in fund name, manager, etc.) that should have triggered a fresh review, a review in which they argued the whole institutional/retail issue should have arisen, and thus they should be liable as they were in the case of the funds added later. However, this judge was apparently only focusing on the initial decision, and found no reason that the subsequent fund changes should have triggered a full review, and thus—no violation of fiduciary duty. So much for the duty to monitor.

Not-So-Quiet Period

Remember when it used to be quiet in July?

Not so this past week, with the announcement of two major retirement industry acquisitions, a significant update on fee disclosure regulations, and a ruling in a revenue-sharing case that could have far-reaching implications.

On the two industry acquisitions, LPL’s absorption of National Retirement Partners (NRP) will surely be of most interest to the adviser community (see LPL Acquiring National Retirement Partners). LPL, which had only recently launched an IPO (and is thus literally in a “quiet period”), has struggled for some time with its retirement plan focus, while NRP has had its own share of issues in the wake of the recent financial crisis. LPL’s backing should certainly prove to be restorative for NRP’s positioning, and it’s hard to imagine that a newly constituted retirement-focused unit at LPL under Bill Chetney’s leadership won’t provide a clarity of focus for LPL’s efforts in this space.

Plan sponsors may feel a greater immediate impact from Aon’s acquisition of Hewitt (see Hewitt to Merge with Aon), the rationale is that the former’s middle-market product set (especially its insurance lines) will find room to grow in Hewitt’s predominantly large-client base, while Hewitt’s large-plan expertise will be able to find new applications in Aon’s target markets. Those notions inevitably look logical on paper; time will tell if the firms’ cultures and client approaches will assimilate. That said, the new partners are projecting a LOT of cost savings alongside a $5 billion merger—and in a people-intensive business.

As for the final release of the 408(b)(2) fee disclosure regulations, the wait appears to have been worth it (see DoL Issues New Fee Disclosure Rules). I am admittedly not yet all the way through a careful reading of the interim final package, but the removal of a written-contract requirement surely meets the common sense test, while retaining the impact of written disclosures. Similarly, the approach on disclosure—a reliance on full disclosure rather than the, to my eye, more limited conflict-of-interest focus of the prior regulations, should provide plan fiduciaries with more information, even if it does bring with it a potentially greater effort in sifting for those conflicts. Finally—and this is the provision almost certainly likely to draw the most industry focus—the DoL has opted to require that “certain providers of multiple services” disclose separately recordkeeping costs.

This was one of the more controversial provisions in the earlier proposals, and the Labor Department at that time tried to craft a “Solomonic” yet practical solution for those bundled providers who continue to claim that they are simply unable to break those costs out of their integrated delivery models, by basically requiring that unbundled providers disclose those costs, while those who couldn’t (or said they couldn’t) needn’t.

I am encouraged that this new proposal does not make that differentiation. In response to my question on the issue last week, Assistant Secretary of Labor Phyllis Borzi noted that they had heard from a number of sources during the course of the process and comment periods that many plan sponsors still are under the impression that recordkeeping is “free,” and they felt it was necessary to help disavow them of that notion. Back in the day when recordkeeping was routinely priced as a discrete service, it generally was found to constitute about 20% of the total costs for a DC plan; so, IMHO, it’s certainly large enough to warrant a separate disclosure. Ms. Borzi noted that those who may (still) find it difficult to comply with the measure have a year to do so. Personally, I would argue that they should have seen it coming before now.

As for that revenue-sharing case, well, we’ll take a look at it next week—unless, of course, we have another not-so-quiet week.

Thinking "Caps"

While the spate of revenue-sharing suits has—for the moment, anyway—faded into the background, fees remain one of the most hotly debated topics in our industry.

If anything, the intensity has heightened in recent weeks, as we near the Form 5500 filing deadline for December plan-year ends, even as we anxiously await the new 408(b)(2) fee disclosure regulations from the Labor Department—regulations that might well have been at some odds with legislation proposed by Congressman George Miller (D-California) that rode through the House as part of that extenders bill before being dropped by the Senate.

