7 Common Retirement Plan Mistakes

The headlines are all about revenue-sharing, conflicts of interest and statutes of limitation — but the things that are likely to get plans and plan sponsors in trouble are a lot more mundane.

Here are seven that are more likely to gum up the works for your average plan sponsor.

1. Not following the terms of the 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, result in a distribution that is not authorized under the terms of the plan document. And since these types of distributions are often spent quickly by participants, and thus are not readily recoverable, it can be complicated and time-consuming to set the situation right.

Oh, and don’t forget that administrative procedures for dealing with such things have been known to be, or become, inconsistent with plan documents over time.

2. Failure to follow plan document eligibility and vesting provisions.

The plan document also spells out employees’ rights to retirement benefits and the formulas for determining them based on the correct application of service and/or age requirements of the plan regarding eligibility for participation, as well as the proper application of the plan’s vesting schedule.

To 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; simply put, it is the operating manual for the plan. 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. Not keeping your plan document up to date.

As central to the plan’s operation as the plan document should be, it needs to be updated when the tax laws affecting 401(k) plans change. The IRS generally establishes a firm deadline by which plan amendments reflecting tax law changes must be adopted. If you don’t remember the last time you updated your plan, you’re probably overdue.

4. Not starting required minimum distributions (RMDs) 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 on a timely basis or have not been paid 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 participant 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.

Note also that the rules about the timing of matching contributions or other employer contributions are different than those for elective deferrals.

6. Failing to obtain spousal consent.

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 HR accounting system incorrectly classifies a participant as not married (or when the participant was not married at one point and subsequently 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.

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

Assuming that the plan allows it (another plan document check), 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.

- Nevin E. Adams, JD

IRS Guidance Available
 
As for plans that fall short of any of the above, the IRS has resources available to help you identify these problems before they occur — and an outline of how to go about fixing them if they do occur. And should you find a plan in one of the foregoing predicaments, you might want to check out these resources from the IRS:

• If you haven’t updated your plan document.

• If you have issues with required minimum distributions.

• If you haven’t made contributions on a timely basis.

• If you didn’t get spousal consent.

5 Investment Committee Lessons Learned From Tibble

Two things have been overlooked by many people in the days leading up to the Supreme Court’s decision in Tibble v. Edison International and the weeks thereafter: (1) most of the wrongs¹ initially alleged did not survive the judgment of the district court; and (2) only a single issue — the determination as to how to apply ERISA’s statute of limitations to fund selection — was before the nation’s highest court.

While the Supreme Court rejected the notion that an initial fund review was sufficient in the absence of significant changes in circumstance to preclude the need for an ongoing assessment, the defendants in Tibble did a lot of things right that many plans don’t. Here are five:

1. They had a plan investment committee.

ERISA only requires that the named fiduciary (and there must be one of those) make decisions regarding the plan that are in the best interests of plan participants and beneficiaries, and that are the types of decisions that a prudent expert would make about such matters. ERISA does not require that you make those decisions by yourself — and, in fact, requires that if you lack the requisite expertise, you must enlist the support of those who do have it. No committee required.

2. They had regular committee meetings.

Having a committee and not having committee meetings is potentially worse than not having a committee at all. If there is a group charged with overseeing the activities of the plan and that group doesn’t convene, then one might well assume that the plan is not being properly managed, or that the plan’s activities and providers are not prudently managed and monitored, as the law requires. The Edison investment committee met quarterly to review plan investments and to review reports and recommendations from investment staff.

3. They kept minutes of committee meetings.

There is an old ERISA adage that says, “prudence is process.” However, an updated version of that adage might be “prudence is process — but only if you can prove it.” To that end, a written record of the activities of your plan committee(s) is an essential ingredient in validating not only the results, but also the thought process behind those deliberations.

More significantly, those minutes can provide committee members — both past and future — with a sense of the environment at the time decisions were made, the alternatives presented and the rationale offered for each, as well as what those decisions were. They also can be an invaluable tool in reassessing those decisions at the appropriate time and making adjustments as warranted — properly documented, of course. And they can be useful in subsequent litigation. Or not.²

4. They had an investment policy statement.

While plan advisors and consultants routinely counsel on the need for, and importance of, an investment policy statement, the reality is that the law does not require one, and thus, many plan sponsors — sometimes at direction of legal counsel — choose not to put one in place.

Of course, if the law does not specifically require a written investment policy statement (IPS) — think of it as investment guidelines for the plan — ERISA nonetheless basically anticipates that plan fiduciaries will conduct themselves as though they had one in place. And, generally speaking, you should find it easier to conduct the plan’s investment business in accordance with a set of established, prudent standards if those standards are in writing, and not crafted at a point in time when you are desperately trying to make sense of the markets. In sum, you want an IPS in place before you need an IPS in place.

Not also that, while not legally required, Labor Department auditors routinely ask for a copy of the plan’s IPS as one of their first requests. And therein lies the rationale behind the counsel of some in the legal profession to forego having a formal IPS: Because if there is one thing worse than not having an investment policy statement, it is having an investment policy statement — in writing — that is not followed.

That said, the Edison investment committee had an IPS, and by all accounts, were attentive to its terms. Terms that apparently were focused on the investment and asset allocation aspects of the fund choices, rather than on the costs and alternatives.

5. They hired an investment professional to help.

The Edison plan investment committee had access to, and relied on the services of, an investment adviser (AonHewitt’s investment consulting arm) to review/select/monitor funds. And they did make fund changes during the period in question (in fact, the district court noted that in 33 of 39 instances during the period in question, they replaced funds with others that actually decreased the revenue-sharing received by the plan).

The Tibble defendants clearly did a lot of things right in reviewing and monitoring their investment menu — so what did they do wrong?

Well, with regard to this litigation, what this $2 billion+ plan didn’t do was ask investment fund providers to waive the minimums for investment in institutional class shares, shares that were reportedly identical in every way save one (fees) to the retail class chosen. It might well be that the IPS itself and the focus of the committee didn’t consider all the factors (notably fees) that play into fund performance and suitability, and should be considered.

Following the Supreme Court’s ruling, it’s clear there is a fiduciary duty to review the funds on the retirement plan menu on an ongoing basis, though how much and how often remain to be established.
But perhaps most importantly, one lesson is now crystal clear now, if it wasn’t previously: “set it and forget it” is not an appropriate standard of review for ERISA fiduciaries.

Nevin E. Adams, JD

Footnotes

1. The district court cited three possible rationales for the retention of retail-class shares offered by witnesses for the defendant/employers — but found no evidence for them in the actions taken (or not taken).

2. The district court noted that witnesses for the defendant/employers offered three possible rationales for keeping the retail shares: 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. But Judge Stephen V. Wilson noted that, “None of these explanations is supported by the facts in this case.”

3 Things You Should Know About Automatic Enrollment

One of the most celebrated plan design features of the 401(k) era is automatic enrollment. Nearly as old as the 401(k) itself, once upon a time it was called a “negative election.” But regardless of the name, the concept has been extraordinarily effective at not only getting, but keeping, workers saving via their workplace retirement plans.

However, adoption of the design, after a surge in the wake of the passage of the Pension Protection Act of 2006, now seems to have plateaued. Moreover, current data suggests that, while automatic enrollment adoption has certainly had a positive impact on retirement outcomes, we’re not getting as much mileage from it as we might.

