Oliver’s ‘Twist’: 5 Takeaways

I’ve long enjoyed John Oliver’s take on the world. He has a gift for bringing humor to subjects that aren’t generally seen as funny, and in the process not only helps make complex topics more approachable, he gives voice to the frustration that millions surely feel at the world around us.

That said, when he decides to weigh in with his style of biting commentary on your profession – well, let’s just say that you’re likely to be in for a bumpy ride. And so it was this weekend, when he took on retirement savings, retirement advisors and the process of setting up a small plan 401(k).

Now, it wasn’t as biased as some media treatments of the retirement plan profession have been. Oh, they brought in the exaggerated math on fees from that 2013 PBS Frontline special, copied (and doubled down on) their dismissal of active management …and he did reference termites. But all in all – and while continuing to emphasize throughout that this was a complicated process (one that your average worker, not to mention plan sponsor, probably isn’t prepared to undertake) – he looked at our industry through the kind of eyes that most of us can appreciate, for its humor, if nothing else.

Make no mistake, Oliver was, of course, exaggerating to make a point (or two). But to my ears, the most compelling part of the program was when he described the process his production company went through in trying to set up a 401(k) plan for their employees. Of course, we know nothing about the particulars of the plan, and that makes it nearly impossible to do a reality check. Suffice it to say that he felt that this tiny start-up plan was being overcharged (1.69% + $24/participant + investment management fees), and even more so by the broker engaged to help them set up the plan – who (aside from making spreadsheet errors) seemed to be basically collecting money (1% in year one, and 0.5% each year thereafter) for (apparently) doing little more than telling them that their plan was “too complicated” to be placed at Vanguard (and whose idea was that, anyway?).

Is that overly simplistic? Almost certainly. This was no mere “hatchet” piece, however. To my ears Oliver gave voice to some great advice that, with luck, every listener (and reader) will take to heart:

Start saving now.

Oliver acknowledged that this can be rather simplistic advice for some, noting that some individuals aren’t currently able to afford to save. However, he quickly set that aside to make clear to his listeners that saving for retirement should be a priority. And he said it more than once.

Seemingly tiny fees can add up.

It’s not all about the fees, of course (or shouldn’t be), but the point that fees compound just like returns was well worth understanding. In my experience the issue isn’t that individuals think their fees are small, but that they are either unaware of them or, even worse, think that because they are unaware of them (despite those reams of disclosures), they must be $0.00.

There is, of course, no such thing as a free lunch – or a free retirement plan. Even if participants aren’t paying those fees, someone is.

If you’re lucky, you have a 401(k) at work.

Though Oliver didn’t cite this statistic, we know that workers who have a plan at work are 15 times more likely to save than those who don’t. If you have a plan at work, you have the advantage of payroll deduction, the encouragement of an employer’s education program, and likely their match, and increasingly options like automatic enrollment, contribution acceleration, and defaulted investments into qualified default investment alternatives (QDIAs) like target-date funds or managed accounts, which are not only better diversified at the outset than your average worker would be able to do on their own, but are rebalanced automatically over time by people who actually know what they are doing.

Oh, and you have a plan fiduciary looking out over all of this, with a charge to ensure that the program’s design is in your best interests, and that the fees for those services are reasonable. Lucky indeed. And Oliver’s production firm employees seem to have been well served here.

The retirement plan is a potential minefield, and you need to pay attention.

Arguably this applies to both participants and plan sponsors, but Oliver’s admonition was to an employer, like his company, that goes about setting up a 401(k) plan for its workers. This may look easy from the recliner watching HBO, but in the real world, there are complicated legal documents, complex investment considerations, regulatory requirements, participant disclosures… oh, and did we mention the personal liability?

To his credit, Oliver acknowledged the complexity, explaining that his production company “spent weeks trying to understand our own 401(k) plan.” How many employers can say that?

If you don’t pay close attention, this can really get away from you.

Complicated as things can be during the set-up, Oliver made a subtler point: that if you think setting up a retirement plan is a “set it and forget it” project – well, you’re wrong. To his production company’s credit, they did the math on their fees (going so far as to not only involve, but get “Janice in accounting” excited about their potential savings. Of course, their team not only did the math, they also had in mind a specific figurethey thought was reasonable (though whether it actually was for a start-up plan of unknown complexity is another matter). It may not have been a very well researched benchmark, but it gave them an objective measure against which they could evaluate their plan.

Ultimately, Oliver stated that, “It doesn’t need to be this confusing.” More precisely, it shouldn’t be.

- Nevin E. Adams, JD

It's worth reading John Hancock's perspective on the plan setup situation described by Oliver.  It's here. 

A Fiduciary ‘Idiot Light’

Among the assorted “idiot lights” that adorn my current car dashboard is one that alerts me to low tire pressure.

It’s come in handy on precisely two occasions – one when a nail had punctured my tire (though I had already discerned that I had a problem from the sound of the flat tire nanoseconds before the light came on); the other when I had neglected to keep an eye on the tire pressure (which coincided with a day that I had let my daughter take my car to work). Other than that, it’s never really been on or an issue – or a help – until recently, when it came on, and stayed on, about 100 miles from home.

Now my owner’s manual suggested that this behavior might be a sign of a bad sensor, and sure enough, (after 100 miles of driving angst) that was subsequently confirmed by my mechanic – who also informed us that it would cost a couple of hundred dollars to replace it. Perhaps needless to say, that light continues to illuminate my dashboard.

Since the initial flurry of so-called “excess fee” litigation a decade ago, many have perhaps become numbed to the filings. Nearly all have involved multi-million, and multi-billion dollar plans – name brand companies. One might well expect – and many pundits have opined – that this litigation, funded, if not fueled, by a contingency fee structure, was really a concern for those larger plans and their larger asset pools.

Fiduciary Failings?

Or would have, until the recent filing in the case Damberg v. LaMettry’s Collision, Inc. (D. Minn., No. 0:16-cv-01335), which involved participants who were part of a 114-participant plan that had (in 2014) less than $10 million in plan assets.

These small plan participants alleged that the plan fiduciaries breached their fiduciary duties by:

• selecting an unduly expensive structure for its 401(k) plan – one that bundled recordkeeping and investment management services;
• failing to conduct an RFP for the structure to minimize expenses;
• failing to evaluate whether an unbundled or alternative fee structure was a better option;
• failing to conduct due diligence regarding whether the assessed fees (retail versus institutional shares) were appropriate; and
• failing to actively monitor the selected structure’s fees and expenses.

They also challenged the application of asset-based fees for recordkeeping (rather than a flat per-participant fee), and went on to suggest that for retirement plans with more than 100 participants, a reasonable annual per capita fee paid by retirement plan participants should not exceed $18.

Nothing New?

These types of charges are nothing new, of course. All (with the possible exception of the concerns expressed about the bundled pricing structure) have been invoked in just about every one of the previous excessive fee lawsuits.

What is different, of course, is that these charges are being leveled at a plan that is considerably smaller than those that have thus far been the targets of this type of litigation.