The urgency behind these initiatives is two-fold: to force those who provide services to these plans to more fully and accurately disclose their fees to plan fiduciaries, and to provide participants with some idea of the monies that are being netted from their investment returns (and taken from their accounts). Ultimately, it is about helping people make better, or at least more informed, decisions about their retirement plan investments—and these initiatives are all predicated on the notion that these fees are not adequately disclosed, or sufficiently understood, at present.

That said, a report recently issued by the Transamerica Center for Retirement Studies (from its 11th Annual Retirement Survey) paints a somewhat different picture (see 401(k) Participants not as Knowledgeable as Employers Think).

Asked whether they would like to receive more information from their retirement plan provider about fees and expenses associated with their plan, two thirds of the roughly 600 employers surveyed (and these were not limited to clients of Transamerica) said no, and half of those strongly disagreed with that proposition (smaller firms were somewhat more likely to disagree strongly). Now, that’s a startling statement in view of the characterization of the current state of 401(k) fees by many in Congress and most in the media—not to mention a few in the industry itself.

Asked if those in their firm who were responsible for overseeing the retirement program had a “clear understanding of the fees and expenses associated with the retirement plan,” nearly all—94%—at least somewhat agreed with that proposition. Nearly three-quarters of those at (277) larger firms strongly agreed with that statement, as did nearly half of the smaller firms (271). Could it be that these employers weren’t interested in receiving additional disclosures because they felt they already understood?

Moreover, strong majorities of employers felt that their workers had a similarly clear understanding of the fees associated with their account; one in five strongly agreed with that statement, while roughly half were willing to say they “somewhat agreed” with the proposition. Those results, of course, stood in some contrast with workers, where only about a quarter were willing to say they were aware of fees that may be charged to their account (admittedly, nearly as many weren’t sure, while about half said they were not aware).

These are the kinds of results that tend to work legislators, consultants/advisers—and journalists—into a lather. The “common wisdom” is, of course, that retirement plans are being gouged; that retirement plan sponsors are complacent, if not complicit in the theft; and that plan participants are oblivious to it all.

We may draw some comfort from the reality that most retirement plan fees are drawn from the expense ratios applied to the various funds, ratios that are generally disclosed, if somewhat imperfectly, to plan fiduciaries and participants alike (we may not yet know the apportionment, but the gross amount is certainly ascertainable). And yet, most advisers would likely view the Transamerica Center results with scepticism, if not downright cynicism. I can hear many of you saying to yourself right now, “They may THINK they know what they’re paying, but they really don’t.”

That said, don’t YOUR clients know what they are paying?

It’s hard to know exactly what inferences to draw from the research. Perhaps the plan sponsors are being misled or maybe misinformed; perhaps they do have a workable, if imprecise, idea of the plan costs. Improbable as this might seem, they might even happen to be a uniquely well-informed segment of plan sponsors. We may know what they are thinking, but we do not know what they think they are paying, much less how realistic that assessment.

Regardless, more disclosure is surely coming and—whether they think they know and don’t, or think they do and are correct in that assumption—IMHO, it’s hard to imagine that those disclosures won’t be a positive contribution to the exercise of their fiduciary responsibilities.

Here’s hoping it keeps us all thinking, rather than leaving us all guessing.

- Nevin E. Adams, JD

Prudent Mien?

Anyone who has been paying attention to 401(k) plan litigation these past several years knows that a common trigger—perhaps the most common trigger—for litigation is the presence of company stock in the plan; more specifically, the presence of company stock that has sharply declined in value. Indeed, one has only to look at the two-month period following the struggle to contain the current oil spill in the Gulf of Mexico and the number of litigants and potential litigants circling the BP 401(k) plans to appreciate just how much more aggressive the plaintiffs’ bar has become in pursuing such actions.

That said, those who have been paying attention to how these cases have played out in court are doubtless aware that many, perhaps most, are not coming to trial at all. Rather, they have been dismissed with what, IMHO, is startling regularity, due to a “presumption of prudence.”