So, here are three things that plan sponsors — and others — should know about automatic enrollment.

1. You don’t have to default contributions at 3%.

Three percent was the standard default contribution rate for automatic enrollment plans long before the Pension Protection Act of 2006 incorporated it as part of its auto-enroll safe harbor. Originally cited in a now-obscure IRS regulation years before the advent of the PPA, in the years to follow, it was largely embraced because it was seen as little enough that it wouldn’t spur massive opt-outs by automatically enrolled participants.

With more than a couple of decades of experience under our belts (a third of that under the auspices of the PPA), we know a couple of things. First, that 3% is indeed too small an amount to spur most auto-enrollees to opt out. In fact, there have been any number of studies — and some real-world experience — suggesting that a defaulted contribution rate twice as high would produce very nearly the same result.

What many plan sponsors may not know is that while that the auto-enrollment safe harbor of the PPA calls for a minimum starting deferral of 3%, it is a floor, not a ceiling.

But another, and more important, thing that we’ve all known from the very beginning is that a 3% rate of deferral is not enough.

2. If you are going to default at 3%, make sure you accelerate the contribution rate.

Automatic enrollment and contribution acceleration have always been separate things: the former a decision made by the plan sponsor, with the participant having the ability to opt-out; the latter a voluntary decision by the participant, facilitated by the plan sponsor.

These two traditionally separate concepts were wedded in the PPA’s automatic enrollment safe harbor, and for a very sound reason: As noted above, a 3% deferral is not enough.

Current survey data suggests that plan sponsors continue to separate these two design choices, and that tells me two things: 

• most plan sponsors who adopt automatic enrollment designs aren’t doing so with an eye toward taking advantage of the PPA safe harbor; and
• while many plan sponsors are willing to make one monetary decision on behalf of their workers, they apparently aren’t nearly as willing to make two, however integral it might be to retirement security. 

3. Automatic enrollment isn’t just for new hires.

Despite our extended history with automatic enrollment, and the PPA’s safe harbor that contemplates its extension to all eligible workers, to date most plans — roughly two-thirds — that have adopted automatic enrollment have done so only for new hires. Over the years, I have heard a variety of explanations for this trend — anything from a hesitation to “suddenly” take contributions from long-time workers (who have ostensibly declined to take advantage of previous opportunities to join) to a general resistance to running the risk of stirring up trouble with existing workers.

However, to me, the most logical explanation is economic: Just take the likely increase in participation rate (generally from 70% to 95% or so) resulting from automatic enrollment, and then figure out the increase in matching dollars that would result, particularly for an employee population that is likely more tenured and highly compensated.

Little wonder that so many decide to “let sleeping dogs lie.” Though in all my years of experience working with 401(k) plans, I have never heard of even a single participant who objected to being automatically enrolled. On the other hand, I’ve heard dozens of stories of long-tenured workers who had, for a variety of reasons, put off signing up for their 401(k) — but who, when they finally were enrolled, were oh-so-very-grateful for that “start,” however delayed.

And that, perhaps as much as anything else, is something plan sponsors should know.

- Nevin E. Adams, JD

The “New” Math?

One of my more frustrating memories of parenthood was trying to help my kids with their homework. Not because I hadn’t covered the territory once upon a time myself, or because I couldn’t manage to refresh my recollection(s) of the subject. It wasn’t enough to teach my kids a method sufficient to arrive at the correct answer, and to help them understand how we got there. No, it didn’t “count” unless I could arrive at the answer by adhering to what struck me as a weirdly inefficient and complicated regimen upon which their teachers insisted.

If this was the “new math,” I remember thinking at the time, I fear for the sanity of the next generation.

This past weekend The New York Times ran an article aptly, if somewhat awkwardly, titled, “New Math for Retirees and the 4% Withdrawal Rule.” The focus of the article, like the 4% rule itself, was how to pace withdrawals in retirement so that you don’t run out of money before you run out of retirement. However, like so many other things these days, it’s apparently not as simple as it once was, complicated by the low interest rate environment and the current high stock market values.

Though a lot of time, thought and attention has been paid to the 4% rule (and its progeny), to me it’s basically just math. After all, once you stipulate certain assumptions about the length of retirement, portfolio mix/returns, and inflation, a guideline like the 4% “rule” is really just a mathematical exercise.

‘Drawing’ Board

But if those rules purport to tell us how much we can draw from our retirement savings without running out, how does that compare with what people are actually withdrawing? The Employee Benefit Research Institute (EBRI) has previously examined withdrawal patterns in their IRA database, and found that the median IRA individual withdrawal rates amounted to 5.5% of the account balance in 2010, though among those 71 or older (when required minimum distributions kick in) were much more likely to be withdrawing at a rate of 3-5%.

Those median numbers don’t tell the whole story, of course. A separate EBRI analysis, this one based on data from the University of Michigan’s Health and Retirement Study (HRS), found that lower-income workers were withdrawing money from their individual retirement accounts in much greater numbers, earlier, and at much larger percentages, than other workers. In fact, the report noted that nearly half (48%) of the bottom-income quartile of those between the ages of 61 and 70 had made such an IRA withdrawal, and that their average annual percentage of account balance withdrawn was 17.4% — higher than the rest of the income distribution. In sum, a number of individuals, again, notably lower-income workers, were withdrawing more from their retirement savings accounts than those in higher income groups — and apparently more than the 4% “rule” would suggest would allow them to avoid running out of money in retirement.

Will these drawdown rates create a problem down the road? Will these individual run short of funds in retirement? Will those withdrawals, along with other resources that may be available, be sufficient to live on? The answers, of course, depend on the individuals, their circumstances, health, needs, expectations — and preparations.

Those ultimate realities may be new for some — but the “math” won’t be.

- Nevin E. Adams, JD

13 Things About Work You Probably Didn’t Learn in School

This weekend our youngest will graduate from college. It’s a big day for him, of course, and a big deal for us, having for some part of the past eight years had either one, two — and for one interesting year, all three — of our children in college at the same time.

Life has many lessons to teach us, some more painful than others. But as my son — and graduates everywhere — look ahead to the next chapter in their lives, it’s a natural time for the rest of us, particularly those of us who are parents, to reflect on the lessons we’ve learned along the way.

So, for my son — and all the other graduates out there — here are some things I wish I had known when I entered the workforce:

 

1. If you don’t speak up, people will assume you’re happy with the way things are.

 

2. If you wouldn’t want your mother to learn about it, don’t do it.

 

3. Never assume that your employer (or your boss) is looking out for your best interests.

 

4. You can be liked and respected.

 

5. Be very careful when using the “Reply All” button.

 

6. Never miss an opportunity to tell someone “thank you.”

 

7. Be willing to take all the blame — and to share the credit.

 

8. Know at least a little about sports and the weather.

 

9. Never assume that “senior management” knows what they’re doing.

 

10. Watch your language. People notice people who don’t curse.

 

11. Sometimes the questions are complicated, but the answers aren’t.

 

12. That 401(k) match isn’t really “free” money — but it won’t cost you a thing.

 

13. Plan for your future now because retirement, like graduation, seems a long way off — until it isn’t. 

Congratulations to my son — and all the graduates out there. We’re proud of you!

