15 Retirement Plan Points to Ponder

Working with retirement plans is a complicated, challenging, and constantly changing process. That said, there are certain constants — and things that bear repeating and/or reconsidering from time to time.

Here are a few points to ponder from my list of “constants”:

1. The key to successful retirement savings is not how you invest, but how much you save.

 2. The vast majority (more than 90%) of participants defaulted in at a 6% deferral do nothing to change that default. Of those who do, about half actually increase that deferral rate.

 3. Plan fiduciaries are responsible for every participant investment decision in plans that don’t comply with ERISA 404(c). Most plans don’t comply with ERISA 404(c).
 
4. Hiring a co-fiduciary doesn’t make you an ex-fiduciary.
5. “Because it’s the one my record keeper offers” is not a good reason to choose a target-date fund.
 
6. Given a chance to save via a workplace retirement plan, most people do. Without a workplace retirement plan, most people don’t.
7. Isaac Newton’s First Law: An object that is at rest will stay at rest unless an external force acts upon it. Ditto plan participants.
 
8. Nobody (except perhaps the lawyers who wrote them, the regulators that mandate them and, eventually, the plaintiffs’ bar) is actually reading all those participant notices.
9. You want to have an investment policy in place before you need to have an investment policy in place.
 
10. Disclosure isn’t the same thing as clarity.
11. “Stay the course” is only a viable strategy if you’re already on the right course.
 
12. If you can’t remember the last time you did a provider search, you’re probably overdue.
13. A prudent process helps you win in court; a good result keeps you out of court in the first place.
 
14. Despite litigation concerns, most plan sponsors still have a better chance of being struck by a meteor than being sued by a plan participant.
15. It’s not what you’re doing wrong; it’s what you’re not doing that’s wrong.

- Nevin E. Adams, JD

4 Reasons Why Plan Sponsors Should Care About the Fiduciary Proposal

As I talk to retirement plan advisors and plan sponsors around the country, there seem to be three camps of thought on the Labor Department’s fiduciary reproposal:

• those who think it will be a big deal;
• those who think it will be a big deal but manageable (once certain key issues are addressed); and
• those who are nearly completely oblivious as to the proposal, its potential impact or its current status.

Unfortunately for advisors in the first and second category, nearly all plan sponsors seem to be in the third group.

Here’s why plan sponsors should care about the proposal.

You might have to change your plan education materials.

Remember back when your plan education materials only had generic fund references, and your participants struggled to figure out which of the specific funds on their plan menu were supposed to match up with those colored pie chart pieces? Remember how frustrated they were when you couldn’t tell them? And how poor the results were? Perhaps not, because you’ve been able to show sample asset allocations including actual fund names for well over a decade now as participant education.

However, as currently proposed, the Labor Department’s fiduciary proposal would consider any specific fund references to be advice, not education. And that would make the folks who provide such materials fiduciaries. And that would likely mean a return to education materials that aren’t nearly as educational.

You might have to change advisors.

The rules about how advisors work with retirement plans and retirement plan participants are getting ready to change, arguably in ways as significant as at any time since the passage of ERISA. For some advisors, that may mean that they will want to focus on different areas, some may choose to focus on different size plans, or to forgo working with plan participants altogether.

And while this could also bring a whole new generation of advisors to choose to work with these plans, this is a big change. And though we don’t yet know what the ultimate result will be, things will likely not be the same, particularly for smaller employers, who may very well find that the advisors they work with now will not be willing (or able) to serve their plans under the new regimens.

Your advisor might be more expensive.

There are doubtless advisors and advisor practices out there who won’t have to change a thing in order to comply with the new regulations, and whose fee structure won’t be affected. But others will, and those who do have to make changes could have to make a lotof changes – and that could affect how, and how much, they charge. And that could, of course, have an effect on others.

These changes might not be effective immediately, and how – and how much – will obviously depend on exactly what form the final regulations take. There will almost certainly, at least at the outset, be fewer advisors working with retirement plans. As for what that may mean to their costs, only time – and the final regulations – will tell.

Your advisor may not be able/want to help participants with their rollover decisions.

Today many retirement plan advisors only work with plans, or with participants in those plans. However, a growing number either work with participants as they consider a rollover decision, or have others in their firm who do. Participants who have developed a relationship with a plan advisor while they are accumulating retirement funds often have an interest in extending that relationship to the time when they are trying to figure out what to do with a rollover, or how to create a reliable stream of retirement income that won’t end before their retirement (particularly since a significant percentage of plans don’t offer a systematic withdrawal option). Similarly, plan sponsors, who have undertaken a review and monitoring of those advisors while they work with plan participants have generally prefer to see those discussions taking place with that trusted advisor than with some random advisor off the street.

And for those plan sponsors who want to encourage ex-employees to roll those balances over to another account, the current plan advisor can be a valuable help in facilitating that decision.

However, the Labor Department’s current proposal would, at best, greatly complicate this relationship. The services provided to a participant among many in a workplace retirement plan are quite different from that for an individual in a rollover situation, or one who would be rolling those savings into an individual retirement account (IRA), with the broader array of choices and decisions that would entail. However, the DOL’s current proposal would restrict even a level-fee plan advisor from working with an individual participant circumstance if he or she charged more, even if the level of service was significantly different and more complicated, even if he or she charged a flat fee for those highly individualized services.

That’s why the American Retirement Association and NAPA have advocated for a “level-to-level” compensation exemption that would address this issue.

Of course, at this point, these potential issues are just that – potential issues. The Labor Department has taken great pains to assure legislators, industry professionals and the public at large that they have listened, and are making a serious effort to address the major concerns expressed regarding the proposal (our concerns are outlined here and here).

Still, the devil is (always) in the details, the “proof” in the pudding. But as we wait to see how the Labor Department has chosen to address the concerns expressed, plan sponsors – and advisors – who haven’t yet given consideration to the potential new landscape for retirement plan education and advice would be well advised to do so.

- Nevin E. Adams, JD

4 Reasons Why Plan Sponsors Should Care About Outcomes

It’s obvious why participants have a vested interest (literally) in the retirement income — the outcome, really — of their retirement savings plans. Here are four reasons why plan sponsors should care about outcomes.

You want your employees to appreciate your benefit plan(s).

If you’re responsible for benefit plans in your organization, you have a very real interest in how your workforce (and management team) view those benefits. Plan sponsors have long used participation rate as the plan success metric — after all, what better measure of success in plan design, education and communication than the objective data as to how many employees have chosen to participate.

But in a time when a growing number of plans have adopted automatic enrollment — well, while credit is certainly due plan sponsors who have taken that step, the resulting bump in participation rates owe more to the inertia of human behavior than innovative plan design.

There is, however, little question that the better your plan performs on an individual basis — positive growth in account balances, a resulting more robust projection of retirement income — the better workers will feel about the benefit plans that helped provide that result.

You don’t want your employees worrying about their finances at work.

Any number of workplace surveys bear out the impact that external concerns — particularly external financial concerns — have on morale and productivity at work (see “Finance Distractions Take Toll on Productivity, Benefit Satisfaction”) and “Study Finds Link Between Financial and Physical Wellness.”) Those concerns don’t even touch on the vulnerability to theft and/or misuse of organizational resources that can tempt financially vulnerable workers.

A robust retirement savings balance at work isn’t a cure for all financial ills, of course, but it can be a source of solace, as well as a resource in time of true financial need.