Now, one needn’t scour ERISA’s text to discern the boundaries of this legal construct; indeed, that would be a futile effort. Rather, it is a concept gleaned by the courts (and subsequently enshrined in legal precedent) from their understanding of the black letter of the law. It is a concept that found its footing in a 1995 case called Moench v. Robertson. Now, in that case, as in many of the new generation of “stock drop” cases (drawing their name from the fact that the action arises after the value of the stock drops), a plan participant sued a plan committee for breaching its fiduciary duty based on its continued investment in employer stock after the employer's financial condition “deteriorated.” The Moench court (the 3rd Circuit) affirmed the duty of prudence, but looked to ERISA’s diversification requirement and the allowances made for employer stock holdings in an employee stock ownership plan (ESOP), and saw there a rebuttable presumption that an ESOP fiduciary that invested plan assets in employer stock acted consistently with ERISA (bearing in mind that, since Moench dealt with an ESOP, the plan document itself called for investment primarily in employer securities).

Now, I will admit to being something of a strict constructionist in my interpretation of the law. I am suspicious of those who manage to, through some jurisprudential alchemy, wrest unexpected (and likely unintended) legal conclusions by reading between the lines of the letter of the law. Further, I am generally distrustful of a process that builds on those kinds of legal “extensions” to base future determinations that are, IMHO, often far afield from the intentions of the law itself. After all, once you have established that 2 + 2 = 5, how hard is it to argue that 2 + 5 = 10?

Ironically—certainly in view of how the resulting Moench presumption has proven to be a powerful force in dismissing many of the stock drop cases at the pleading level—though the 3rd Circuit found a presumption of prudence, it reversed summary judgment for the committee/defendants because the facts alleged (precipitous drop in stock prices, committee members' knowledge of the impending collapse, and their conflicted loyalties as corporate insiders and fiduciaries), if proven, could overcome the presumption. And that finding came in the context of an ESOP, a plan design that, if not exempt from ERISA’s fiduciary strictures, would certainly seem to warrant a certain reasonable amount of fiduciary deference in the decision to hold employer stock.

That said, today the law of the land would seem to lie squarely on the side of plan fiduciaries who continue to hold out employer stock as a plan investment, come hell or high water (literally, in some cases). In effect, this “presumption of prudence” seems to have become a magic talisman against which no claim of malfeasance can be successfully alleged, much less established, simply because the courts have discovered (a cynic might say created) a presumption that holding employer stock is appropriate.

Plan fiduciaries have long been tempted by the allure of placing employer stock in these programs, and plan participants have, in large part, responded favorably1. Frankly, I find the rapaciousness of the plaintiffs bar on such matters to be unseemly at best—some downright unscrupulous—and many of the so-called “investigations” are nothing more than a fig-leaf-cloaked excuse to troll for potential litigants. Disaster can befall the best of firms, and stock prices sometimes tumble for reasons that have nothing to do with the fiduciary management of these plans.

That doesn’t mean that plan fiduciaries can pretend that they do not know things they clearly know as corporate fiduciaries; nor, as a recent amicus brief filed by the Labor Department on the broadening application of the Moench decision states, should the securities laws “immunize fiduciaries who knowingly incorporate false SEC filings into participant communications from liability under ERISA” (see “Solis Argues for Stock Drop Case Law Change”).

In this day and age, a plan fiduciary unable to see the potential for employer-security-related litigation is perhaps unworthy of the role; and, IMHO, a dual-role plan/corporate fiduciary unable to appreciate the potential for a conflicted duty vis-à-vis his or her responsibility to the retirement plan is living in a state of active denial.

As for those not yet targeted by litigation, thus far the courts may have presumed that plan fiduciaries are entitled to a certain deference in such matters—but, IMHO, that’s stretching the letter of the law.

—Nevin E. Adams, JD



1 Nor, as some like to posture, are participants necessarily bludgeoned into investing disproportionately large sums of their retirement savings there. Sure, the match accounts for some, and perhaps displaced loyalty some more, but I have found that participants are simply more familiar—and comfortable—with that option.