- Nevin E. Adams, JD

On Retirement Plans and Plans for Retirement

When is a plan not a plan? When you have a retirement plan at work, apparently.

The good news is that the 2015 Retirement Confidence Survey shows a strengthening of retirement confidence — at least among those who had some kind of retirement plan (DB, DC or IRA). Indeed, among that group, the number saying they were very confident has doubled since 2013.

The bad news? Well, there doesn’t seem to be much in terms of substantive savings accumulations¹ or planning behaviors to account for this uptick in confidence.

Consider that fewer than half (48%) of workers report they and/or their spouse have tried to calculate — even a single time — how much money they will need to have saved by the time they retire so that they can live comfortably in retirement, a level that has held relatively consistent over the past decade.

In other words, while many have (or had) a retirement plan, they don’t seem to have a plan for retirement. 

On the other hand, workers reporting that they or their spouse have a DC, DB or IRA plan are twice as likely as those who do not have such a plan (60% vs. 23%) to have tried to do a calculation to estimate what they will need to finance retirement. And despite higher savings goals, workers who have done a retirement savings needs calculation are more likely to feel very confident about affording a comfortable retirement (33% vs. 12% who have not done a calculation). Moreover, worker households with a retirement plan are more likely than those without such plans to report having saved for retirement (90% vs. 20%).

That said, after a quarter century reading and studying the RCS, several things are clear:

Those who have made the effort² — even a feeble one — to figure out how much they need in retirement are more confident, and likely better off in the long run, since they tend to set higher savings goals.

Those who work with an advisor are more confident, and likely better off in the long run, since they also tend to set more realistic (i.e., higher) savings goals.

And perhaps most importantly, those who have access to a retirement plan are not only more confident, they are probably better off, since they tend to have actual sources of income on which to draw in retirement.

But ultimately, while having a retirement plan may provide some quantifiable increase in confidence about retirement, it’s having a plan for retirement — and acting on it — that grounds that confidence in reality.

Nevin E. Adams, JD

Footnotes

1. While much will likely be made of the relatively low/modest savings amounts reported by RCS respondents, without knowing individual factors like age or income, it’s impossible to discern whether those amounts are woefully inadequate, or reasonable. 

2. Those plans for retirement need to be reconsidered on a regular basis, since many are forced (or choose) to leave the workforce earlier than planned.

3 (More) Pervasive Retirement Myths - an Academic Perspective

Last week I highlighted three “myths” about the retirement system that will not die — all the more distressing because they are perpetuated by retirement industry pundits. Here are three more that (mostly) aren’t perpetuated by those who actually work with retirement plans, but by academics.  Academics who, sadly, are often listened to, and cited by those who regulate and legislate these programs.

The Match Doesn’t Matter

This doubtless comes as a surprise to those of us who work with retirement plans and retirement plan participants. More precisely, there are a few studies out there that suggest that a matching contribution doesn’t have a very strong impact on participation. The study that is cited most often in support of this one is one conducted several years ago in conjunction with H&R Block, where individuals were offered a financial incentive to take their tax refund and deposit it in an IRA. Most didn’t — and thus the notion that the promise of the match doesn’t produce (much) in the way of participation.

Now, if you find yourself saying, “But that’s not really an analogous situation to 401(k) saving” — well, you wouldn’t be the only one to think so.

But even if it has only a modest impact on the decision to participate, the data clearly suggests that it has a big impact on the rate of savings — and on the savings accumulations itself.

You Can Plug the Leakage Problem by Limiting Loans

Preventing “leakage” has become a constant drumbeat of many in our industry, their passion fueled by estimates of the enormity of the problem that seem limited only by the imaginations of those clamoring to solve it. As recently as a week ago, I was at a conference where a respected researcher went so far as to suggest that we are losing as much as $1 in leakage for every $2 contributed into the system. I kid you not.

Now, the “out” for these wild exaggerations is that nobody knows for sure, and so — if you’re looking for them — you see those estimates footnoted with disclaimers like “author’s calculations.” Or sometimes they come right out and admit that it’s based on a “host of simplifying assumptions.”

Don’t get me wrong — “leakage” can be a threat to an individual’s retirement security. But when the nonpartisan Employee Benefit Research Institute (EBRI) looked into the matter in testimony provided to the ERISA Advisory Council last year, it was cashouts — not loans or hardship withdrawals (even including the impact of a six-month suspension of contributions) — that turned out to be approximately two-thirds of the leakage impact.

So, if you want to solve the real leakage problem, you might want to start by accurately assessing the size of the problem, rather than just making numbers up. And then you might look for ways to make it easier for folks to keep their savings in the system at job change.

And let’s not forget — locking people’s money up with no access until retirement may solve the leakage problem. But it could also lead to a reduction in the amount of money people save in the first place.

The 401(k)’s Tax Incentives Are ‘Upside Down’

One of the comments you hear from time to time is that the tax incentives for 401(k)s are “upside down” (or as it has been more colorfully described, “out of whack”) — that is, they go primarily to those at higher income levels, who perhaps don’t need the encouragement to save. And from a pure financial economics perspective, those who pay taxes at higher rates might reasonably be seen as receiving a greater benefit from the deferral of those taxes.

Indeed, if those “upside-down incentives” were the only forces at work, one might reasonably expect to find that the higher the individual’s salary, the higher the overall account balance would be, as a multiple of salary. However, drawing on the actual administrative data from the massive EBRI/ICI 401(k) database, and specifically focusing on workers in their 60s (broken down by tenure and salary), EBRI Research Director Jack VanDerhei has found that those ratios hold relatively steady. In fact, those ratios are relatively flat for salaries between $30,000 and $100,000, before dropping substantially for those with salaries in excess of $100,000.

In other words, while higher-income individuals have higher account balances, those balances are in rough proportion to their incomes. They are not “upside down.” Now this is the outcome — the balances — not just focused on the contributions, the amount(s) going in, which is what most of the criticism focuses on.

As retirement plan advisors are well aware, these programs are subject to a series of limits and nondiscrimination test requirements: the boundaries established by Code Sections 402(g) and 415(c), combined with the ADP and ACP nondiscrimination tests. Those plan constraints were, of course, specifically designed (and refined) over time to maintain a certain parity between highly compensated and non-highly compensated workers in the benefits available from these programs. The data suggest they are having exactly that impact.

More recently, the “fairness” of these incentives has been questioned since they “only” go to workers who are covered by workplace retirement plans (though, as I pointed out last week, those numbers are often distorted as well). A better solution might be to expand those covered by such plans, rather than to undermine the diligence of those who are saving.

You’re less likely to hear these statements in your earshot — they tend to show up in academic forums, and sometimes in legislative hearings — forums where “decorum” might suggest avoiding confrontation.

But this is not just an academic exercise. And no one is well served — even the often well meaning academics who are trying to help improve the current system — by perpetuating misunderstandings.

- Nevin E. Adams, JD

3 Pervasive Retirement Industry Myths

Ours is a complex and complicated business — constantly changing and evolving. And yet, there are key fallacies about today’s retirement system — and how it compares with what used to be — that will not go away.

Back in the good old days being “covered” by a pension plan meant you would actually get a full pension benefit.

We’re routinely told that “once upon a time” individuals used to work for a single employer their entire career, and that most of those workers were “covered by a workplace retirement plan, frequently a defined benefit pension.”