You want your employees to retire on time.

Workers who think they can’t afford to retire are likely to try and extend their working career — potentially complicating succession planning and your ability to attract (and/or retain) new talent. Data from benefits consultant Mercer notes that each delay in retirement can block 5+ jobs, and that if 4% of your population is retirement eligible and half of those people choose to delay retirement, 10% of your employee population would experience promotion blockage.

As an employer, those trends can also result in higher labor costs, and safety and productive concerns (see “Plan Sponsors Waking up to Costs of Older Workers who Can’t Retire.”)

You want your plan to ‘work.’

There are employers who only offer a workplace retirement plan because everybody else does, who are willing to just “set it and forget it,” who, hearing that workers aren’t taking advantage of the benefit they worked so hard to set up, shrug and say “it’s up to them.”

But that’s not you. Is it?

- Nevin E. Adams, JD

Note: You can find some interesting perspectives on various aspects of plan and participant outcomes at our Participant Outcomes resource page.

5 Reasons Why Your Small Business Should Offer a Retirement Plan

People who don’t have access to a plan at work don’t save for retirement. Here’s why small business owners should care.

About half of private sector workers did not participate in a workplace retirement savings program in 2012, and a recent report by the Government Accountability Office (GAO) found that most workers who did not have coverage lacked access to such programs.

While there are many reasons that might account for those individual decisions, among those not participating, the majority worked for an employer that did not offer a program or they were not eligible for the programs that were offered. In particular, lower income workers and those employed by smaller firms were much less likely to have access to programs, after controlling for other factors. However, the majority of these workers participated when they had workplace access.

Here’s why small businesses should provide that access.

To attract and retain workers.

Okay, every time somebody talks about the reasons to offer a retirement plan, “attract and retain qualified workers” is on, if not at the top of, that list. But it’s a bit more complicated than that. The reality is that a larger employer that does not offer a retirement plan benefit sticks out like a sore thumb.

However, among smaller employers, the situation is almost a mirror image. In fact, the GAO reports that only 14% of small employers with fewer than 100 employees sponsor a plan in which workers can save for retirement.

The opportunity for smaller employers then, is to stand out from your competition precisely because you do offer a workplace retirement plan.¹ And to use plan design features such as vesting and an employer match to keep the good workers you’ve attracted, and maintain that competitive edge.

Your workers will use it.

This may seem obvious, but among the more intriguing rationales offered by small businesses for not offering a workplace retirement plan was one put forth in a 2003 Small Employer Retirement Survey by the Employee Benefit Research Institute (EBRI) — that their employees are “not interested” in having a retirement plan. And I have actually had plan sponsors say to me “nobody has ever asked about a 401(k).” Well, I’ll grant you that workers are probably more concerned about their paycheck, and perhaps health care. And they may just be glad to have a paying job, and don’t want to rock the boat by pressing for benefits.

That said, the vast majority of workers who do not participate in a workplace retirement plan – 84% — reported they did not have access to a workplace retirement program. Of two key access factors — the employer must offer a program, and the worker must be eligible to participate — GAO found that the lack of access was primarily due to employers not offering a retirement program (68% reported they worked for an employer that did not offer a program, and another 16% reported they were not eligible for the program their employer offered. Indeed, the GAO report found that workers at the largest firms were only slightly more likely to participate compared to workers at the smallest firms.

Your workers need it.

You may well employ a workforce that has alternative sources of retirement income — a legacy from that rich uncle everyone’s so fond of, or maybe they have a surefire lottery strategy. Or perhaps their pension or savings from a prior employer, combined with Social Security, will be “enough.”

But EBRI’s 2014 Retirement Confidence Survey suggests that retirement confidence — and the retirement savings that ostensibly underpin that confidence are at least somewhat connected. There’s a growing body of research that suggests that financial concerns take a toll on productivity. That’s not just retirement, of course — but it’s a big part of it.

You need it (too).

It’s not unusual for a small business owner to invest heavily in the enterprise, including sinking some of their own personal retirement savings into “the business.” Whether you have or not, and no matter how much you are now able to pursue your passion, you’ll want to provide for a retirement at some point that doesn’t necessarily require liquidating your business to fund it. That’s when the benefits that your employees appreciate can pay off for you as well, including:

• The availability of pre-tax contributions that can reduce your current taxable income.
• Deferral of taxes on pre-tax contributions and investment gains until you take a distribution.
• The flexibility of a Roth 401(k) (if offered).
• The “magic” of compounding returns over time.

Oh, and there are tax advantages. 

Despite all the compelling reasons outlined above, for some it still (rightly) comes down to the bottom line. And, in addition to the benefits of offering a plan, there are some tax advantages designed to encourage you to do so.

Any employer matching contributions will be tax-deductible, as will any costs incurred by the employer in connection with offering the plan. Better yet, you may be able to claim a tax credit for some of the ordinary and necessary costs of starting a SEP, SIMPLE IRA or qualified plan.
But don’t take my word for it — here’s what the IRS has to say.

Let’s face it, there are any number of reasons to put offering a workplace retirement plan — not enough time, worries about the expense, a sense that this is something better put off to a future time.

Then again, aren’t those the same reasons often put forth to justify not saving for retirement?

Nevin E. Adams, JD

1. A growing awareness of the coverage “gap” among smaller employers has led a number of states to consider a variety of initiatives that, generally speaking, include a requirement that employers above a certain size/business longevity threshold offer a payroll deduction IRA option to their employees. The Obama administration is lending its support to these efforts, with some additional regulatory clarity anticipated before the end of the year.

5 Things Millennials Need to Know About Saving for Retirement

Retirement seems a long time off — particularly when you’re young.

However, Millennials — generally defined as those born between 1978 and 2004 — are living longer, and many will have to finance retirements that are actually longer than their working careers.

So, while it can hardly be expected to be top-of-mind for most of this group, here are five things worth knowing about saving for retirement — now.

1. Social Security won’t be as much as you think it will be.

Okay, some of you don’t think it will be anything at all, certainly not by the time that you are old enough to collect. But set aside for a moment the questions you may have as to whether or not Social Security is financially viable without reform, or if you should even count on it at all. Your parents — who are either now, or soon hope to be, collecting Social Security — had the same concerns, after all.

However, even if you assume that the program remains largely unchanged from what it pays today, if you retire at full retirement age in 2015, your maximum benefit would be $2,663 a month, according to the Social Security Administration. However, if you retire at age 62 in 2015, your maximum benefit would be $2,025; and if you retire at age 70 in 2015, your maximum benefit would be $3,501.
Now those amounts are based on earnings at the maximum taxable amount for every year after age 21. In other words, that’s probably more than most of us would get. In fact, the average monthly Social Security retirement benefit for January 2015 was $1,328. Note that the maximum benefit depends on the age a worker chooses to retire, among other things — and that assumes that the current questions regarding Social Security’s longer-term financial viability are addressed, and/or that current benefit levels aren’t reduced.

In sum, the odds that you’ll get that current maximum aren’t large — and the odds that current benefits will be reduced still seem pretty good.