On many occasions during the months since that sensor light on my car dashboard started blinking, I have worried that I might actually have a problem, one “masked” by my choosing to ignore the glaring reminder on my dashboard. I’ve worried that, by ignoring the warning signs that “idiot light” is meant to detect, I will one day wind up feeling like a true idiot, and all because I was too cheap (or lazy) to replace that tire sensor.

Plan fiduciaries – and those who guide them – have had at least a decade to see the writing on the wall on these excessive fee lawsuits. Those who have been ignoring these risks because they think they are immune, or are too small to be a target, should have just seen an “idiot light” come on their fiduciary dashboard.

- Nevin E. Adams, JD

See also: 5 Things Plan Sponsors Should Know; 5 Things Plan Sponsors Don’t (Always) Do — But Should.

The Deification of DB-ification

I recently stumbled across another of those “DC plans are becoming like DB plans” articles — you know, the so-called “DB-ification” of 401(k)s? This is all supposed to be a good thing, of course, but is it?

We are, of course, routinely told that defined benefit plans do (or did) a better job of providing adequate income in retirement than defined contribution plans — though we aren’t generally reminded that that assumes that workers have actually managed to accumulate service credits sufficient to vest in those benefits, and that those programs are properly funded.

However, this interest in emulation of DB plans by DC plans is a relatively recent focus, fueled in no small part by the success of Pension Protection Act-engendered trends, primarily auto-enrollment (after all, nobody asks people to fill out a form to be covered by their DB plan) and asset allocation fund defaults (ditto on asking participants to choose the investments in the DB plan). But while it’s said that imitation is the sincerest form of flattery, it’s not like those auto-designs were actually copied from DB plans.¹

Don’t get me wrong — anything that turns employees into participants (and automatic enrollment surely does that) and helps them make better investment decisions (and, generally speaking, asset allocation solutions fulfill that need) has to be a good thing. But to suggest — as many of these reports do — that these trends are essentially helping DC programs mature into their more “responsible” DB counterparts seems a gross misinterpretation of what is going on.

If we’re really looking to bring the best of the DB approach to DC plans, we need look no further than the definition of a defined benefit. Defined benefit plans are funded — at least, they are supposed to be — with an eye toward the benefit that will be paid out. As the name suggests, the benefit is defined — and the decisions that are made about how much to contribute to the plan and how those contributions will be invested are also done with that in mind.

Defined contribution plans, on the other hand — even the “automatic,” DB-ified ones — have an entirely different focus. They are (still) mostly focused on how much participants can afford to put into them (or can be forced to put into them without them opting out), not how much you need to get out of them. Oh, sure, the PPA’s safe harbor automatic enrollment — and a growing number of DC plans — includes a provision to increase those contributions on an annual basis. But is it any replacement for the kind of true funding discipline that a defined benefit focus represents? More importantly, will it be enough to provide the same kind of retirement security that the DB system promised?

Let’s not kid ourselves — when they worked (and they didn’t always), DB designs were “better” not because they made decisions for individuals (though that helped), but because somebody else was generally doing the funding,² but more importantly doing so based on specifically targeted outcomes.

We’re not likely to shift the funding paradigm — but there’s nothing to keep us from emphasizing the focus on the ultimate benefit, the outcome that we hope to achieve — and the discipline to fund those DC accounts so that they can provide it.

- Nevin E. Adams, JD


Footnotes

1. Another DB “innovation” – the annuitization of the benefit — is certainly talked about (though not yet widely adopted) in the context of DC plans. Ironically, the trend in DB plans seems to be to replace that with the lump sum option so prevalent in DC plans.
2. Another significant DB/DC difference — and one that tends to get glossed over — is that DB plans not only don’t ask employees to sign up or make investment decisions — they — at least the ones in the private sector — generally don’t ask participants to fund them. Oh, sure, that DC plan frequently comes with a match, but the primary source of funding for most of these programs lies with the participant.

Did We ‘Need’ a New Fiduciary Regulation?

I was recently asked by a reporter if the new fiduciary regulation was “needed.” The question caught me a bit off guard, because having been in “figure out how to deal with this” mode for most of the past year, I had long since moved past “why” and “if” to “when” and “how.”

I was reminded of our last home purchase – which we bought in a bit of a rush. Oh, it wasn’t like we didn’t know we were moving – but our ability to actually hone in on a new home was hindered by the fact that our current home had to sell first. And, as is often the case in such things (or has been for us), we had gone a long time with nary an offer, much less a viable one.

Once that offer came, of course, we had to move quickly (literally). And so, the planning that we had done mentally in anticipation of that day was thrust into overdrive. Ultimately we settled on a house that wasn’t the best we had seen, but it was the best available at the time (within the price and commuting distance restraints we placed upon it). At the time we moved in, I took some comfort from the fact that its prior residents had lived there more than a quarter century. More than enough time, I thought, to have fixed whatever ails might have arisen there.

It wasn’t long, however, before we realized that with that longevity in residence had come a certain complacency about the upkeep and maintenance; the even uglier things we found underneath the ugly pink carpet, the doors that we hadn’t opened during the inspection that fell off the hinges, the garage door opener that dropped out of the ceiling after a dozen uses…. I was later to tell folks that we spent the next several years (and no small amount of money) doing the 25 years of maintenance that the former residents had simply chosen to live without.

Was Fiduciary Regulation Needed?

So, with that experience in mind, I returned to the reporter’s question… was the new fiduciary regulation “needed”.

After a quick pause, I responded that, more than 40 years on, it certainly bore consideration. After all, the retirement savings world has changed a lot over the past generation, and if DB plans were never quite as ubiquitous as some remember them, defined contribution plans, and IRAs – which now have more assets than the DC plans which spawned many of them – increasingly are. It’s not just those individual retirement savers, either – the plan sponsor fiduciaries that play such an integral role in critical areas like plan design and outcomes measurement need all the help they can get in these increasingly complex areas.

At some point you can’t be in this business and not know that, as in all human endeavors, there are bad actors. Generally speaking, and thankfully, they are the minority. But they are out there, and every retirement plan advisor I have ever spoken with can cite examples, frequently multiple ones, of situations they have encountered, and not always been able to fix. You can’t credibly argue there aren’t problems – only whether this particular solution is well suited to, and cost effective for, the task for which it has been presented.

And yet, while all that was known and acknowledged, like the family having grown accustomed to the walls that surround our existence, there were no clarion calls for change, certainly not of the scope and scale contemplated by the Labor Department’s fiduciary regulation.

Not that I ever bought the widely cited $17 billion figure that proponents of the regulation said (and continue to say) it was costing American savers. Nobody knows the exact figure, of course (though I’m pretty sure you won’t be close if your assumptions are predicated on the notion that all active management choices are at an advisor’s direction, and only look at IRAs, even if you do cut that result in half). But let’s say it was exaggerated by a factor of two – would a $9 billion “rip-off” have been enough to warrant redress? What if it were a “mere” $1 billion?