While defined benefit plans were certainly more common a generation ago, they were not as ubiquitous as is often assumed (see here).  

Moreover, while some workers did spend their working career at a single employer (and some still do, particularly in the public sector), the data show that for the very most part we have long been a nation of relatively short-tenured workers. How short? Well, the median job tenure in the United States — how long workers stay at one job — has hovered around five years for the past three decades. Indeed, according to the nonpartisan Employee Benefit Research Institute (EBRI), in recent years it has ticked up, to about 5.5 years, but that’s because women are staying in their jobs longer; job tenure for men has actually been dropping.

What that means is that even workers who were “covered” by a pension plan in the private sector weren’t working with that employer long enough to get much — or any — of that promised pension benefit.

Only half of American workers have access to a workplace retirement plan.

Speaking of coverage, this is one of those statements that, while technically accurate, is somewhat misleading. Applied to all workers, that is what the National Compensation Survey (conducted by the U.S. Department of Labor’s Bureau of Labor Statistics) indicates. But it includes all workers, including very young, very low-income, part-time and part-year workers.

If you focus on full-time, full-year wage and salary workers ages 21-64, an analysis by the Employee Benefit Research Institute (EBRI) noted that in 2013, two-thirds of those workers — workers who might reasonably be expected to be covered by a voluntary workplace retirement plan under current law — did, in fact, work for an employer that sponsored a plan.

The average 401(k) balance tells us…anything.

Let’s say I told you that the average 401(k) balance in a survey sampling was $130,000 — would that be good or not?

What if I then told you that our sampling consisted of an individual who is 25 years old and has a 401(k) balance of $5,000, and an individual who is 64 years old and has a 401(k) balance of $255,000? How might that change your response? Would that tell you anything meaningful about the retirement readiness of that group?

Of course not — but surveys and coverage of those surveys routinely purport to glean a sense of retirement readiness from those kind of numbers. Despite the reality that they are comprised of savings totals for workers with a wide range of age, tenure, and savings rates — totals that are simply added together, and then divided by the number of workers in the sample.

The math on 401(k) averages is easy. The conclusions often drawn from that math, iffy. At best.

So, the next time you’re at an industry event and hear someone (who should know better) repeat one (or more) of those statements, or interviewed by a reporter who puts one (or more) of those presumptions forth as “proof” of the current system’s shortfalls, keep in mind that the data tells a different story.

And one that isn’t told often enough.

- Nevin E. Adams, JD

At Long Last, Retirement Confidence Surges

New nonpartisan data has uncovered a major uptick in retirement confidence, as millions of Americans with access to workplace retirement plans finally took advantage of the wide array of resources long available to them.

Those tools included the use of online calculators and the help of plan advisors. “I was always too busy to take advantage of these resources,” noted survey participant Jack V. Copeland. “Frankly, with all the negative coverage about retirement shortfalls and such, I didn’t see much point.”

Not that the new research, published by the Oxford Newfound Institute of Nihilism (ONION), didn’t uncover retirement savings shortfalls among survey participants. However, with workers now taking the time to assess their personal situation, savings rate and projected retirement income needs, developing plans to address the situation rather than simply worrying about their dim prospects for retirement savings success became the order of the day. Previous research had shown that fewer than half of workers had made even a single attempt to assess their retirement needs, and many of those had simply guessed.

Ironically, despite this newfound and dramatic increase in confidence, the new retirement savings goals were not only more likely to produce a successful outcome, they were generally higher than the goals previously set by workers who had gone through the process.

Some of the most dramatic impacts were recorded by participants in plans where employers had not only provided for automatic enrollment immediately upon hire, but who applied automatic enrollment retroactively to existing hires as well. “All these years, I just assumed my employer thought it was too late for me to start saving,” said one long-time worker who had just been automatically enrolled under such a program.

A separate, plan sponsor-focused report found that the renewed focus and confidence translated into tangible workforce management benefits as well. “We found that a growing number of older workers were simply hanging on to their old jobs, afraid to retire because they had no idea how much they would need to have in retirement,” observed one. “Now, for the first time in a long time, we’re seeing workers actively plan for their retirement date with confidence. We should have done this years ago!”

No foolin’.

- Nevin E. Adams, JD

Note: Sure it's April Fool’s, but while the post above has a certain tongue-in-cheek character, the implications are not as fictional as you might think. In fact, they are well within the realm of a very potential reality for millions more — with a little help from plan advisors, their plan sponsor clients and the cooperation of plan participants.

The Gaps in Retirement Savings "Gaps"

As spring follows winter, so apparently do dire predictions about the nation’s retirement prospects.

For example, the Center for Retirement Research (CRR) at Boston College now claims we are looking at a $7.7 trillion dollar “retirement gap” for American workers, up from $6.6 trillion five years ago. Meanwhile, a new report by the National Institute on Retirement Security (NIRS) on what it called the “Continuing Retirement Savings Crisis” didn’t cite a specific aggregate gap, but a year ago NIRS employed a similar approach to suggest that that gap was likely somewhere between $6.8 trillion and $14 trillion.

While these outcomes are cited widely (the CRR’s as recently as last week in a U.S. Senate hearing), the underlying methodologies and assumptions are worth understanding. Both rely heavily on self-reported numbers from the Federal Reserve’s Survey of Consumer Finances (SCF), and while both track the progress of American retirement readiness by examining how individuals in the SCF did over time, they fail to acknowledge that doing so compares the balances and readiness of two completely different groups of individuals at different points in time. The NIRS analysis builds on that shaky foundation by incorporating some assumptions about defined benefit assets and extrapolating target retirement savings needs based on a set of age-based income multipliers — income multipliers, it should be noted, that have no apparent connection with actual income, or with actual spending needs in retirement. But then, the math is easier.

There’s no question that there is a gap between what Americans are likely to need to live comfortably in retirement and the resources available to fund it. The non-partisan Employee Benefit Research Institute (EBRI) recently updated its EBRI Retirement Readiness Rating and found that the retirement savings gap was $4.13 trillion for all U.S. households (not just those who have retirement plan balances, though it uses actual 401(k) data for those who do have such plans, rather than relying on self-reported estimates), where the head of the household is between 25 and 64, inclusive. That may be well short of the projections offered by the NIRS and CRR, but it’s a big number, nonetheless.

Indeed, considering the enormity of that gap, policymakers — and Americans generally — might well feel like throwing up their hands and despair of ever closing it (indeed, earlier this month NIRS published a survey indicating that 86% of Americans believe the nation faces a retirement crisis).

What is unfortunately often lost in the trillion-dollar gap headlines (and the concurrent surveys that, unsurprisingly, talk about our deteriorating confidence about our retirement) is that not everyone has a retirement savings gap. Ironically, considering their differing methodologies, the CRR, NIRS and EBRI all put the number at about 50%. (EBRI’s number, which in its assumptions and use of actual data seems more conservative, says the number at risk of running short of money in retirement is in the low 40% range.)