2. Not everyone has a pension, and you probably don’t.

Now, by “pension” I mean the traditional defined benefit (DB) pension plan; one that, in the private sector anyway, was largely employer funded. According to the nonpartisan Employee Benefit Research Institute (EBRI), in 2011, just 3% of all private-sector workers participated only in a DB plan, and 11% had both a defined contribution (DC) and a DB plan. So, only something like 14% of workers in the private sector still have a traditional pension plan (even then, it doesn’t mean there’s no reason for concern; see “3 Pervasive Retirement Industry Myths“.)

Despite this, studies pop up every so often that indicate that a remarkably large number of workers think they do have a pension. Do you? Better double check.

3. You won’t be able to work as long as you think.

You hear people talk about 65 as the “normal” retirement age, even though it’s no longer that, even for Social Security benefits. Oddly, considering all the talk you hear about people retiring later, the average age at which U.S. retirees report retiring is 62 — an age that has increased in recent years — while the average age at which non-retired Americans expect to retire, 66, has largely stayed the same.

Meanwhile, EBRI’s Retirement Confidence Survey (RCS) has consistently found that a large percentage of retirees leave the workforce earlier than planned — 49% of them in 2014, for example. Many who retire earlier than they had planned often do so for negative reasons, such as a health problem or disability (61%), though some state that they retired early because they could afford to do so (26%).

So, if you’re thinking you don’t need to save for retirement now because you can you just keep working… well, you might need a “Plan B.”

4. You could be missing out on ‘free’ money.

Okay, you may not be saving at all (your parents got off to a slow start as well). You won’t be the first group of young workers to have college debt, or just have a lot of things you’d rather spend your money on in the here-and-now. Or both. It can be hard, particularly when you’re getting established, to prioritize all the demands on your paycheck.

But if you do have a 401(k) or other retirement savings plan at work, you may also have something called an employer match (see “6 Things 401(k) Participants Need to Know“). That’s where your employer will put into your account a certain amount, perhaps 50 cents for every dollar you save. For you, that’s “free money,” but you’ll only get that if you actually take advantage of your retirement savings plan at work.

p.s.: if have been automatically enrolled in your employer’s 401(k), you may want to check out the savings rate. These typically start contributions from your paycheck at a much lower rate (a 3% default savings rate is common) than those who have taken the time to fill out an enrollment form (who tend to go with the savings rate matched by their employer.

5. The sooner you start, the easier it will be.

The Labor Department says that for every 10 years you delay before starting to save for retirement, you will need to save three times as much each month to catch up.

I know it sounds simplistic. But trust me, you’ll be amazed at how quickly your retirement savings grow. See, the money you save earns interest. Then you earn interest on the money you originally save, plus on the interest you’ve accumulated. As your savings grow, you earn interest on a bigger and bigger pool of money. This is something financial pros call the “magic of compounding.” But it’s no trick.

- Nevin E. Adams, JD

6 Questions For Your Next 401(k) RFP

RFPs, or requests for proposals, come in all shapes and sizes. Mostly they are long, drawn out affairs, frequently copied from templates drawn up to capture a broad sense of capabilities. The problem is, for most plan sponsors it’s akin to going shopping for a car armed with Chilton’s auto repair manual (that said, if you need one, a quick Google search on “401k RFP” will turn up plenty).

So, aside from all the general information that you’ll want to get from every provider during the RFP process – the size of their business, the quality, tenure and turnover of their key staff, their capabilities, service structure, years and investment in “the business,” fees, services offered and references, there are some questions that aren’t in every RFP — but to which the answers can be enlightening.

1. What plan design changes would you recommend, and why?

This question has two payoffs. First, in order to recommend changes, they have to know what your current plan looks like. Secondly, it gives you a chance to evaluate the quality of their recommendations. As an extra bonus, if the changes recommended indicate they don’t know what your current plan looks like, that tells you something as well.

2. How many other clients like me do you have?

There are many ways to answer the “like me” question — comparable size, similar workforce demographics, geographic proximity, etc. Hone in on the ones that have similar plan provisions (particularly match, eligibility, and withdrawal) and employee population sizes. Then get their contact information.

3. Are there any restrictions on fund choices?

Many providers place boundaries on the funds available on their platform. Some of this is in the interests of efficiency in education and processing, some of it doubtless ease their evaluation of suitability and review, and some of it may simply facilitate revenue-sharing structures. Regardless, if there are restrictions as to which fund(s), particularly proprietary offerings, must be on your menu, or in what proportion, you need to understand that upfront. And understand why.

4. What’s your preferred QDIA?

Admittedly, everybody doesn’t have a “preferred” qualified default investment option (at least not labeled as such). That said, industry surveys suggest that target-date funds are the most common default fund option today, though managed accounts are making inroads. Knowing what’s available (both what type, and which specific one(s) — and what’s “preferred” — can give you insights not only as to the breadth of offerings, but the perspective of your potential partner on what may well be the primary investment selection of participants in your plan.

5. How — and how much — do you and your other partners get paid?

Sure, fees will be part of any self-respecting RFP response, though since such things are often variable, you’re more likely to get a fee schedule than a fee quote — particularly during the “getting to know you” phase that accompanies most RFPs. Still, it will be worth your time to find out what variables need to be quantified to provide a precise calculation, and then provide them. Because there’s nothing like a bottom line number to help you focus on the bottom line.

As for the “how” — revenue-sharing arrangements, and the potential conflicts of interest that can be obscured by some arrangements — are a current and growing litigation concern. Knowing not only how much, but how, can shed light on potential issues before they become real ones.

6. Please provide the contact information for three clients that have left you in the last 18 months.

It’s normal, and natural, to ask for references — and you should. But references are one thing; ex-clients are another. It’s an awkward question to ask, particularly at the outset of a potential relationship. But we’ve all lost clients for reasons good and bad, and there’s value in talking to someone who, for whatever reason, has opted to go elsewhere, if only to find out how the provider handled the transition out.

Odds are you’ll get the names of clients who left via merger or acquisition, not those who have actually fired them. But you never know. And you’ll never know until you ask.

Got some other suggestions? Post them in the comments section below. Or email me at nevin.adams@usaretirement.org.

- Nevin E. Adams, JD

5 Things Plan Sponsors Don’t (Always) Do — But Should

There is frequently a difference between doing all that the law requires of a plan sponsor and doing everything that could be done.

Here are five things that plan sponsors don’t always do — but should.

1. Have a Plan/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 enlist the support of those who do have it.

However, having a committee for having a committee’s sake can not only hinder your decisions — it can result in bad decisions. Make sure your committee members add value to the process. (Hint: Once they discover that ERISA has a personal liability clause, casual participants generally drop out quickly.)

2. Keep 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 the 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.

3. Have an Investment Policy Statement.

While plan advisers 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 the 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, plan sponsors (and the advisors they work with) will 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.

It is worth noting that, though it is 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.

4. Remove ‘Bad’ Funds from the Plan Menu.

Whether or not the plan has an official investment policy statement (IPS), plan sponsors are expected to conduct a review of the plan’s investment options as though they do. Sooner or later, that review will turn up a fund (or two) that no longer meets the criteria established for the plan. That’s when you will find the true “mettle” of the investment policy; will the plan sponsor/committee have the discipline to do the right thing and drop the fund(s), or will they succumb to the very human temptation to leave it on the menu (though perhaps discouraging or even preventing future investment)? Oh, and make no mistake — there will be someone with money in that fund. Maybe even a senior executive. Still, how can leaving an inappropriate fund on your menu — and allowing participants to invest in it — be a good thing?