But is the cure “proportionate” to the ills it purports to address? I’m pretty sure it will cost more than the current projections suggest – that’s the nature of such things. However, I’ve been in this business too long not to appreciate the benefits that ERISA’s oversight can bring, and those may well be understated. That said, it would be naïve to assume that flat fees (or flat rates) are necessarily cheaper in every situation. Or that the advice that comes with those pay structures is inherently “better.” But a shift in those directions will remove what is surely at least a temptation for some. And if fewer individuals take advice at those rates, and on those conditions – well, they will almost certainly do so with a greater appreciation for what such insight is worth, even if they are unwilling to pay for it.

Though it is less than a week old, there’s a pretty consistent sense that the final regulation is more workable than its predecessor. Indeed, many would argue, considerably so. Make no mistake, the Labor Department may not have acquiesced in every comment or suggestion made over the past year, but they were clearly taking notes.

That does not, however, mean that it doesn’t still have “bugs” that have to be worked out, provisions that need to be refined, definitions that need to be clarified. We may have known this was coming, but this new fiduciary “home” has only just come on the market.

It’s not unusual for “cures” to be worse than the disease – or to at least be more costly. The fiduciary regulation may yet turn out to have unintended consequences (count on it) – or, hard as it may be to imagine right now, we may look back in a couple of years and wonder at how quickly we adjusted.

Regardless, the waiting is over. The work begins.

5 Reasons to Plan and Save for Retirement Now

As April is National Financial Literacy month, and this is National Retirement Planning Week, those who work with retirement plan participants know it’s important to do the right thing(s) when it comes to retirement planning and savings.

But for those you are trying to help encourage, here are five reasons to plan and save for retirement now, and as an integral part of that financial plan.

Because you don’t want to work forever.

Seriously, no matter how much you love your job, if you want to stop working one day – and trust me, you will – you are going to have to think about how much income you will need to live after you are no longer working for a paycheck.

Because living in retirement isn’t “free.”

Many people assume that expenses will go down in retirement – and, for many, perhaps most, they do. On the other hand, there are changes in how we spend in retirement as well – and they aren’t always less. A recent report by the nonpartisan Employee Benefit Research Institute (EBRI) notes that health-related expenses are the second-largest component in the budget of older Americans, and a component that steadily increases with age. Health care expenses capture around 10% of the budget for those between 50–64, but increase to about 20% for those age 85 and over,” EBRI notes. And those spending shifts don’t take into account the possibility of a need or desire to provide financial support to parents and/or children.

Because you may not be able to work as long as you think.

In 1991, just 11% of workers expected to retire after age 65. Twenty-five years later, in 2016, 37% of workers report that they expect to retire after age 65, and 6% say they don’t plan to retire at all, according to the 2016 Retirement Confidence Survey. At the same time, the percentage of workers who say they expect to retire before age 65 has decreased, from 50% in 1991 to 24% in 2016.

However, the RCS has consistently found that a large percentage of retirees leave the workforce earlier than planned – nearly half (46%) in 2016, in fact. Many who retired earlier than planned say they did so because of a hardship, such as a health problem or disability (55%), or changes at their employer such as downsizing or closure.

The bottom line: Even if you plan to work longer, the timing of your “retirement” may not be your choice.

Because you don’t know how long you will live.

People are living longer, and the longer your life, the longer your potential retirement, especially if it begins sooner than you think. Retiring at age 65 today? A man would have a 50% chance of still being alive at age 81 (and a woman at age 85); a 25% chance of living to nearly 90; a 10% chance of getting close to 100. How big a chance do you want to take of outliving your money in old age?

Because the sooner you start, the easier it will be.

As recently as the 2015 RCS, fewer than half (48%) of workers report they and/or their spouses 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.

Whether or not you feel fully financially “literate” now, you need to have a plan for your retirement. And there’s no time like the present to start.

- Nevin E. Adams, JD

The Choices of a Lifetime

It was 10 years ago today – a Saturday morning as I recall.  I had just wrapped up my weekly column when I got a call from my sister. My father, who had been battling cancer for several years now, had suffered a series of heart attacks. By the end of the day, he had passed.

As the family converged, my siblings and I tried as best as we could, together with Mom, to deal with the tasks that required our attention, and divvied up the ones that seemed to call out for individual attention. Having spent my entire professional career in financial services, and having picked up a law degree along the way, my “job” was to organize the will and assets.

The estate wasn’t complicated.  My parents each chose careers of service to others; Dad as a minister, and then a director of missions where he helped other ministers until his “official” retirement several years ago (far as I could tell, Dad’s only retirement was from the receipt of a regular paycheck), while Mom was a school teacher – a teacher who took a fairly significant (and unpaid) “sabbatical” so that she could stay at home with her four kids until the youngest was ready to head off to school. They both loved what they did, but those aren’t professions that tend to make one wealthy (in a monetary sense, anyway).

Despite that, my Depression-era reared parents saved what they could. On top of the expenses of rearing four kids, Dad, considered self-employed for most of his working life, funded both the employer and employee portions of Social Security withholding and still found a way to set aside money in a tax-sheltered account (he also tithed “biblically,” for those who can appreciate that financial impact). Mom, covered by a state pension plan, saved diligently to buy back the service credits she had forgone during the years she worked in our home without a paycheck, and also set aside money in her 403(b) account. Somehow, despite all those draws on their modest incomes, they managed to accumulate a respectable nest egg (don’t tell me those of modest incomes can’t and won’t save).

Today, ten years later, and cruising toward 86, Mom is still self-sufficient (though nervous about what the politicians in her state may yet do to her pension, into which she, as many teachers do, contributed mightily over the years), thanks to the choices they made along the way over the course of a lifetime. 

I’ve always been proud of my parents, who sacrificed so much along the way to give us the best they could. I’m also proud – and more than a little impressed – of how committed they were to saving what they could, when they could, and the results of that commitment. So often – perhaps too often, IMHO - I think we are inclined to excuse inadequate savings rates as the product of strained finances, a tight economy, or the simple human inclination to indulge in short-term pleasures.

On this, the anniversary of my Dad’s passing, my parents’ example reminds me – and hopefully you – that the decision to save is just that – a decision, a choice.

Here’s hoping more of us make the right one - while we still can.

 

- Nevin E. Adams, JD

The "Plot" Thickens

In recent weeks, I have been distressed to see a pair of reports by what are sometimes affectionately referred to as 401(k) “haters” — but that’s not what I find most troubling.

One, by the Economic Policy Institute, is innocuously titled, “The State of American Retirement,” but it might be more honestly subtitled, “How 401(k)s have failed most American workers.” The other is a formalized (and slightly updated) version of Teresa Ghilarducci’s Guaranteed Retirement Account (GRA) proposal titled, “A Comprehensive Plan to Confront the Retirement Crisis.” Both reports tread familiar, and misguided, ground.

Misguided and misleading as these kinds of reports are, they’re not new or even original. I’d almost be inclined to simply ignore them. That is, until I see headlines like, “The Plan That Could Render Your 401(k) Obsolete,” or “These Depressing Charts Show the Different Ways 401(k)s Fall Short,” reported with a straight face by the personal finance press. The latter, which just appeared in The Washington Post, leads off with the assertion, “We already know that the 401(k) has not been a great solution for improving Americans’ retirement security.” Oh, do we?