How big is the gap at an individual level? The EBRI analysis breaks it down into manageable numbers: For those on the verge of retirement (Early Baby Boomers), the deficits vary from an aggregate of $19,304 (per individual) for married households, to $33,778 for single males and $62,734 for single females. If you look only at the individuals who do have gaps (EBRI’s projections, which take into account the potential costs of nursing home care and living expenses based on real experience, rather than arbitrary replacement ratios, indicate that about 57% will have sufficient retirement income), the gap for Early Boomers ranges from $71,299 per individual for married households to $93,576 for single males and $104,821 for single females.

Not surprisingly, those eligible to participate in workplace retirement plans fare better. Also not surprisingly, those who have jobs are more likely to have incomes and access to a workplace retirement plan — and those who work for larger employers are more likely to have both larger incomes and access.

However, even EBRI’s estimates include a wide range of personal circumstances, from individuals projected to run short by as little as a dollar to those projected to fall short by tens of thousands of dollars. For those seeking to understand, and perhaps craft solutions for, the current projected shortfalls, this is an important distinction, and one given short shrift by a headline’s focus on the aggregate.

There are, of course, broad policy changes that can, and have, made a big difference, nationally and at a plan level — things like automatic (and immediate) enrollment, contribution acceleration and prudent selection of a default investment option, not to mention ideas (or legislation) that expand access to those plans.

That said, ultimately the retirement savings gap is an aggregation of individual savings gaps. And as advisors well know, you close those one individual at a time.

- Nevin E. Adams, JD

The Troubble With Tibble

Ours is a complex business. For one thing, it’s fraught with potential peril for inattentive plan fiduciaries, many of whom find themselves tasked with the responsibilities of the role (frequently as part of a much wider range of responsibilities) with little in the way of background, training or explanation to help.

And then you have the defendants in the Tibble v. Edison International case: a large ($2 billion-plus) plan that not only had an investment committee, but also one separate from the benefits administration function. Moreover, that investment committee had access to the services of an investment advisor (Hewitt’s investment consulting arm) to review, select and monitor funds and, according to the findings of the lower courts, a review process that was attentive to the requirements of an investment policy statement (IPS).

What they did not do was ask about the availability of lower-priced institutional shares.

However, that wasn’t the issue before the U.S. Supreme Court this past week. Rather, the Court was asked to decide how to apply ERISA’s statute of limitations to the action of selecting these funds. Three of the retail class funds were added as plan investment options in 1999; three more were added in 2002. The plan sponsor plaintiffs had successfully argued before the 9th Circuit that when the suit was brought in 2007, the funds which were added in 1999 had been on the plan menu for more than six years — beyond ERISA's statute of limitations. At issue was whether the prudence of that older selection could be challenged.

In the presentations before the Supreme Court, both parties agreed that there was a fiduciary duty to review plan investments, and both parties were willing to concede that the initial review and selection of an investment fund should be more extensive than just considering the retention or replacement of a fund that was already on the investment menu. It was the nature and extent of that review that consumed much of the discussion during the hearing.

In the initial ruling in the case, the district court said there had to be a change in circumstances significant enough to make the continued investment in that investment option an imprudent one, and cited legal precedent for its view. The discussion last week noted precedents in the 9th, 4th and 11th Circuits saying that change would have to be tantamount to adding a new fund. In Tibble, there doesn’t appear to have been a change in the funds on the menu per se, but rather, the mere existence of lower-cost institutional shares.

However, the Assistant to the Solicitor General, appearing in support of the plaintiffs’ position as a friend of the court, told the justices that in its assessment, the ongoing monitoring of investment options was "not limited to circumstances in which the fund changed so much that it's like a new fund is being put in place.” 

It remains to be seen how the Supreme Court’s view of the level of review and the circumstances that trigger it will affect the outcome of this case. We’ll have an answer by June.

That said, the words that linger in my mind — and that I think plan fiduciaries should remember — also came from the Assistant Solicitor General: “You have a duty to look on a periodic basis and, really, how are you going to know if there have been changes unless you looked.”

How indeed.

- Nevin E. Adams, JD

The Importance of Having a Plan

Over the course of my career, I’ve had the opportunity to participate in any number of “projects,” and to manage more than a few.

Some were explicitly tagged as such at the start, while others simply expanded to fit that name. Most of those projects turned out well; others faded into the woodwork after a time; some drew to a close after “redefining success;” and a couple actually “crashed and burned.” A lot of variables determine whether a project will be a success or failure, but in my experience, projects that lack either a limited budget and/or a specific timeframe are doomed from the outset.

I was therefore interested in some of the findings from the 8th annual America Saves Week survey this week. The survey, sponsored by the Consumer Federation of America, the Employee Benefit Research Institute (EBRI) and the American Savings Education Council (ASEC), found that more than half (57%) of those with a savings plan with specific goals said they were making good or excellent progress meeting their savings needs — nearly three times the number without a plan.

Moreover, nine-in-ten of those with a plan were spending less than their income and saving the difference (compared with only half of those without a plan), and more than twice as many (65%) of those with a plan said they were saving enough for retirement as among those without that specific savings plan (31%).

While those gaps were found between those who had a specific, individual, savings plan with specific
goals, it’s long been established that having access to a retirement plan at work makes a big difference in terms of whether people save for retirement or not — and the impact transcends income, gender and age. In fact, data prepared by the nonpartisan EBRI shows that more than 70% of workers earning from $30,000 to $50,000 participated in employer-sponsored retirement plans when a plan was available, whereas less than 5% of those middle income earners without access to an employer-sponsored plan contributed to an IRA. In other words, middle class workers are 15 times more like to save for their families’ retirement at work than on their own.

During this America Saves Week, it’s important to reinforce the importance of saving. However, it may be even more important to remember the positive impact of having a specific plan.

Not to mention the positive impact of having access to a retirement plan at work.

- Nevin E. Adams, JD

See also: “4 Things You Need to Know if You are Not Saving for Retirement.” 

For an idea as to the impact that eligibility for participation in a workplace retirement plan can make, see “Retirement Savings Shortfalls: Evidence from EBRI’s Retirement Security Projection Model.” 

3 Things Every Plan Committee Member Should Know

Plan investment committee members come in all shapes and sizes, sometimes drawn exclusively from staff of the employer sponsoring the plan, sometimes not. More importantly, they are frequently tapped for this important role for reasons that may have little to do with their background or expertise in the matters that will come before the committee.

Now, with luck they’ll learn early on about the requirement to act solely in the interests of plan participants and beneficiaries, the importance of process (and documenting that process) and the implications of the prudent expert rule.

But as important as those considerations are, there are some important things that every plan committee member should know before they sit down at their first committee meeting.

You are an ERISA fiduciary. Even as a small and relatively silent member of the committee, you’ll direct and influence retirement plan money — and it’s that influence over the plan’s assets that makes you an ERISA fiduciary.

As an ERISA fiduciary, your liability is personal. How personal? Well, you may be required to restore any losses to the plan or to restore any profits gained through improper use of plan assets. You can obtain insurance to protect against that personal liability — but that’s probably not the fiduciary liability insurance you may already have in place, or the fidelity bond that is often carried to protect the plan against loss resulting from fraudulent or dishonest acts of those covered by the bond. If you’re not sure what you have, find out. Today.

You are responsible for the actions of other plan fiduciaries. All fiduciaries have potential liability for the actions of their co-fiduciaries. For example, the Department of Labor notes that if a
fiduciary knowingly participates in another fiduciary’s breach of responsibility, conceals the breach, or does not act to correct it, that fiduciary is liable as well. So, it’s a good idea to know who your co-fiduciaries are—and to keep an eye on what they do, and are permitted to do.