5. Monitor Providers on a Regular Basis.

In some sense, we all “monitor” the performance of our plan provider all the time. Is the website available when people try to access it? Do checks and statements arrive on time? Are the balances displayed accurate? The reality is that, for most of us, no news is seen as “good” news. After all, if the answer to any of the foregoing questions was “no,” we’d not only know about it, we’d be complaining about it (after fending off our own set of complaining phone calls). Plan sponsors have a very full-time job dealing with a myriad of things that are “broken” — why go looking for trouble?

At least once a year — no matter how well things are going — it’s worth determining if your plan has access to the new services that have come online since you converted; that you are getting the advantages of the most current thinking about costs and fees; and how your plan’s participation, deferral, and asset diversification stack up. And yes, even with a reliable provider, you may have to ask.

Beyond that, every three to five years (sooner if there are problems, of course), plan sponsors should go through a formal request for information (RFI) or request for proposal (RFP) process—on your own, or with the help of an adviser (who undoubtedly has more experience with such things).

Two other things to keep in mind: First, if you are a fiduciary, and you feel that you lack the expertise to make those decisions, you will of course want — and, in fact, are expected — to hire someone with that professional knowledge to help.

Secondly, while fiduciaries are often reminded of the things they shouldn’t do, recent litigation trends suggest that they’re just as likely to get sued (if not more so) for failing to do something they should be.

- Nevin E. Adams, JD

10 Ways the Class of 2019’s 401(k) Will Be Different

Time marches on, and each generation comes to the workplace with its own unique set of experiences and expectations.

Each August since 1998, Beloit University has published the Beloit College Mindset List, providing a look at the cultural touchstones that shape the lives of students entering college in the fall. For example, the class of 2019, who were for the most part were born in 1997, have never licked a postage stamp, never known a world without Google or Splenda, and have grown up in a world where wi-fi is an entitlement.

Despite those differences, the class of 2019 will one day soon be faced with the same challenges of preparing for retirement as the rest of us. They’ll have to work through how much to save, how to invest those savings, what role (if any) Social Security will play, and — eventually — how and how fast to draw down those savings in retirement — whatever, and whenever, that turns out to be.

Here are 10 things I think we’ll be able to say about most of the Class of 2019 when it enters the workforce:

• They’ve never had to wait to be eligible to start saving in their 401(k) (their parents generally had to wait a year).
• They’ve never had to sign up for their 401(k) plan (their 401(k) automatically enrolls new hires).
  They’ve never had to make an investment choice in their 401(k) plan (their 401(k) has long had a QDIA default option).
• They’ve never had to rebalance their 401(k) account (their 401(k) default option was an asset allocation fund or managed account, automatically rebalanced by professionals).
• They’ve always had fee information available to them on their 401(k) statement (it remains to be seen if they’ll understand it any better than their parents).
• They’ve always known what their 401(k) balance would equal in monthly installment payments.
• They’ve always been able to figure out how much they need to save for a financially secure retirement (though they may not be any more inclined to do so than their parents).
• They’ve always been able to transfer their balances online and on a daily basis (and so, of course, they mostly don’t).
• They’ve always had an advisor available to answer their questions.

And perhaps most importantly, they’ll have the advantage of time, a full career to save and build, to save at better rates, to invest more efficiently and effectively.

- Nevin E. Adams, JD

Never Forget

Early on a bright Tuesday morning in 2001, I was in the middle of a cross-country flight, literally running from one terminal to another in Dallas, Texas, when my cell phone rang.

It was my wife. I had been on an American Airlines flight heading for L.A., after all - and at that time, not much else was known about the first plane that struck the World Trade Center. I thought she had to be misunderstanding what she had seen on TV. Would that she had….

That day, when family and friends were so dear and precious to us all, I spent in a hotel room in Dallas. It was perhaps the longest day - loneliest night - of my life. In fact, I was to spend the next several days in Dallas – there were no planes flying, no rental cars to be had – separated from home and family by hundreds of insurmountable miles for three interminably long days. As that week drew to a close, I finally was able to get a rental car and begin a long two day journey home.  While it was a long, lonely drive, it gave me a lot of time to think, though most of that drive was a blur, just mile after endless mile of open road.

There was, however, one incident I will never forget. Somewhere in the middle of Arkansas, a group of Hell's Angels bikers was coming up around me. A particularly scruffy looking guy with a long beard led the pack on a big bike - rough looking. But unfurled out behind him on the bike was an enormous American flag. At that moment, for the first time in 72 hours, I felt a sense of peace - the comfort you feel inside when you know you are going - home.

All these years hence, I can still feel that ache of being separated from those I love – and yet still remember the warmth I felt when I saw that biker gang drive by me flying our nation’s flag. On not a few mornings since that awful day, I think how many went to work, how many boarded a plane, not realizing that they would not get to come home again. How many sacrificed their lives so that others could go home. How many still put their lives on the line every day – here and abroad - to help keep us and our loved ones safe.

We take a lot for granted in this life, nothing more cavalierly than that there will be a tomorrow to set the record straight, to right wrongs inflicted, to tell our loved ones just how precious they are. As we remember that most awful of days, and the loss of those no longer with us, let’s all take a moment to treasure what we have – and those we have to share it with still.

Peace.

-          Nevin E. Adams, JD

5 Things You CAN Do After a Market Correction

By now, you’ve heard — and perhaps dispensed — what appears to be the “common wisdom” about the recent market tumult: “stay the course,” “ride it out,” and my personal favorite, “don’t just do something, stand there.”

For all our industry’s long-standing concern about participant inertia, in times like these the inclination to “do nothing” is undoubtedly to the benefit of most participants. That said, one can well imagine that those who are turning to their advisors for help and guidance (wonder what the robo-advisors are saying?) might be a little frustrated with the admonition that the best thing for them to do right now is… nothing.

Early indications are that most retirement plan participants will — again — ride this one out (though there are some exceptions. But, hey — while the markets have your attention, here are five things participants can, and should, do:

Check your account balance. While a lot of experts will tell you to avoid looking at your account right after a big drop in the markets, if you’re making individual fund choices, it’s probably worth checking out how your account is currently invested. If you haven’t checked in a while, you might find that it’s gotten “out of balance” from your original investment selections.

Get started on rebalancing. While this may not be a great time to rebalance your entire account, you can start by changing the investment elections of new contributions, rather than transferring existing balances. It will take longer to realign the entire account, but at least you aren’t realizing those as-yet-unrealized losses.

Increase your current deferral rate. This is the biggie. When you think about just how much cheaper those retirement plan investments are compared with a few days ago, it’s hard to pass up that kind of bargain. More so if you aren’t yet saving at the maximum level of the match.

Look into automated rebalancing. If you still make and maintain individual investment fund choices in your retirement account, it can be hard to pick the best time to make a change. (Hint: a period of extreme market volatility is almost never the best time.) However, the vast majority of providers now have in place mechanisms that will, at some preset frequency (e.g., monthly, quarterly, or annual), automatically rebalance those accounts in accordance with your established investment elections. It’s a good way to keep things in balance without having to worry (or remember) about it.

Think about getting some professional help. Odds are, even if you like keeping up with the markets, it’s not your day job. A good, trusted advisor is always a great option, but you might find it useful to look into a solution that is professionally managed all the time — such as a balanced fund, target-date fund or managed account option.