Here’s some data that (somehow) is overlooked by these reports: According to the nonpartisan Employee Benefit Research Institute (EBRI), in 2013, 82% of 401(k) participants (for whom this information was available) made less than $100,000 per year, and 51% of 401(k) participants made less than $50,000. Even more importantly, moderate income workers participate when they have the option: More than 70% of workers earning between $30,000 and $50,000 save in their 401(k). Oh, and the notion that “less than half of American workers have access to a retirement plan”? Well, the fact is that 8 out of 10 full-time workers are eligible for some kind of workplace retirement plan, the most common of which is a 401(k)-style plan. The 50% statistic cited repeatedly by academics and the media includes seasonal and part-time workers — granted, they have a retirement to worry about, but their issues in the here and now are economic, not a fault of ERISA or the 401(k), which have long had specific coverage thresholds.

It is, as a colleague of mine said recently, blaming the well for the drought.

The failure laid at the feet of 401(k)s — if a failure it is — is that people who don’t work, or who don’t work for employers who offer a retirement plan at work, are in worse shape than those who do. Now, I’m not saying that the 401(k) design works for everyone, and it most assuredly won’t work for those who don’t have access to its benefits. That said, 401(k)s are working for far more people and in far more varied circumstances than the fear-mongering headlines give them credit for. It’s one thing, after all, to acquiesce to what has become a journalistic “creed” — that “if it bleeds, it leads” – and something else again to wield the knife.

It’s past time to call out these reports — and the reporting on them — for what they really are: part of a long-standing and deliberately intentioned “plot” to kill the 401(k) — first by undermining its value, discounting and demeaning the modest tax deferrals that encourage American savers to put aside their natural preferences for spending, then discrediting as “rich” those who do take advantage of the option and make thoughtful preparations for retirement, and then, as advisors well know, disparaging those who work with retirement savers to make good long-term decisions.

It’s been said that, “A lie unchallenged becomes the truth.” If those of us who know better don’t start speaking up — and speaking out — you can bet that the drumbeat of coverage about the failure of the 401(k) will one day become a self-fulfilling prophecy. For some, that day has already arrived.

- Nevin E. Adams, JD

5 Ways to Boost Retirement Confidence

With increasing regularity, the financial services industry pumps out surveys that purport to capture America’s sense of confidence regarding its readiness for retirement, at least on a financial footing. Mostly, however, they seem to focus on the symptom, rather than dealing with the underlying cause(s).

However well-intentioned, these all seem designed to highlight a persistent strong undercurrent of concern — one that, certainly when juxtaposed against the generally disappointing preparation levels reported by respondents, seems completely warranted.

Confidence about retirement is one thing, of course, and preparation something else, though the two are logically intertwined. That said, for those looking to shore up confidence levels, data from the granddaddy of such surveys — the non-partisan Employee Benefit Research Institute’s (EBRI) Retirement Confidence Survey — provides a roadmap:

Work for an employer that offers a retirement plan.

Data indicates that workers — even workers of modest means — are 15 times more likely to save for retirement if they have access to a retirement plan at work than those who don’t have that option. It is perhaps not surprising then that in recent years, the RCS has tracked a huge gap in confidence about retirement between those who have a retirement plan and those who don’t; in the 2015 RCS, 44% of workers without a retirement plan are not at all confident about having enough money for a comfortable retirement, compared with only 14% of those who have a plan.

Furthermore, among those with a plan, the percentage of those who are very confident increased from 14% in 2013 to 28% in 2015. In contrast, the percentage of those who are very confident remained statistically unchanged among those without a plan (10% in 2013, 9% in 2014 and 12% in 2015).
Workers reporting that they or their spouses have money in a defined contribution plan or IRA or have a defined benefit plan from a current or previous employer were more than twice as likely as those without any of these plans to be very confident (24% with a plan vs. 9% without a plan in the 2014 RCS).

Figure out how much you’ll need.

The RCS has found that workers reporting that they or their spouses 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 their 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, as recently as the 2015 RCS, fewer than half (48%) of workers report they and/or their spouses 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.

Talk with an advisor.

Anecdotally, when you ask someone about their interest in engaging the services of an advisor, they are likely to tell you that they will wait until they need one — by which most seem to mean that, once they have accumulated enough savings to make it “worthwhile,” they’ll consider getting some help. What’s often overlooked is the role that a financial advisor — particularly one whose expense is covered by an employer plan — can play in helping make that account growth a reality.

In the 2015 RCS, more than three-quarters (78%) of respondents who had talked with a professional financial advisor about retirement planning were either somewhat or very confident that they will have enough money to live comfortably throughout their retirement years, far more than the 49% who did not use an advisor. The 2013 RCS found that nearly two-thirds (65%) of those who used either online calculators or asked the advice of financial advisors were either somewhat confident or very confident that they will have enough money to live comfortably through their retirement years.

On the other hand, nearly half (44.6%) of those who simply guessed were also somewhat confident or very confident.

It seems that, as noted above, the calculation/determination itself has a positive impact, though the kind predicated on real assessment clearly does more for confidence (and probably for the actual basis of that confidence as well).

Retire.

One might expect that the financial realities of being in retirement might well shatter the fragile levels of confidence expressed ahead of crossing that threshold — and yet the RCS has consistently chronicled that retirement confidence is higher among those already in retirement than among those still working. In the 2015 RCS, 37% of retirees were very confident about having enough money to live comfortably throughout their retirement years (up from 28% in 2014 and 18% in 2013), and a third were somewhat confident.

This is despite a consistent finding that individuals are frequently forced to leave the workforce earlier than planned, and that they are less likely to work in retirement than pre-retirees anticipated (in the 2015 RCS, 67% of current workers plan to work for pay in retirement, compared with just 23% of retirees who report they have actually worked for pay in retirement. In the 2015 RCS, 37% of retirees were very confident about their prospects, up from 27% in 2014 and 18% as recently as 2013.

However, as one might expect, workers who are not confident about their financial security in retirement plan to retire later, on average, than those who express confidence.

Save for retirement.

Retirement confidence, like confidence generally, is a state of mind, and one not always grounded in an accurate assessment of reality. As noted above, the mere act of guessing about retirement needs seems to be enough to provide a boost in confidence, certainly in the short run.

Regardless, it’s hard to deny that the best, most secure, means of assuring retirement confidence is establishing a solid foundation for that belief by:

• taking advantage of the opportunity to save and having the discipline to do so;
• establishing a goal and revisiting that goal on a regular basis; and
• enlisting the help of professionals in establishing those goals and in making sound, diversified investments.

Because ultimately, of course, what really matters is not how confident you feel, but whether you have a reason to feel confident.

- Nevin E. Adams, JD

Why Doesn’t Every Plan Have Automatic Enrollment?

For all the good press and positive results that automatic enrollment gets, one might well expect that every plan would embrace it. And yet today, nearly a decade after the passage of the Pension Protection Act, many still don’t.

So, why don’t all plans use automatic enrollment — and what can you do about it? Here are the primary objections that I have heard from plan sponsors — and some possible responses.