Having established those basics, as an ERISA fiduciary, you are expected to act solely in the interests of plan participants and their beneficiaries, and with the exclusive purpose of providing benefits to them; to carry out those duties prudently (and by prudent, it is intended that you be a prudent expert); to follow the terms of the plan documents (unless inconsistent with ERISA); to diversify plan investments (specifically with an eye toward minimizing the risk of large investment losses to the plan); and to ensure that the plan pays only reasonable plan expenses for the services it engages.  

A couple of additional points on fulfilling those duties; it’s going to be hard to follow the terms of the plan documents if you haven’t read them, and it’s likely to be difficult to ensure that the plan pays only reasonable expenses if you don’t know what the plan is paying, or for what.

And finally, should you, as a plan fiduciary lack the expertise to carry out those duties, you will, of course, want to hire someone with that professional knowledge to carry out the investment and other functions.

Additional information on fiduciary responsibilities can be found here.

- Nevin E. Adams, JD

The Impact of Assumptions on the Impact of Leakage

It has become something of an article of faith in our industry that “leakage,” the distribution of money from retirement accounts prior to retirement, is bad.

Bad, of course, in the sense that those “premature” withdrawals, via hardship withdrawals, loans or the so-called “deemed distributions” that result when a termination occurs when a loan is outstanding, reduce individual retirement savings.

So when the Center for Retirement Research at Boston College published a paper last week entitled “The Impact of Leakages on 401(k)/IRA Assets,” it really wasn’t a question of “if” there was an impact, it was a question of how much. The answer, according to the paper: a reduction in wealth at retirement of a jaw-dropping 25%.

Now by any measure, a 25% reduction in retirement wealth is a massive problem — and one that would, if valid, call for the kind of countermeasures touted by the Boston College researchers.

But consider the findings published recently by the non-partisan Employee Benefit Research Institute (EBRI) based on its massive participant database of actual participant balances and activity. Among participants with outstanding 401(k) loans at the end of 2013, the average unpaid balance was a mere $7,421, and the median loan balance outstanding was $3,973.

Moreover, the report notes — as it has for a number of years examining trend analysis in that database — that overall, loans from 401(k) plans tended to be small, with a sizable majority of 401(k) participants in all age groups having no loan outstanding at all: 88% of participants in their 20s, 73% of participants in their 40s, and 86% of participants in their 60s had no loans outstanding at year-end 2013.

So, how did the Boston College researchers manage to come up with a 25% reduction in retirement wealth? Quite simply, they started by deriving an estimate based on a “host of simplifying assumptions” — their words, not mine.

What are those simplifying assumptions? It starts with a hypothetical participant who initially makes $40,000/year, gets a 1.1% annual pay increase in real terms, assumes that he/she defers 6% of pay, is matched at a rate of 50 cents on the dollar, and whose investments gain a 4.5% real annual return. But the key assumption — and the one that arguably creates the conclusion of the paper — is their further assumption that 1.5% of assets leak out each year!

Under these assumptions, the leakages result in accumulated 401(k) wealth of $203,000 at age 60 compared with $272,000 with no leakage. So their math (and assumptions) lead to a conclusion that these leakages reduce 401(k) wealth by 25%. To “prove” the point, they provide a simple chart of the numbers they just produced, and direct the reader to it as though it provides some sort of independent corroboration.

They go on to clarify: “This estimate represents the overall impact for the whole population, averaged across both those who tap their savings before retirement and those who do not.” That’s right — averaged across everyone, not just those who actually dip into those savings prior to retirement.

Now at that point, it’s arguably just math, not so much a quantification of the impact of leakages as the mathematical impact of a series of simplifying assumptions. As for the so-called impact of leakages? It might more accurately be described as the impact of assumptions.

- Nevin E. Adams, JD

That’s not to say that leakages don’t have an impact on retirement accumulations, and doubtless for some, that impact is significant. EBRI’s analysis found that among loan defaults, hardships and cashouts at job change, cashouts were found to have a much more serious impact on 401(k) accumulation than either plan loan defaults or hardship withdrawals (even with the impact of a six-month suspension of contributions included). The leakages from cashouts resulted in a decrease in the probability of reaching an 80% real replacement rate of 5.9 percentage points for the lowest-income quartile and 4.5 percentage points for those in the highest-income quartile. In fact, the effect from cashouts (by themselves) — not loans or hardship withdrawals — turns out to be approximately two-thirds of the leakage impact.  

It’s also worth noting that it’s one thing to quantify the impact of not allowing early access to these funds — and something else altogether to assume that participants and plan sponsors would not respond in any way to those changes, perhaps by reducing their contribution levels, or by either deciding to continue to participate or to participate in the first place.

A Deja View on Retirement Policy?

One of my favorite movies — and perhaps my favorite “holiday” move — is Groundhog Day, the 1993 film starring Bill Murray as an arrogant weatherman who finds himself stuck in Punxsutawney, Penn. by a blizzard, who then discovers that he is also “stuck” reliving February 2 — over and over and over. A feeling, quite literally, of “déjà vu all over again.”

Murray’s character goes through some semblance of the five stages of grief (denial, anger, bargaining, depression and acceptance) as he comes to terms with his predicament, but even as he tries to break out of this cycle, he learns from his past experience(s) and modifies his behaviors accordingly; avoiding stepping in a deep puddle of slush, ducking an insurance salesman, and even carrying his own jack to help change a tire. Eventually, of course, all that “learning” pays off, though not without a lot of pain and frustration.

There was, in fact, something of a feeling of déjà vu in President Obama’s budget proposal yesterday, certainly with regard to workplace retirement plans. In addition to some new incentives around encouraging automatic enrollment and expanding access to part-time workers, making a return appearance was giving the Pension Benefit Guaranty Corporation (PBGC) the authority to set risk-based premium rates for pension plans and the administration’s proposal to mandate employer offering of “automatic” IRAs who do not already offer a workplace retirement plan, this time channeled to the myRA structure outlined a year ago.

The 2016 budget proposal also resurrects the notion of imposing a reduction on the value of itemized deductions to 28% — including retirement contributions, and the imposition of a retirement savings cap.

Arguably, these proposals stand little chance of making their way into reality. That said, the latter two proposals in particular are blunt policy instruments, and seem likely to reduce, not enhance, the nation’s retirement security prospects.

Consider that a year ago when the savings cap was introduced in the 2015 budget, projections by the nonpartisan Employee Benefit Research Institute (EBRI) show that more than 1 in 10 current 401(k) participants are likely to hit the proposed cap sometime prior to age 65, even at the current, albeit historically low, discount rate of 4%. When you apply the higher discount rate assumptions closer to historical averages, the percentage of 401(k) participants likely to be affected by these proposed limits increases “substantially,” according to EBRI.

As for the itemized deduction cap, it would mean that those affected — likely those making the decisions on matching contributions of offering a plan in the first place — would pay taxes on contributions in the year the contributions are made, and then again at the full rate when contributions are distributed at retirement. How’s that for dis-incentivizing workplace retirement savings?