So, yes, there are some things you can do after a market correction, or even on a regular basis. And one more thing: There’s no time like the present.

- Nevin E. Adams, JD

‘Tipping’ Points: 4 Ways to Tell a Fad from a Trend

One of the most valuable skills in my profession — and perhaps in any profession — is an ability to discern trends early. Just as valuable is the ability to discern the sometimes fine line of distinction between what may be a trend, and what may, in fact, be nothing more than a fad. Most plan sponsors have a functional aversion to the latter, and the vast majority have no real passion for being too early in the adoption of the former. After all, nowhere in the fiduciary directive to do only things that are in the best interests of participants and beneficiaries will you find an admonition to be “first.”

One must be careful in making generalizations about such things, of course. The difference between a fad and a trend is often no more than one of time and acceptance, after all, and each plan sponsor situation is based on hugely independent factors. Still, in working with plan sponsors over the years, I have found that a new idea/product can quickly evolve to become a trend if it:

• is cheap (free is better);
• is easy (the less effort, the better);
• solves a problem (the bigger, and more immediate, the better); and
• has regulatory/legislative sanction (the more official, the better).

As a corollary, things that cost money, seem complicated to adopt/incorporate, or that don’t address a current perceived problem will naturally be a harder sell. (I have never found that the removal of a potential threat — such as a lawsuit — is a compelling sales proposition.) But even if all the factors listed seem to apply, that new product/idea trend can be “trumped” by one simple factor — does it mean (or appear to mean) taking on additional risk (or costs) for the plan, or the plan sponsor? If so, all the other factors don’t really matter. Those are the “trends” that “the industry” says everyone should/will be embracing… and then nobody (much) does.

Little wonder then that things like daily valuation (which, certainly at the outset, seemed to be both cheap AND easy), burgeoning fund menus (which were easy to add, if not communicate/navigate) and, more recently, target-date funds (easy, solved a problem and, post-PPA, with regulatory and legislative backing) seem to become the “norm” almost overnight. Little wonder, too, that things like automatic enrollment (certainly prior to PPA, less so these days), and in-plan lifetime income options are harder sells. It also helps explain why things like offering advice or automatic enrollment can, over time, be seen in a new light, courtesy of developments in regulations and/or technology that serve to reweight the scales.

One More Thing

There is, however, one additional factor that influences plan sponsors in their decision-making process, and as odd as it may seem, it is a factor that influences most of us from a very young age. For as surely as plan sponsors are understandably reluctant to be first to embrace a new concept, as human beings we also have a tendency to go with the flow, to follow the crowd. Fads become trends sometimes for no reason other than the rationale offered by teenagers everywhere for occasionally aberrant behavior — because “everybody (else) is doing it.”

Plan sponsors rely on advisors not only to keep them abreast of current trends, but to help them cut through the clutter and “spin” of the latest hot product pitches. To help them fulfill their fiduciary obligations to act in the best interests of participants by providing access to services (and services at fees) that are reasonable for their needs.

Indeed, the best advisors stay aware and alert to new developments and opportunities — but resist the siren call of the crowd, helping plan sponsors understand both the pros and cons of new concepts, be they fads, trends or something in between.

- Nevin E. Adams, JD

7 Things Every ERISA Fiduciary Should Know

When it comes to workplace retirement plans, there are three kinds of people: people who are ERISA fiduciaries and know it, people who aren’t ERISA fiduciaries and know it, and people who are ERISA fiduciaries and don’t know it.

If you’re in the first or last category — well, here are seven things that every ERISA plan fiduciary should know.

If you’re a plan sponsor, you’re an ERISA fiduciary.

Fiduciary status is based on your responsibilities with the plan, not your title. If you have discretion in administering and managing the plan, or if you control the plan’s assets (such as choosing the investment options or choosing the firm that chooses those options), you are a fiduciary to the extent of that discretion or control. If you’re not sure, there’s a good chance you are.

For the very most part, you can’t offload or outsource your ERISA fiduciary responsibility.

ERISA has a couple of very specific exceptions through which you can limit — but not eliminate — your fiduciary obligations. One has to do with the specific decisions made by a qualified investment manager — and, even then, you remain responsible for the prudent selection and monitoring of that investment manager’s activities on behalf of the plan.

The second exception has to do with specific investment decisions made by properly informed and empowered individual participants in accordance with ERISA Section 404(c). Here also, even if your plan meets the 404(c) criteria (and it is by no means certain it will), you remain responsible for the prudent selection and monitoring of the options on the investment menu (and, as the Tibble case reminds us, that obligation is ongoing).

Outside of these two exceptions, you’re essentially responsible for the quality of the investments of the plan — including those that participants make. Oh, and hiring a 3(16) fiduciary? You’re still on the hook as a fiduciary for selecting that provider.

If you’re responsible for selecting those who are on the committee(s) that administer the ERISA plan, you’re an ERISA fiduciary. If you are able to hire a fiduciary, you’re (probably) an ERISA fiduciary.

The power to put others in a position of power regarding plan assets is as critical — and as responsible — as the ability to make decisions regarding those investments directly.

Hiring a co-fiduciary doesn’t keep you from being an ERISA fiduciary.

All fiduciaries have potential liability for the actions of their co-fiduciaries. If a fiduciary knowingly participates in another fiduciary’s breach of responsibility, conceals that breach, or does not take steps to correct it, both are liable.

Your liability as an ERISA fiduciary is personal.

That’s right, the legal liability is personal (you can, however, buy insurance to protect against that personal liability — but that’s likely not the fiduciary liability insurance you may already have in place).

An ERISA fiduciary can’t just quit and walk away.

The Department of Labor cautions that “fiduciaries who no longer want to serve in that role cannot simply walk away from their responsibilities, even if the plan has other fiduciaries. They need to follow plan procedures and make sure that another fiduciary is carrying out the responsibilities left behind. It is critical that a plan has fiduciaries in place so that it can continue operations and participants have a way to interact with the plan.”

As an ERISA fiduciary, you’re expected to be an expert — or to hire help that is.

ERISA’s “Prudent Man” rule is a standard of care, and when fiduciaries act for the exclusive purpose of providing benefits, they must act at the level of a hypothetical knowledgeable person and must reach informed and reasoned decisions consistent with that standard. The Department of Labor notes that “[l]acking that expertise, a fiduciary will want to hire someone with that professional knowledge to carry out the investment and other functions.”

As an ERISA plan fiduciary, it’s never too late to start doing the right things the right way. But doing the right things means understanding what is expected of you — and appreciating the implications.

- Nevin E. Adams, JD

Why the ‘Ideal’ Plan Isn’t Always

Advisors and providers often talk about the “ideal” plan — but ideal for what?

That’s a rhetorical question of sorts — generally it means “ideal” in terms of providing a better retirement savings outcome. Indeed, I routinely see articles and commentaries (and panel presentations) that self-righteously take employers to task for not “caring” enough about their workers (or their retirement outcomes) to do the “right” things.

While I think our industry views such observations as a challenge, a call to action, all too often I think policymakers and regulators — and certainly the 401(k) “haters” — hear a different message. While I suspect that one-on-one, most advisors allow for a more nuanced perspective on such things, at the risk of stirring up a little controversy, let me offer a different perspective on that “ideal” plan.