Cost.

The simple reality is that automatic enrollment “works,” which is to say that overnight, it has the very real potential of transforming a long-standing plan participation rate of 67% or 75% to 95% or greater.

The other simple reality is that when you take that likely increase in participation rate (generally from 70% to 95% or so), and then figure out the increase in matching dollars that would result — well, it can be a sudden budget jolt, particularly when you think about it applying to an employee population that is likely more tenured and highly compensated.

Personally, I’ve never seen much response to the threat that plan sponsors who aren’t attentive to the outcomes of the plans they provide will find themselves accounting for that decision in a court of law (remember when they were all going to get sued for not offering advice?). Nor have I seen the cost possibilities of adopting a stretch match offset the PR realities of imposing it.

For years, employers have struggled with the rising (and often annually rising) costs of benefits like health care. A number of larger employers have embraced the so-called “de-risking” of their pension obligations, in many cases trading the uncertain future obligations on their bottom line of their defined benefit pension in favor of a defined contribution alternative. But that has also had the effect of transferring a greater uncertainty about retirement to their workers.

RESPONSE: Today there is plenty of evidence to suggest that workers are increasingly concerned about retirement finances, and that those concerns are not only cutting into their productivity at work, but that, in a growing number of situations, their solution to those concerns (real or imagined) is simply to extend their working careers. And a growing number of CFOs recognize that those costs are real and growing — and can be mitigated by better retirement preparations by their workforce.

Some (still) view it as too paternalistic.

Like it or not, at some level, automatic enrollment requires that the plan sponsor “impose” a savings decision on a participant, and even though workers can choose to opt out, many plan sponsors are simply disinclined to set aside the purely voluntary approach.

Indeed, inklings of this can be seen in the varied industry surveys that continue to find that, even when plans adopt automatic enrollment, they tend — by a margin of 2:1 — to apply it only to new hires, rather than to “disturb” workers who, at least in theory, have previously been afforded the opportunity to participate and decided not to. Some are hesitant to “insult their intelligence” by doing so, and for others, it’s just the economic dilemma posed above.

While plan sponsors are understandably reluctant to rouse those “sleeping dogs,” it’s hard to imagine that they aren’t just as concerned about their retirement well being as those recent hires. Moreover, while the PPA doesn’t mandate going back to older workers, plan sponsors desirous of those safe harbor protections either have to, or have to be able to establish that they have.

RESPONSE: The ultimate solution, of course, lies in understanding that the reasons some newly eligible workers chose not to participate — or more likely made no choice at all — are the same reasons the not-so-newly eligible are still on the sidelines. For employers — particularly those who have already embraced the design on behalf of their new hires — the question remains: Shouldn’t you be just as invested in the retirement security of those who have made a longer-term commitment to you?

Safe harbor plans already have it covered.

Many smaller programs that might once have been willing to go down that route as a means of avoiding trouble with the nondiscrimination and top-heavy tests have since found the solace required in adopting a safe harbor design.

RESPONSE: Maybe nothing. If a safe harbor plan is already in place, well arguably, that’s just a different kind of automatic enrollment, though it doesn’t tend to show up in the adoption statistics.

Some fear it will reduce deferrals.

More accurately, it may reduce average deferrals. Indeed, the simple math of automatic enrollment is that you get more people participating, albeit at lower rates (at least until design features like automatic contribution acceleration kick in). Put another way, participation rates go up, and average deferral rates dip — at least initially. That might mean that some individuals do, in fact, save less by default than if they had taken the time to actually complete that enrollment form, or if they fail to take advantage of the option to increase that initial default. This is a line of thinking that gets picked up every so often by the financial press, generally by some writer looking to find a contrarian angle on automatic enrollment. And sure enough, the conclusion seems so striking that many seem to feel compelled to share those articles, rather than simply dismissing it as ill informed, if not uninformed.

RESPONSE. Remind them that those articles ignore the reality — borne out by the data — that many workers, and generally younger, less tenured workers, will be saving more because that initial savings choice was automatic. Those most likely to be short-changed by automatic enrollment are higher income individuals — who arguably ought to know better.

Concerns about administrative issues.

Even in this age of automation, it can be complicated to unwind payroll elections, and while the PPA outlined a series of provisions to make it easier to give workers the ability to opt out (an extended grandfathering period for them, and the ability for their employer to temporarily invest those monies in vehicles that wouldn’t lose value during that temporary period), it can still be a tedious, painful process (depending on whom you rely on for payroll and recordkeeping services).

RESPONSE. Sure it can be a hassle if it should come up — and we’re talking about somebody’s paycheck. On the other hand, so few opt out, the hassle might be more illusion than reality.

Some employers — especially smaller ones — know why employees aren’t contributing.

When you look at the survey data on automatic enrollment adoption, there is a wide gap between the largest employers (where automatic enrollment is relatively common) and the smallest employers. Of course, most industry surveys do a better job of capturing the activity among the former (those being the clients of the providers who produce those surveys) than the latter, so it’s easy to think that automatic enrollment is more prevalent than it actually is.

However, when you talk with smaller employers about the concept, it’s not unusual to encounter a very personalized resistance, because they: (a) have likely approached their workers individually on the topic; and/or (b) have heard directly the reason(s) why they are not participating. To them automatic enrollment is a particularly harsh approach, since it basically requires that they ignore or discount the reason(s) they have already been given.

RESPONSE: First, it’s worth confirming that they have, in fact, actually made those inquiries directly. Second, see how long it has been since that conversation. Circumstances change, after all — and that trusted worker who told them several years back why they couldn’t contribute, may now be embarrassed to change course. Finally, of course, automatic enrollment, particularly with the help of today’s default investments, makes it a lot easier to start saving — right.

What's Next?

The reality is that automatic enrollment won’t be appealing to every plan sponsor’s benefits philosophy or budget. But unless your plan participation rate is in the upper 90% range, the reality is that whatever you are doing to encourage participation isn’t as effective as automatic enrollment could be. And once you get people in the plan, just think what else you could be helping them with…

- Nevin E. Adams, JD

15 (More) 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.

Since I published my first list of 15 last fall (one of my most popular, as it turns out), I’ve gotten several very good suggestions — and had an epiphany or two.

Here are a few (more) points to ponder:

1. Cheaper isn’t always better, unless it’s the only difference.
2. Sometimes you do get what you pay for — but not always.
3. If you’re not doing anything “wrong,” you probably aren’t doing anything much.
4. You can spend a lot of money in court being right.
5. A fund whose allocation is based solely on date of retirement is sure to miss something, but not as much as a fund whose allocation doesn’t take that into account.
   