Indeed, perhaps the thing most troubling about the latter two proposals in particular is that they reveal a basic misunderstanding about the interrelationship between the incentives to employers to offer these programs, and the existence and expansion of these plans.

In sum, they don’t appear to understand that if you diminish the incentives to employers of participating in workplace retirement plans, you’ll likely see fewer retirement plans in the workplace.

So, while we’d like to think that those guiding retirement policy would learn from their mistakes, it looks like instead it’s déjà vu all over again.

- Nevin E. Adams, JD

Stocks Swayed by the Super Bowl?

Will your portfolio soar with the Seahawks, or get pummeled by the Patriots?

That’s what adherents of the so-called Super Bowl Theory would likely predict. The Super Bowl Theory holds that when a team from the old National Football League wins the Super Bowl, the S&P 500 will rise, whereas when a team from the old American Football League prevails, stock prices will fall.

It’s a “theory” that has been found to be correct nearly 80% of the time; for 38 of the 48 Super Bowls, in fact.

It certainly “worked” in 2014, when these same Seattle Seahawks bumped the Broncos, a legacy AFL team, and in 2013, when a dramatic fourth quarter comeback rescued a victory by the Baltimore Ravens who, though representing the AFC, are technically a legacy NFL team via their Cleveland Browns roots. Admittedly, that the markets fared well in 2013 was hardly a true test of the Super Bowl Theory since, as it turned out, both teams in Super Bowl XLVII — the Ravens and the San Francisco 49ers — were NFL legacy.

However, consider that in 2012 a team from the old NFL (the NY Giants) took on — and took down — one from the old AFL (the New England Patriots, who once were the AFL’s Boston Patriots). And, in fact, 2012 was a pretty good year for stocks.

On the other hand, the year before that, the Pittsburgh Steelers (representing the American Football Conference) took on the National Football Conference’s Green Bay Packers — two teams that had some of the oldest, deepest and, yes, most “storied” NFL roots, with the Steelers formed in 1933 (as the Pittsburgh Pirates) and the Packers, founded in 1919. So, according to the Super Bowl Theory, 2011 should have been a good year for stocks (because, regardless of who won, an NFL team would prevail). But as you may recall, while the Dow gained ground for the year, the S&P 500 was, well, flat.

There was the string of Super Bowls where the contests were all between legacy NFL teams: 2010 (when the New Orleans Saints bested the Indianapolis Colts, who had roots back to the NFL legacy Baltimore Colts)), 2009 (the Pittsburgh Steelers took on the Arizona Cardinals, who had once been the NFL’s St. Louis Cardinals), 2007 (where the Indianapolis Colts beat the Chicago Bears 29-17), and 2006, when the Steelers besting the Seattle Seahawks. The markets were higher in each of those years.

As for 2008? Well, that was the year that the NFC’s New York Giants upended the legacy AFL’s Patriots’ hopes for a perfect season, but it didn’t do any favors for the stock market. In fact, that was the last time that the Super Bowl Theory didn't “work.”

Patriot Gains

Times were better for Patriots fans in 2005 when they bested the NFC’s Philadelphia Eagles 24-21, and, according to the Super Bowl Theory, the markets should have been down for the year. However, in 2005 the S&P 500 climbed 2.55%. Of course, the 2002 win by those same New England Patriots accurately foretold the continuation of the bear market into a third year (at the time, the first accurate result in five years). But the Patriots’ 2004 Super Bowl win against the Carolina Panthers failed to anticipate a fall rally that helped push the S&P 500 to a near 9% gain that year, sacking the indicator for another loss.

Consider also that, despite victories by the (AFL legacy) Denver Broncos in 1998 and 1999, the S&P 500 continued its winning ways, while victories by the NFL legacy St. Louis (by way of Los Angeles) Rams and the Baltimore Ravens, did nothing to dispel the bear markets of 2000 and 2001, respectively.

In fact, the Super Bowl Theory “worked” 28 times between 1967 and 1997, then went 0-4 between 1998 and 2001, only to get back on track from 2002 on (purists still dispute how to interpret Tampa Bay’s victory in 2003, since the Buccaneers spent their first NFL season in the AFC before moving to the NFC).

Indeed, the Buccaneers’ move to the NFC was part of a swap with the Seattle Seahawks, who did, in fact, enter the NFL as an NFC team in 1976 but shuttled quickly over to the AFC (where they remained through 2001) before returning to the NFC.¹ And, not having entered the league until 1976, wherever they began, can the Seahawks truly be considered a “legacy” NFL squad? Bear in mind as well, that in 2006, when the Seahawks made their first Super Bowl appearance — and lost — the S&P 500 gained nearly 16%.

As for Sunday’s contest, after the Seattle Seahawks opened as 2-point favorites, the Patriots now appear to be 1-point favorites — and this is the first time since 1975 that we actually have two Number 1 seeds facing off in the Super Bowl. It looks like it will be a good game, and that — whether you are a proponent of the Super Bowl Theory or not, would be one in which whoever wins, we all do!

- Nevin E. Adams, JD

1. In fact, Seattle is the only team to have played in both the AFC and NFC Championship Games, having relocated from the AFC to the NFC during league realignment prior to the 2002 season. The Seahawks are the only NFL team to switch conferences twice in the post-merger era. The franchise began play in 1976 in the NFC West division but switched conferences with the Buccaneers after one season and joined the AFC West.

Third Time a Charm for Fiduciary Reproposal?

So, advisors, how does it feel to be compared to a termite?

That’s right, a powerful coalition of retirement, union, and so-called consumer protection groups has launched a new attack on retirement plan advisors.

They’re doing so ahead of the president’s State of the Union address, and doing so now because he is expected to throw his support behind the Department of Labor’s fiduciary rule (re)proposal. Yes, that one.

Not that they yet know what they are supporting. In a new website launched to help promote their position, even they say “If the Department gets the rule right…”, apparently relying on the word of the Department of Labor that “…its goal is to make sure that all financial professionals have a legal obligation to put the interests of their customers first when they offer retirement advice.”

We don’t yet know what will be in this latest version. What we do know is that the last version raised significant concerns about its impact on the retirement plan marketplace, especially with regard to plans for small business, for IRAs, and for distributions from qualified retirement plans. We know that they saw fit, as part of an unprecedented power grab, to create a right to impose Labor Department oversight on non-ERISA individual retirement accounts that has not existed since the origins of those programs a generation ago. We know that they didn’t believe that a comprehensive and transparent disclosure of potential conflicts and financial interests were sufficient to preserve the long-standing seller’s exception for business owners who might be considering offering a workplace retirement plan.

As for this newest version, there is reason to think it may go even further; that it might actually prohibit existing plan providers from advising participants on investment options for plan distributions, blocking retirement plan participants from the plan advisor they most know and trust — while at the same time effectively leaving them vulnerable to the solicitations of others outside the plan who often offer more expensive options.

No, we don’t yet know what will be in the latest version — because, having brought two previous flawed versions to light, the Labor Department seems to have developed a case of stage fright when it comes to sharing, much less discussing the new version. Will the third time be a “charm?” Not likely, with so little input from, or dialogue with, those actually working with these programs.

As for those advocacy groups backing this as-yet-sight-unseen regulation — well, they might see advisors as a colony of termites, but the so-called solutions that the Labor Department has put forth thus far seem more likely to burn down the house of America’s retirement than to save it.