Extending Automatic Enrollment to All

Following the passage of the Pension Protection Act of 2006, with its automatic enrollment safe harbor, many likely assumed that plans which adopted the provision would do so for all eligible workers. And yet, nine years on, most industry surveys indicate that the majority (on the order of two-thirds) of automatic enrollment plans have extended that feature only to new hires.

This is a subject that I have broached with plan sponsors and advisors numerous times over the years. Most frequently I am told that there is a great reluctance to “second guess” the participation decisions of workers who have had multiple opportunities over the years to enroll and yet, for a variety of reasons, haven’t done so. And so, whether it’s attributed to “not wanting to insult their intelligence” or a simply willingness to “let sleeping dogs lie,” most plan sponsors I have spoken with simply find it easier (or less painful) to implement new things with “new” people.

One concern that is not generally articulated, but is surely a concern for some, is that automatic enrollment’s very success may be a financial impediment. Doubtless you’ve proudly promoted the surge in participation that embracing automatic enrollment produces. But have you considered what a 20% increase in participation by older, more tenured, and likely higher paid individuals would add to your typical benefits budget?

Automatic Enrollment — at 6%

By just about any measure — and in what has to be the vast majority of situations — starting participants off by deferring 3% of their pay won’t be enough to fund their retirement. It is a start, however, and a better start than many younger and lower-income workers would have in the absence of automatic enrollment (despite the periodic news items and research reports that suggest that automatic enrollment results in diminished savings rates).

There’s a flip side to that level, of course. While a 3% starting rate has the legislative imprimatur of the PPA, long before 2006 it had been widely accepted as a “standard” default rate precisely because it was deemed to be so small that workers wouldn’t take steps to stop their contributions. The experience of the past 30 years supports that premise.

As noted above, 3% is probably not enough — but in looking at the trends in automatic enrollment, 3% remains the “norm.” Moreover, participants tend not to modify that starting default. And since the adoption of automatic escalation noticeably lags the adoption of automatic enrollment, we run the risk of creating a new generation of sub-optimal savers.

Recognizing that disconnect, a growing number of people are calling for a higher starting default rate, generally 6%. Moreover, there many surveys have suggested that inertia is a strong enough force that participants aren’t much more inclined to opt out from a 6% default than they are from a 3% default.
And while a growing number of providers and advisors are touting it — and there are plan sponsors embracing that higher default rate — the vast majority aren’t.

So what’s behind the reluctance to raise the bar to 6%?

Honestly, I don’t think it’s hard to figure out. The reasons cited by plan sponsors vary, and while some still express concerns about employee pushback (see above), it seems fair to think that the typical 20% increase in plan participation rates, coupled with a commensurate increase in match costs, would give any rational plan sponsor pause, particularly to a level that would, in many circumstances, require the maximum employer matching dollars.

Stretch ‘Math’

For sponsors that have pushed back on the match cost associated with automatic enrollment, it’s gotten very trendy to push a “stretch” match. The logic goes like this: An employer that might be reluctant to expand participation (and its employer match) with a match of 50 cents on the dollar up to 6% of pay could instead offer a match of 25 cents on the dollar up to 12% of pay. The match structure is supposed to encourage participants (certainly those motivated by the employer match) to increase their contributions, but the cost of the match to the employer will be the same as under the prior formula.

Well, the math certainly works out. But we’re dealing with people, so let’s just admit that some number of those who contributed 6% to get the match won’t (and in some cases won’t be able to) contribute at the higher level.

But the larger problem — and one that is almost never acknowledged by proponents of the stretch match — is that once you’ve actually had a match program in place, “stretching” out the match is almost certain to be an employee relations disaster for the plan sponsor. The goal may be to keep the cost the same, but workers will almost certainly see the move as a reduction in benefits.

The Cost of Bad Retirement Outcomes

Ultimately the plan design alternatives outlined above don’t require employer involvement to be undertaken by employees, who can enroll on their own, and at levels higher than the standard “auto” defaults provide.

There is, of course, a cost associated with “bad” retirement outcomes: Workers who don’t have (or don’t think they have) enough retirement savings may seek to extend their tenure beyond that considered optimal for the employer. That can impact the employer’s health care costs and impede its ability to hire, retain and promote. And workers worried about their finances and retirement security may well be less productive.

So, yes, Virginia, that “ideal” plan has a price tag. And helping plan sponsors make “better” plan design decisions requires not only an acknowledgement of that fiscal reality, but creative solutions that take those considerations into account.

- Nevin E. Adams, JD

3 Things Plan Sponsors Should Know About Changing Providers

By most industry estimates, approximately 10% of plans change providers every year.  Of course, far more consider making a change (without actually acting on it), and many changes are thrust upon plan sponsors, a consequence of poor service, or provider consolidation.

Regardless of the motivation for undertaking the change, here are three things that in my experience every advisor (and provider) wishes plan sponsors understood about recordkeeping conversions — before setting them in motion.

Your provider search will take longer than you think.

Human beings are, generally speaking, poor judges of time requirements, particularly with things with which they don’t have a lot experience (like provider searches) and that require the involvement/input of committees (like provider searches).

We tend to assume that we’ll have more time available for such things than actually winds up being the case, and we tend to assume that such things will take less time than they actually do. We also tend to make those types of assumptions about the participation of other members of the team. It’s not just that those assumptions tend to be optimistic, it’s that, all too frequently, they are wildly optimistic.

Your provider and/or advisor will likely make a good faith effort to provide a timetable of events, and will likely take pains to emphasize to you the amount of time it will take to actually conduct this process. Doubtless they will remind you — and remind you more than once — just how important it is that you make the time commitment, and deadlines, noted in that timetable.

My advice: Take whatever timetable they give you — and double it.

A big part of the reason your provider search will take longer than you think…is you.

A change of providers inevitably brings with it additional work, greater time commitments, and what sometimes feels like an incessant series of questions about things to which you never previously gave much thought. Moreover, you’ll have to think about how to communicate this change to your participants — and deal with the inevitable flurry of questions from them about how to do things to which they never previously gave much thought.

However, these realities are generally not top of mind when we enter into discussions about making a provider change. So, while the search is generally set forth on a wave of optimism and hope, it can, before long, find itself bogged down in the inevitable administrative minutia that consumes so much of a plan sponsor’s time. And the longer it takes, the worse it can become.

The bottom line is, at the outset you probably didn’t have 25% of your day just sitting there waiting for some big project to fill it. Even the most committed will, at some point (and likely at several some points) be tempted to push off that update call, to set aside responding to some integral data definition, to dither on making a determination that will hold up the entire project.  A good project plan will account for some of these. But not an indefinite number.

(Almost) Everybody wants to change providers on January 1. Everybody can’t.

If your plan year-end is Dec. 31 (and it is, for the vast majority of plans), there are some real benefits to making a provider change at that point in time. Plan reporting — both participant and regulatory (Form 5500) — is quite simply neater when you finish the reporting year at the same time you conclude your arrangements with a provider. Anything else is going to require someone somewhere to “splice” together reports at some point. Doing so doesn’t have to be a big deal — but it can be “awkward.”

There are some reasons not to make those kinds of changes at year-end, of course. First off, there’s generally quite a queue wanting to do so. You may well be able to get in that queue, but your new provider will likely have their hands full with a lot of plans just like yours. More significantly, your soon-to-be-ex provider likely will as well — and guess who is likely to get the most/best attention?