6. If you don’t know how much you’re paying, you’re likely paying too much.
7. Don’t assume that those who aren’t saving via your workplace retirement plan know what they are doing — or what they are missing.
8. There’s something about putting decisions down on paper that helps people take them more seriously.
9. Figuring out how much to take out is harder than figuring how much to put in.
10. The werewolves always outnumber the silver bullets.
11. When it comes to workplace retirement plans, there are three kinds of people: those who are ERISA fiduciaries and know it, those who aren’t ERISA fiduciaries and know it, and those who are ERISA fiduciaries and find out via subpoena.
12. If you can’t remember the last time you did a request for proposal, it’s probably overdue.
13. The default deferral rate for a non-automatic enrollment plan… is zero.
14. If you don’t know why “we’ve always done it this way,” it’s time you did.
15. You may not know all the right answers, but it’s worth knowing the right questions.

- Nevin E. Adams, JD

4 Things That Make Me Go ‘Huh?’

Ours is a business where surveys and trends often shape not only perceptions, but policy — though sometimes the conclusions drawn, and even the premise itself — make me go “huh?”

Here’s a sampling:

Citing a drop in deferral rates as a failure of automatic enrollment.

Every so often a personal finance writer will stumble across an industry survey that shows that the average deferral rate in 401(k) plans has declined, a problem they attribute to automatic enrollment adoption. We all know what is going on here; individuals who take the time to fill out a form and enroll in the plan manually tend to defer at a higher rate than do those who are automatically enrolled, the latter typically at a modest 3% rate. On the other hand, automatic enrollment has a dramatic impact on raising the participation rate. The rest is just math — more people, saving at lower rates = a lower average deferral rate.

Now, those individuals automatically enrolled at a 3% rate may draw down the average deferral rate of a plan, or the industry, but it’s almost certainly true that most people who are now saving 3% without automatic enrollment would likely have been saving — nothing at all.

Equating retirement confidence with retirement readiness.

Seems as though every other month we get yet another take on how Americans feel about their retirement prospects — and it’s never very reassuring. The Retirement Confidence Survey conducted by the nonpartisan Employee Benefit Research Institute (EBRI) and Greenwald & Associates has been chronicling that sentiment for a quarter century and over that span of time has tracked movements in confidence that mostly seem to mirror the markets, rather than any real cognizance of retirement preparations. Indeed, the RCS has routinely found that fewer than half of the survey respondents have made even a single attempt — including guessing — to ascertain their retirement needs.

It’s not that confidence about one’s retirement prospects isn’t a relevant consideration — but we shouldn’t equate an uninformed sense of that status with reality.

Comparisons of DB versus DC investment returns.

If ever there was an apples-and-oranges undertaking, it’s the comparison of defined benefit and defined contribution plan returns. The former is, of course, the return of a portfolio representing a single overriding investment philosophy designed to achieve a specific aggregate objective, and one overseen by a plan fiduciary (or plan fiduciary committee). The latter is little more than an aggregation of individually managed (or more frequently unmanaged) portfolios.

And yet, every so often someone wants to offer a comparison of the returns between the two as some kind of evaluation as to which is “better.”

In many of these comparisons, defined benefit portfolios have fared “better,” and the underlying explanation (implicit or explicit) for that differential has tended to be diversification (or “better” diversification), and in more recent years, lower fees have been credited. What we’re apparently supposed to draw from that is that DB plans are better-managed in terms of asset allocation by professionals, better able to negotiate lower fees than their DC counterparts, and generally provide a better return on investment. In other words, DB plans are “better.”

Now, I’m not saying that all, or even most, of those individually directed DC plan allocations are as well designed or maintained as those put in place by a DB investment committee, and however well negotiated it is, it’s hard to imagine that a DC plan with all its inherent complexities could (or should) get as good a deal on price as a DB offering. In fact, unless your defined benefit plan has a single participant, those programs have completely different objectives and timeframes.

You might as well be comparing a sports car to a Hummer; which is “better” depends on the distance, the terrain, the length of time you have to complete the journey, how much fuel you have — and how many people you have to transport.

Using average 401(k) balances as a proxy for retirement security.

If there is one number I wish our industry would quit publishing, it’s the average 401(k) balance. Here you have participants who may (or may not) have a DB program, who are of all ages, who receive widely different levels of pay, who work for employers that provide varying levels of match, and who live (and may retire) in completely different parts of the country. Frequently it is based only on the accumulations that have occurred during their tenure at an individual employer, and often only the balance that is found on the single recordkeeping system that is publishing the result. But in preparing this number, those widely varied circumstances are all slopped together to create — mush.

Worse than mush, actually. Because it is an average of so many varied circumstances, the result is almost never “enough” to provide anything remotely resembling an adequate source of retirement income, a point that is reiterated somewhat incessantly (and generally without the caveats about what it is an average of) in the press.

I’ll allow that some of the permutations of this calculation — such as when we see that average broken down by age demographic — can be instructive as to longer-term trends, but an average 401(k) balance is akin to an average reviewer rating on Amazon.com.

As with everything else on my “huh?” list, it’s mathematically accurate — and nearly completely useless.

- Nevin E. Adams, JD

Are the Panthers a Portfolio Pick?

Will your portfolio pick up with the Panthers, or will it get bucked by the Broncos?

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, and 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 39 of the 49 Super Bowls, in fact.

It certainly proved to be the case this past year, following Super Bowl XLIX, when the New England Patriots bested the Seattle Seahawks 28-24 to earn their fourth Super Bowl title. It also “worked” in 2014, when the Seahawks bumped off the Denver 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, the fact 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 teams.

However, consider that in 2012 a team from the old NFL (the New York 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.

Steel ‘Curtains’?

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:

• 2006, when the Steelers bested the Seattle Seahawks;
• 2007, when the Indianapolis Colts beat the Chicago Bears 29-17;
• 2009, when the Pittsburgh Steelers took on the Arizona Cardinals, who had once been the NFL’s St. Louis Cardinals; and
• 2010, when the New Orleans Saints bested the Indianapolis Colts, who had roots back to the NFL legacy Baltimore Colts.

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 hopes of the AFL-legacy Patriots 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. According to the Super Bowl Theory, the markets should have been down that year. However, the S&P 500 climbed 2.55%. Of course, Super Bowl Theory proponents would tell you that 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 (the one that nobody remembers because it was overshadowed by Janet Jackson’s infamous “wardrobe malfunction”) 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.

Bronco ‘Busters’

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 2003 victory, 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, regardless of when 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, the “line” has been a bit volatile, though the Panthers seem to be hanging in as 6-point favorites. For the third year in a row, the Super Bowl will feature the two No. 1 seeds in the big game – and, perhaps not surprisingly as a result, four of the last five Super Bowls have come down to the last play.

Jersey ‘Sure’?

The Broncos are 0-4 all-time wearing their orange jerseys in the Super Bowl — but they’ll be wearing white this Sunday. The Panthers might be glad to be in their dark jerseys — they were wearing white in their single Super Bowl appearance, a loss. On the other hand, believe it or not, 10 of the last 11 Super Bowl winners were wearing white jerseys, according to CBS Sports.

All in all, 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 regardless of which team 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.

7 New Year’s Resolutions for Plan Sponsors

This is the time of year when resolutions for the cessation of bad behaviors and the beginning of better ones are in vogue. Here are mine for plan sponsors.

Put your fund menu on a diet.