- Nevin E. Adams, JD

The saveourretirement.com website is funded by AARP, AFL-CIO, AFSME, Americans for Financial Reform, Better Markets, the Consumer Federation of America, and the Pension Rights Center.

6 Things 401(k) Participants Need to Know

Our industry spends a lot of time and money educating workers about the advantages and mechanics of saving for retirement.

But here are six things I think too often go unsaid.

Your 401(k) isn’t free.

That’s right, it isn’t free. It may be heavily subsidized by your employer, and you’re likely paying a lot less for the fund(s) and features you have access to than if you were to try and buy them on your own (say, via an IRA or brokerage account) — but even then, it’s probably not “free,” nor should you expect it to be. But if you don’t know how much you are paying, you should find out.

You’ve probably been provided some information about your 401(k) plan fees already. You can find out how to use that information here. More information about 401(k) fees is available here.   

That employer match isn’t “free” either.

You may have heard that you should save enough to receive the full employer match — that “you don’t want to leave that free money on the table.” It is, of course “free” money to you when you save in your workplace retirement plan. But not every employer provides a matching contribution, and it’s a real out-of-pocket cost for those that do. Remember that, if you’re lucky enough to have an employer who makes a matching contribution — and thank them.

Saving to the level of the match is probably not enough.

As noted above, many employers choose to encourage your decision to save for retirement by providing the financial incentive of an employer matching contribution. While there are a number of factors that go into determining the amount and level of the match, how much you need to set aside for your own personal retirement goals is almost certainly not one of those factors.

You certainly don’t want to leave any of that match on the table by not contributing to at least that level. But if that’s where you stop saving, you’re probably going to come up short.

How much you save is more important than how you invest what you save.

There are bad investments that can cost you money, and good investments that can help your account grow faster. But what really matters in achieving financial security for retirement is how much you save (including the amount of the employer match, if any).

For more information, see “Missing the Forest for the Trees” here.  

If you’ve never tried to figure out how much you’ll need to live in retirement, you may not live very comfortably in retirement.

Surveys routinely show that most Americans have not even tried to guess how much money they will need to live on in retirement, much less actually made an educated guess. Sure, it sounds complicated, and sure, things can change over time — and yes, you’re busy. But saving for retirement with no idea of how much you might need is a bit like going on a long trip in a car you don’t know with a gas gauge that isn’t working.

Chances are, your 401(k) plan has some resources that will help you do the calculation. If not, or if you’d like a “second opinion,” try the free Ballpark E$timate at choosetosave.org. 

If you don’t know what you’re doing, get help.

And not the kind you might get from Joe in the lunchroom, Sally in accounting or “experts” you’ve never met. If there’s a professional advisor working with your 401(k) plan, that’s a great place to start.

- Nevin E. Adams, JD

5 Things Plan Sponsors Should Know

Whether or not you’re in the habit of making New Year’s resolutions, this is a time of year when reassessments seem appropriate, and perhaps in no area as much as that of retirement plan administration. Many find themselves in the role of plan sponsor (or plan committee) with no background, limited training, and far more responsibility than they may appreciate at the outset.

For those of you who find yourself starting the year with new plan sponsor clients, or new members of the plan committee, or perhaps even incumbents who could benefit from some New Year’s resolutions, here’s five things every plan sponsor should know:

How much your 401(k) plan costs.

Okay, fees are just one of several factors plan sponsors need to consider, but when the fees for services are paid out of plan assets, there is an obligation to understand the fees and expenses charged. This is important because you are expected to ensure that the fees paid and services rendered to the plan are reasonable. It’s hard to know if the fees paid are reasonable if you don’t know what they are. Oh, and even if the plan fees were determined to be reasonable in the past, they need to be monitored. Things change over time, after all.

Need some help? Check out this information from the Employee Benefits Security Administration. 

The services that you receive for those 401(k) fees.

As noted above, determining reasonability of fees and services means not only understanding the fees paid, but also the services provided for those fees. Larger fees may, of course, be reasonable for more expansive or comprehensive services. But also note that paying big fees for unnecessary services could be considered unreasonable.

See also “Tips For Selecting And Monitoring Service Providers For Your Employee Benefit Plan.”

How much of your 401(k) plan fees/costs go to whom.

Arguably, knowing how much who is being paid for what is required to assess reasonableness. But the Department of Labor now requires that “covered service providers” (CSP) furnish in writing “the services to be provided and all direct and indirect compensation to be received by a CSP, its affiliates, or subcontractors. You can find out more about these requirements here.

Who the plan fiduciaries are.

Odds are, if you as a plan sponsor are reading this, you are one. But don’t take my word for it. Check out “Meeting Your Fiduciary Responsibilities.”

The responsibilities — and obligations — of plan sponsors.

Since you (probably) are one, you should make sure you know what your responsibilities are, the extent of your personal liability, and what kind of insurance is maintained by your employer to address that exposure.

Fiduciaries have important responsibilities and are subject to standards of conduct because they act on behalf of participants in a retirement plan and their beneficiaries. In addition to paying only reasonable plan expenses, these responsibilities include acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them, following the terms of plan documents, and carrying out their duties prudently.

That brings up a sixth item for our plan sponsor list: If a plan fiduciary lacks the expertise to fulfill those duties, they should, of course, consider hiring a professional to help them.

- Nevin E. Adams, JD

Did YOUR 401(k) Increase by $50,000 This Year?

The winner of the year’s most ridiculous 401(k) headline may well be one that ran just last week.

The post was titled, “Did Your 401(k) Balance Increase $50,000 This Year? If Not, You May Be Falling Behind.”

Or, as I am inclined to think when I see such nonsense, “you may not.”

The article was mostly a simple recycling of information just released by BrightScope on their determination of the “Top 30 401(k) Plans of 2014.”  In looking at those 30 plans, BrightScope chose several data points to highlight — including the point that, among those 30 plans, the average account balances have increased nearly $50,000 since the top 30 list of 2013 was compiled.

In drawing insights from those results — specifically the $50,000 increase in average balance — the article’s author (a Certified Financial Planner, no less) opined:

That may be a good benchmark to determine just how effective your retirement savings plan is working for you. If your balance has grown an amount equal to or greater than that, congratulations — you're above average. Less than $50,000 of annual appreciation and maybe it's time to consider some changes.

So, let’s think about this for a minute. We’re supposed to consider as a benchmark for 401(k) plan performance the change in average account balance (which could, of course, include individuals of widely differing age, tenure and compensation levels), of just 30 plans (which could, of course, include widely different match levels, investment options and workforce compositions, not to mention the differences in participant characteristics noted)?  

Oh, and we’re not even talking about the same plans; more than a third of those 30 plans highlighted by BrightScope were not even on the firm’s 2013 list. So, on top of everything else, we’re told that a “good benchmark” may be drawn from comparing a one-year average increase in balance among a completely different set and diverse set of individual participant circumstances among a completely different set of plans.

There may be sillier points of comparison to be made in establishing a benchmark for your 401(k) — but I’ll be darned if I can think of one.

- Nevin E. Adams, JD

If you’re interested in a more realistic and real-world assessment of 401(k) plan growth, see “What Does Consistent Participation in 401(k) Plans Generate? Changes in 401(k) Account Balances, 2007–2012” here.