Bear in mind also that a 1/1 change means that a lot of the preparation, review, and/or testing— not to mention participant communications — will happen during a time of the year when people are generally more inclined to be worrying about other things.

What’s Next?

So, considering those issues, what should a plan sponsor thinking about making a provider change do?

Well, I would suggest you start early, allow plenty of time for slippage in schedule, and be open to the possibility of making a mid-year change instead.

- Nevin E. Adams, JD

Are You Exploiting Naïve Myopic Workers With That Employer Match?

Over the years, I’ve seen some convoluted ways to rationalize undermining the tax preferences of workplace retirement plans and substituting government tax credits — but a new one just may take the cake.

“A Behavioral Contract Theory Perspective on Retirement Savings,” authored by Ryan Bubb and Patrick Corrigan from the New York University School of Law and Patrick L. Warren from Clemson University’s John E. Walker Department of Economics, starts off by assuming that workers are rational, though perhaps not rational in the way you or I might consider to be rational. However, I’ll accept as logical their assertion that rational workers will prefer saving through an employer-provided plan, rather than accepting a job that does not provide such a plan.

They also claim to provide an analysis that “provides novel explanations for the use of low default contribution rates in automatic enrollment plans, the shift away from defined benefit annuities toward lump sum distributions in defined contribution plans, and the offering of investment options with excessive fees.” Well, it’s certainly novel. More on that in a minute.

Exploit ‘Actions’

The authors claim that employers that provide qualified retirement plans provide more after-tax compensation (in the form of employer contributions not subject to FICA) to employees than employers that do not, and that if workers are rational (there’s that “rational” reference again), then competition for workers in the labor market should therefore provide incentives for employers to offer such plans. So, all other things being equal, workers would prefer to work for an employer that offers a plan than one that doesn’t. So far, so good.

Now we all know that some workers don’t save, and some don’t save enough. But the paper maintains that “if workers undersave (or make other retirement savings mistakes) due to behavioral biases,” then the labor market will give employers incentives to design plans that “cater to and exploit, rather than resolve, those behavioral biases.”

They claim that some workers undersave due to myopia — and that also results in employer plan designs that “exploit the myopic,” and that they do so specifically by — wait for it — offering matching contributions, which the study’s authors claim “naïve myopic workers overvalue.”

Moreover, they claim that this matching results in what they term “cross-subsidization” of rational workers, which, in turn, lowers myopic workers’ total compensation. Said another way, matching contributions mean that the naïve, myopic part of the workforce is not only undersaving (because they overvalue the contributions), but actually receiving less compensation (since the employer is paying them less to offset the cost of the contributions). Are you following this?

And while you may be under the impression that employers offer matching contributions either to increase NHCEs’ contribution rates or to meet one of the safe harbors so that they can provide greater tax-advantaged compensation to HCEs, according to the researchers, you would be wrong. They claim that employers offer those matches precisely because myopic workers overvalue them. Sound like a devious plot to you? Now you’re getting it…

Not only that, they also claim that matching contributions crowd out what they consider to be the superior — and non-redistributive — “commitment device” of non-elective contributions. That’s right, contributions that do not require any particular action on the part of the worker other than to exist and be eligible. Apparently it’s the reward for specific behaviors that is distorting things.

‘Over’ Matched?

Indeed, these researchers believe that the mere existence of the match means that workers will overestimate how much they will, in fact, save for retirement — and, since they think they will accumulate more than they actually will, they will save less — and employers save money, not only because they pay less (the offset for the matching contributions), the workers will choose to save less — and get less of a match.

Put simply, the paper claims that the labor market gives employers incentives to craft plan designs that cater to what biased workers perceive to be of value, and that the same behavioral biases that produce worker mistakes in saving for retirement will also typically lead workers to prefer plans that fail to correct their mistakes (apparently by encouraging them to save for retirement, but not as much as they need) and that can even exacerbate them. The result, they say, is an equilibrium set of choice architectures (plan design) that fails to effectively address the basic retirement savings policy problem of people not saving enough for retirement. Choice architecture that, in their estimation, is making things worse, not better. Because employers offer workplace retirement plans — and have the temerity to match the contributions of workers who take advantage of these programs. The horror!

Employer ‘Incentives’

The authors’ main message is that when workers undersave due to those behavioral biases, then “employers have incentives to design employer contributions in a way that fails to address the undersaving problem and indeed that can even actively exploit the undersavers.”

They not only claim that matching contributions are harmful to rational workers, but maintain that they are “unambiguously so.” How? Well, they claim that matching contributions distort the worker’s incentive to save by encouraging too much savings (which is apparently different than enough savings), and the worker would receive more “utility” from being paid this money as wages.

Oh, and as another example of employer bad behavior in plan design (and ostensibly another reason employers can’t be relied upon in this role), the authors note that most employers choose an automatic enrollment default deferral rate of 3%. The authors concede that the use of automatic enrollment can result in retirement savings by employees who would otherwise have initially contributed nothing to the plan. However, they caveat this admission by noting that some who would have saved more than that default rate if they had had to fill out an enrollment form only save at the default rate.

The solution for this? Substituting for the current system of employer-provided pension plans a new federal defined contribution plan, designed by a federal agency and not linked to any particular job, of course. Oh, and not only do they claim that this could improve savings outcomes, but that it would do so “at little to no fiscal cost to the government.”

Except, presumably, for the part where the government trades the temporary deferral of tax revenues for the permanent forgiveness of a government tax subsidy.

FWIW, I find it hard to believe that this kind of analysis would survive serious scrutiny outside of the rarefied air of academia. But stranger notions have.

- Nevin E. Adams, JD

5 Things You Should Know About Target-Date Funds

In a remarkably short period of time, target-date funds have become an integral component of the typical 401(k) menu, and a growing share of 401(k) plan assets — particularly those of newly hired 401(k) plan participants — are being directed to TDFs.

Whether you are a plan fiduciary evaluating the TDF option(s) on your plan menu — or a 401(k) plan participant being defaulted into a TDF option — here are five questions to which you should know the answers about your TDF investment.

1. What is the ‘appropriate’ asset allocation?

This is the million-dollar question for target-date funds. At a high level, this is no more complicated than deciding what is the right mix of stocks and bonds, international and domestic, alternative investments and/or cash for investors at every stage of their investing life — or than picking the firm(s) that you trust to know what that right mix is.

2. How much of what is on your glide path?

The “glide path” sounds like a complicated concept, but it is actually nothing more than how the shifts in asset allocation take place over time. It is the path that these investments take your money on throughout your investing life. Still, for some funds — particularly newer, smaller funds — the asset-allocation strategies outlined in the fund prospectus or fact sheet may still be “aspirational,” may not yet incorporate all the specific strategies that the fund manager has in mind for that time in the future when the funds achieve a certain critical mass. You need to know what the targets are — and know if those targets are part of the current strategy.

3. Are the funds composed of proprietary offerings, or are they ‘open architecture’?

The “debate” over the relative advantages of open architecture versus proprietary offerings has long been part of retirement plan administration choices, and it is part of the target-date decision as well.