Though it is a point often made with jellies and ice cream, a long-standing behavioral finance tenet is that more choice doesn’t lead to better decisions. So what’s with those burgeoning 401(k) investment menus? Plan sponsors tend to offer more than 11 investment options in their DC plans, with 38% offering 11 to 15 options and 45% offering more than 16 options, according to the Rocaton/Pensions & Investments 2015 Survey of Defined Contribution Viewpoints study, which polled more than 400 plan sponsors and other industry professionals.

Odds are that you have funds on your menu that either aren’t being used or being used widely — options that contribute little other than clutter to your investment review and to the decisions of your participants. Take a look — your retirement plan menu shouldn’t be a kitchen sink “solution.”

If you don’t yet auto-enroll workers in your plan, it’s time to start.

There are a lot of reasons given to not initiate automatic enrollment: the notion that these are voluntary, not mandatory benefits; that you don’t want to be too paternalistic; that you don’t want to create a burden for someone who will then have to take steps to unenroll; or perhaps that most commonly cited concern — that by defaulting someone into the plan you will wind up with an angry employee darkening your door. It won’t.

Besides, how much time, energy and expense are you dedicating to the process of encouraging workers to enroll in the plan voluntarily?

If you do auto-enroll participants, raise the bar: Pump up that default to 6%, not 3%, of pay.

We all know that 3% isn’t “enough” to provide retirement security. That said, it remains the most common auto-enroll default rate, doubtless because it is the rate specifically stated in the Pension Protection Act (though it doesn’t prohibit a higher rate). Indeed, since the advent of the concept in the early 1980s, 3% has been the most typical rate, both because it was cited in an IRS example of the concept, and because it has been deemed low enough that it wouldn’t create a financial burden and/or a threshold high enough to warrant an opt-out on the part of the participant.

But if you’ve been doing automatic enrollment for a while now, you’ve had a chance to shake out those adoption “bugs” and to get a feel for how it has affected your participation rate, your match dollars and employee morale. And even if you haven’t done automatic enrollment, why start with a default rate that you know is bound to come up short?

Surveys suggest that there is very little difference in participant opt-out rates between 3% and 6%. But there is a great deal of difference in the retirement outcomes between the two.

Give reenrolling a second thought — and your workers a second chance.

There is perhaps a natural human tendency to impose a new approach/regimen from a point in time forward, to apply a new approach in plan enrollment like automatic enrollment only prospectively, only to workers who join the company after the point in time at which it is effective. And sure, workers who have had their chance to enroll voluntarily may well, in their refusal to do so, have spoken their intent not to participate at a previous point in time.

However, that was then and this is now. If they don’t want to participate, it’s easy enough to opt out. But maybe they didn’t fill out that form the last time because they forgot to, because the investment menu was too complicated or intimidating, or maybe the valid reason(s) they had then no longer apply.

Regardless, don’t you owe them the same opportunity that you are giving your new hires?

Rethink the composition of your investment committee.

People find themselves on plan committees for any number of reasons, good and… not so good. Regardless, this shouldn’t be a position of “honor.” It should be reserved to those who have the knowledge to make sound fiduciary determinations, the courage to make tough choices and the discipline to keep a written record of those choices. They should do so with a full appreciation of the personal liability that comes with their role as a plan fiduciary and a commitment to not only prepare for these deliberations ahead of the committee meeting, but to take their participative role and attendance at these meetings seriously.

And if you don’t have an investment committee, you should resolve to fix that this year as well.

If you don’t know how much you’re paying for your retirement plan, find out.

As a plan fiduciary, you are expected to ensure that the plan pays no more than reasonable expenses for the services rendered to the plan. To do so, you must know the services rendered, who renders them, how they are rendered, and what fee(s) are paid for them. And then you have to decide if it’s reasonable. But if you don’t know the first part, you can’t determine the last. And if you can’t do that, you aren’t fulfilling your duties as a plan fiduciary.

And that could be trouble. For you, and the plan.

Unless you’re an expert in retirement plan design, fiduciary responsibility and investments, get help.

Nuff said. In fact, you might want to start here. It could make fulfilling those New Year’s Resolutions all the easier…

See also 6 Questions to Ask at Your Next Investment Committee Meeting.

- Nevin E. Adams, JD

Naughty or Nice?

A few years back — when my kids still believed in the reality of Santa Claus — we discovered an ingenious website.

This was a website that purported to offer a real-time assessment of your “naughty or nice” status.

Now, as Christmas approached, it was not uncommon for us to caution our occasionally misbehaving brood that they had best be attentive to how those actions might be viewed by the big guy at the North Pole. But nothing ever had the impact of that website — if not on their behaviors (they were kids, after all), then certainly on the level of their concern about the consequences.

In fact, in one of his final years as a “believer,” my son (who, it must be acknowledged, had been particularly naughty that year, and he knew it) was on the verge of tears, worried that he’d find nothing under the Christmas tree but the nuggets of coal in his stocking he so surely deserved.

Bad Behaviors?

With so many reports purporting to chronicle the sorry state of retirement confidence and lack of preparations (think the two might be connected?) among Americans, it seems that many participants act as though some kind of benevolent elf will drop down their chimney with a bag full of cold cash from the North Pole on retirement’s eve. They behave as though, somehow, their bad savings behaviors — and incessant warnings — throughout the year(s) notwithstanding, they’ll be able to pull the wool over the eyes of a myopic, portly gentleman in a red snow suit.

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

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

Yes, Virginia, there is a Santa Claus — but he looks a lot like you, assisted by “helpers” like the employer match, your financial adviser, investment markets and the tax incentives that encourage workplace retirement plans and your ability to save.

Happy Holidays!

- Nevin E. Adams, JD

p.s. The Naughty or Nice site is still online (at http://www.claus.com/naughtyornice/index.php.htm), and it now includes suggestions for how to improve your standing, should that be required. Those looking for suggestions on how to improve your savings standings can check out www.choosetosave.org, along with the Ballpark E$timate, to see how you’re doing!

6 Tips on Shopping for a Provider

My single memory of venturing out on Black Friday to shop came at the instigation of my “little” sister, who has long undertaken such forays. Nor was this to be a random shopping expedition — armed with circulars and coupons, she directed me and my two brothers with the fervor and furor of General Patton as to which stores we were to invade, the objective(s) of these intrusions, and in some cases, the line(s) in which we would take up residence while she pursued items she (apparently) did not trust to the pursuit of mere amateurs.

Shopping for a new provider is not something one would normally compare with a Black Friday foray, but if you have a plan sponsor — or plan sponsor prospect — who’s thinking about shopping for a new provider, here’s a list they may find useful.

Make a list — and yes, check it twice.

In an area fraught with as much potential complexity as searching for a retirement plan provider, it’s easy to think you’ll learn what you need to look for by simply going through the process. Though learn you will, shopping for a retirement plan provider without a sense of your core needs is a bit like going grocery shopping on an empty stomach; everything will sound good, and you’ll likely overload on “sweets.” Santa Claus makes a list — so should you: of plan design features (real and anticipated) that you want supported.

Know your pain points — and be ready to share them.

If you’ve had a plan in place before, you have almost certainly experienced at least one bump in the road, and perhaps several (and perhaps more than a mere “bump”). At the core of those experiences is something someone either did or didn’t do that contributed to the problem(s). Or maybe you simply have certain areas of sensitivity. Regardless, make sure you’ve detailed those, and be certain to share them with potential providers, preferably with a preface of “what procedures/protocols do you have in place to prevent something like….”

Have — and know — your budget.

These services aren’t free, though they may well be packaged in such a way that the plan sponsor doesn’t have to write a check. At a minimum. know how much you are able — and willing — to pay. And while you’re at it, you’d be well advised to be attentive to the cost(s) of the plan, who’s going to be pay them, and how those who provide services to the plan will be paid, and by whom.

Remember that provider rankings are only a starting point.

Think about it — an unknown number of plan sponsors about which you know nothing in terms of complexity of plan design, capabilities of staff or breadth of perspective/experience or tenure with the provider rate those provider capabilities, and from that a satisfaction score is gleaned.

It’s not a bad place to start — but like those rankings on Amazon, they have a limited value in predicting your satisfaction with that platform. They’ll likely affirm your preexisting preferences or fuel your imbedded concerns, but they aren’t much benefit in creating new ones.

Trust — but verify — references.

Proffered references are, almost by definition, going to be positive. (If they aren’t, and aren’t positioned as negative, that will tell you something valuable about the provider who provided them.) But having taken the time to request them, you shouldn’t assume that no value can be gleaned. Press for references that are like you in terms of plan size, design and complexity. Try to get someone who has converted to their platform in the past year — better still, someone who has left that platform in the past year (though it will likely be due to M&A activity, not service or fees). And ask them what questions they wished they had asked when they went through their process. If you ask them if they are satisfied, they’ll likely say they are. The question is, should they be? And will you be?

Get help.

Unless you are a serial provider shopper, odds are you aren’t an expert at the business of shopping for a provider. It is a complicated and time-consuming process, with an abundance of opportunities for disconnect in expectations simply because you don’t ask the right question(s). As an ERISA fiduciary, you are expected to review (and subsequently monitor) those that provide services to the plan with the skill and expertise of a prudent expert. If you lack that, you are expected to engage the services of someone who does.

Or else run the risk of winding up with a lump of coal.

- Nevin E. Adams, JD

The 5 W’s: A New Plan Fiduciary Perspective

The Five Ws (or as they are sometimes called, Five W’s and one H) are questions whose answers are considered basic in information gathering in a variety of settings.

There are a lot of questions that plan fiduciaries should ask, but here are five W’s and an H that every new plan fiduciary — or every “old” fiduciary who is new to a plan — should ask.

Who are the (other) plan fiduciaries?

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), then you are a fiduciary to the extent of that discretion or control. And, if you are able to hire a fiduciary, then you’re (probably) an ERISA fiduciary because 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.

But assuming for a second that you are a plan fiduciary, it’s important to know who the other fiduciaries are for the simple reason that all fiduciaries have potential liability for the actions of their co-fiduciaries. If a fiduciary knowingly participates in another fiduciary’s breach of responsibility and conceals that breach or does not take steps to correct it, then both are liable.

What does the plan cost?

Ever made a hotel reservation or rented a car, only to find that the final bill reflected a price that was significantly higher than the price quoted on the firm’s website or in their promotional materials? Sometimes those extra charges are arguably beyond the control of the provider (sales taxes, special local room taxes, etc.), and sometimes — well, sometimes you just feel that the only reason they charged those the way they did was to obscure the actual cost of what you thought you were buying until they had already charged your credit card.

401(k) fees can feel a little like that, in that some fees are explicit, some are implicit, and some are transactional, meaning that they only show up when certain transactions occur (e.g., loans). Odds are that you are familiar with the explicit fees, and you may well be familiar with certain aspects of the implicit ones too. For example, you may know the basis points charged by the funds on your investment menu, on average if not specifically. But when was the last time you multiplied those basis point charges times the dollar value of assets in those funds?

Those fees might not seem like much — and may, in fact, seem “reasonable” expressed as basis points. But do the math and you might be surprised — especially if your plan assets have been growing. (As a reminder, the fiduciary admonition is that the fees and services must be reasonable, and the reasonability of fees charged should certainly be viewed in the context of the services rendered.)

That said, there’s nothing like bringing it down to an individual account level to really put fees in a “real world” perspective. So whether you actually have an “average” participant or need to create one, take the time to figure out how much they are paying for their retirement plan each year. And then ask yourself whether, if they knew that, they would they feel it was “reasonable”? If the answer is “no,” you either have some communications work, or some fee negotiations, ahead.

When was the plan document last updated?

Having a plan document is one thing, finding it (sometimes) another. But if that document isn’t updated to reflect the latest legal requirements — well, that’s a problem.

Where is the plan document (or at least a copy of it)?

On your way to figure out when your document was last updated, you’ll also have an opportunity to locate it. Like most legal documents, plan documents can be rather tedious to read, much less understand. And, like most legal documents, the longer they are in place, the more changes (particularly changes imposed by law, rather than by specific intent) tend to be appended separately, rather than incorporated, making them even more difficult to read, much less understand.

This frequently results in other documents — sometimes those as “official” as a summary plan description, sometimes as ad hoc as a plan sponsor’s “cheat sheet” — being the actual reference for plan administration. There’s nothing wrong with that, of course — unless or until those “other” documents reflect something other than what the actual plan document provides, since plan fiduciaries are accountable for ensuring that the plan is administered in accordance with the plan document. Thus, knowing what the plan document says (and where it can be found so that you can be sure you know what it says) is crucial.

How much insurance coverage do you have?

As an ERISA fiduciary, your legal liability is personal. While employers routinely carry professional liability insurance (sometimes called errors and omission insurance), in most cases that won’t cover ERISA claims. While fiduciary liability coverage is not required by ERISA, plan fiduciaries are well advised to not only see that this separate coverage is obtained, but to verify the conditions and limits of the policy.

Why do we offer this workplace retirement plan?

The kneejerk response to this question is almost always, “to attract and retain qualified workers.” While benefits matter, and can matter significantly depending on individual circumstances, most surveys suggest that benefits, and specifically retirement benefits, are a secondary consideration.

These programs do have costs, of course: the time and effort to administer the program, the costs of the plan itself, the dollars invested in an employer match, and your time (and exposure to liability) as a plan fiduciary. Those costs may pale in comparison to other programs you are expected to oversee — and the return, that ever-present obsession with ROI, may be years down the road.

Still, anything worth doing is worth doing right. And doing a workplace retirement plan “right” generally starts with having concrete goals and objectives: a specific rate of participation, a quantified level of individuals taking full advantage of the employer match, a definite number with appropriate asset allocations in place, perhaps even an established focus on individual retirement readiness.

Regardless of your goals, and how you strive to achieve them, if you don’t know why the plan is offered in the first place, you may well find yourself lacking the principles that every busy plan fiduciary needs, sooner or later, to keep conflicting priorities in balance — and yourself out of trouble.

- Nevin E. Adams, JD