Those advocating the benefits of open architecture generally tout the ability to pick “best of breed” investment solutions (while readily being able to dump those that fall short), backed by the notion that no one firm can possibly be that best choice across every asset class. Those pushing proprietary choices take issue with that latter point, while pointing to the benefits of their intimate knowledge of their own product set — not to mention the relative cost efficiencies of a proprietary product. There is no one single right answer, but the determination should be part of your evaluation.

4. How much does it cost?

Target-date funds are often constructed as a fund comprised of other funds, and — particularly when a provider incorporates other funds in their offerings, they frequently charge some kind of fee for their expertise in putting together those other funds. This is a fee generally applied as some kind of basis-point charge in addition to the other, regular fees charged by the underlying funds. You will want to know what this charge is, if any, and consider it as part of the total cost of your selection. This fee is generally smaller (sometimes there is no extra charge) for proprietary-only offerings.

Beyond the aforementioned “wrapper” fee, TDFs — particularly mutual fund TDFs — will generally have all the same kinds of fees typically associated with retirement plan investments. Bear in mind that some of the fund allocations may include some relatively exotic asset classes — and those may carry higher expenses than you are accustomed to seeing. Additionally, you may find some retail share class funds included, even in institutional share class offerings. The bottom line: Keep an eye on the bottom line.

5. How should I measure ‘success’?

It wasn’t all that long ago that there were no benchmarks to speak of in this space (other than those constructed by the firms managing those funds). These days the passage of time, and the expansion of the market, have produced several credible benchmarks against which the performance of the funds can be evaluated.

But take note: The benchmarks can be as varied in their underlying philosophy and construction as are the funds themselves. That’s why it is important to first know what you believe about the approach, glide paths, and/or asset allocation before you pick the benchmark.

- Nevin E. Adams, JD

You may also want to check out the Employee Benefits Security Administration’s (EBSA) “Target Date Retirement Funds — Tips for ERISA Plan Fiduciaries” at http://www.dol.gov/ebsa/newsroom/fsTDF.html.

The Course of Human Events

It is easy, looking back, to gloss over just how remarkable was the sequence of events that made this nation’s independence a reality. The bickering and machinations of the Continental Congress in 1776 were every bit as unpleasant, and unproductive, as the worst of today’s elected officials — even though, and perhaps in some measure because, hostilities with Great Britain had officially been underway since the so-called “shot heard ‘round the world” the preceding spring.

The men who gathered in Philadelphia that summer to bring together what was not yet a “new nation” came from all walks of life. Still, it seems fair to say that most had something to lose, both financially and in terms of the personal liberty they advocated as an “unalienable” right. True, many were merchants (some wealthy, including President of Congress John Hancock) already chafing under the tax burdens imposed by British rule, and perhaps they could see a day when their actions would accrue to their economic benefit. But they could hardly have undertaken that declaration of independence without a very real concern that they might well have signed their death warrants.

Ironically, despite the celebrations on the 4th, the resolution that declared that “these United Colonies are, and of right, ought to be, Free and Independent States” was approved by the Continental Congress on July 2. In fact, only President of Congress John Hancock and Charles Thomson, secretary, signed it on the 4th (the former famously in a hand “large enough for King George to read without his spectacles”). Most of the 56 delegates didn’t sign it for another month. One didn’t sign until 1781.

Of course, that “declaration” didn’t magically make it so. The winter at Valley Forge and many other disappointments still lay ahead. The surrender of Cornwallis at Yorktown was still more than five years off, and an official end to the hostilities would not come until two years after that, in 1783.

This week most will commemorate the declaration of this nation’s independence as a unifying experience. And yet, just “four score and seven years” later, as the nation approached another Independence Day celebration, President Abraham Lincoln would find himself in the middle of an enormously unpopular war fought to keep the nation together, even as two massive armies converged at a crossroads community called Gettysburg.

Even in 1776, historians have suggested that only about a third of the colonial citizenry actually favored independence, while a third remained loyal to Britain — and the remainder apparently just wanted to be left alone.

It seems only right then that today, as part of this “course of human events” and perhaps particularly at this time when our nation seems so deeply divided on a number of issues, that we remember not only the differences, but the sacrifices, large and small, that have made this great nation possible.

- Nevin E. Adams, JD

You can read more about the Declaration of Independence here.

4 Steps Toward Financial Independence

While retirement and retirement savings may not be high on your Independence Day weekend agenda, it can be a good time to focus on things that have been pushed aside for more pressing priorities.

Here are four steps you can take this weekend that can help put you on the road to achieve financial independence.

1. Figure Out How Much You Need

Yogi Berra once famously noted that if you don’t know where you’re going, you might not get there.
Effective savings strategies start with a goal, something to aim for. For many, retirement savings goals seem impossible to set. After all, there’s no “blue book” on the cost or quality of retirement — no single answer to the question, “How much do I need?” As a result, many people fear that their estimates “aren’t even in the ballpark” of what will be required. The 2015 Retirement Confidence Survey affirmed a long-standing trend — that most haven’t made even a single attempt to figure out what they might need for retirement.

There are, however, tools that can help you set a reasonable target. If your workplace retirement plan doesn’t currently provide that option, the Ballpark E$timate at www.choosetosave.org is free, thorough, and won’t require much of your weekend to come up with a target based on your individual circumstances.

2. Rebalance Your Account

While a growing number of individuals take advantage of strategies like managed accounts and target-date funds — options that are regularly rebalanced by investment professionals — to invest their 401(k) balances, many workers (especially older ones) still make individual fund selections, either on their own or with the help of an advisor. The problem is, we’re often too busy to go back and review those decisions. Unfortunately, left unattended too long, market movements can leave even the best investment choices out of balance and produce results that are unintended.

If you haven’t rebalanced your account in a while (or can’t remember when you did), take advantage of the long weekend to do so.

Note: if you are using a strategy like a target-date fund, balanced fund or managed account with your workplace plan, you shouldn’t need to rebalance. And if you’re not using one of those options, this might be a good opportunity to consider making a change.

3. Bump Up That Contribution Rate

Like those investment choices, most of us make a decision about how much to save once, frequently when we first join the plan. At that time you may have chosen that rate based on the employer match, or the rate that the plan automatically enrolled you, or perhaps even just the amount that you thought you could afford at the time. Odds are you haven’t changed that rate since that very first time, however — and if you didn’t make that decision based on an assessment of how much you needed to provide a financially secure retirement (see #1 above), it may not be enough.

So, take that rate and consider increasing it — by at least 1%, or more if you can.
And make a point of increasing that savings rate annually.

4. Give Your Plan an Annual Check Up

It may seem obvious, but once you have figured out how much you’ll need to live on in retirement, you need to see if you are on track to achieve that goal. So pull out those retirement plan statements, take a look at your current rate of savings, how you’re invested, the amount of the employer match, and your remaining years of saving/investing, and see how far that takes you in achieving the goal you set above.

If your current approach leaves you short of that goal, consider alternatives — saving more, for instance, or in a way that allows you to maximize your employer match. The tool you used to forecast your needs should also be able to help you see the impact that changes in your current savings strategy can make.

Then remember that things change. Whether it’s your health, your family, your income, or your place of residence, your plan needs to keep up with your needs and expectations.

While you don’t need to constantly reassess, even if there aren’t major changes it’s a good idea to check it out at least once a year — and why not on a long weekend?

Regardless, always consider seeking the help of a qualified expert advisor to help you make the decisions that will allow you to celebrate your own financial independence!

- Nevin E. Adams, JD