7 Smart Shopping Steps to Avoid Buyer’s Remorse

Shopping for a new provider is not something one would normally equate with a Black Friday foray or a Cyber Week scramble. But if you have a plan sponsor — or plan sponsor prospect — who’s thinking about shopping for a new provider, here are some ideas to share.

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 can learn what you need to look for by simply going through the process. And while it’s certainly a learning process, doing so without a sense of core needs is a bit like going grocery shopping on an empty stomach; everything will sound good, and you’ll likely overload on the “sugar” (and perhaps overpay as well).

Even Santa Claus makes a list — so should you: of plan design features (real and anticipated) that you want supported.

Don’t neglect the problems.

Odds are if a plan sponsor is serious about a change in providers, there’s a reason – and it’s usually a sign of trouble, a problem, or worse – more than one problem. Even if that’s not the primary motivation, even the most well-run plan and satisfied plan sponsor has in their memory some issues, service shortfalls, or perhaps service incapability that have left a bitter taste.

The best way to avoid disappointment is to be clear about expectations – making sure that those are detailed and shared plainly with potential providers, preferably with a preface of “what procedures/protocols do you have in place to prevent something like….”

Give yourself plenty of time.

There’s nothing quite like the adrenaline rush of snagging that last desired item from the store shelves or happening upon that cyber deal minutes before it is slated to expire. And yet those moments are surely outnumbered, if not eclipsed, by the many more times that those who defer action until the last minute walk away empty-handed.

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). Even those who are lucky enough to accurately gauge and/or have sway over the multitude of unforeseen obstacles and distractions that inevitably emerge, may well find that the provider of choice has time restrictions of their own. The good ones tend to fill their on-boarding queues quickly, after all – and plan sponsors who make their decisions late may well find that opportunity door has closed.

Have — and know — your budget.

These services aren’t free, though we all know they may be packaged in such a way that the plan sponsor doesn’t have to write a check. At a minimum, plan sponsors should know how much they are able — and willing — to pay. Beyond that, whether they write a check or not, they’d be well-advised, as a plan fiduciary, 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. And they should have a functional understanding of how that compares with alternatives (including the incumbent arrangement).

Remember that provider rankings are only a starting point.

I’ve never put much stock in online consumer ratings – even before we discovered that some of those are bought and paid for by the products/firms rated. Sometimes those ratings contain clues that can help inform your decision, of course, but I’ve never really understood the value in knowing what a complete stranger thinks/feels about a book, music album, movie or restaurant. Complicating matters is the very human tendency to “weigh in” mostly on things you absolutely love – or absolutely loathe. 

Think about it — a finite number of plan sponsors (often an infinitesimally small percentage of their actual client base) about which you know nothing – including all the things that factor into such perspectives – the complexity of plan design, capabilities of staff or breadth of perspective/experience or tenure with the provider – rate those provider capabilities on some arbitrary point scale, and from that some kind of satisfaction score is gleaned (sometimes, god forbid, it’s an average of averages).

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

Trust — but verify — references.

Anybody who’s paying attention will vet references before passing them along. As a consequence, proffered references are, almost by definition, going to be positive (though I never cease to be amazed how many are simply dredged up from an old RPF file without being refreshed).

But even vetted and verified references can provide insights. Press for references that are similar in terms of plan size, design and complexity. It’s often insightful to look for a similar plan 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). Those who have recently transitioned can be a fount of real-world wisdom on things such as what questions they wished they had asked when they went through their process.

Get help.

Unless they are a serial provider shopper (and if they are, watch out), odds are they aren’t 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 the “right” question(s) aren’t asked, and sometimes because the “wrong” answers aren’t recognized as such.
Plan sponsors are, of course, as an ERISA fiduciary, expected to review (and subsequently monitor) those that provide services to the plan with the skill and expertise of a prudent expert. Those who lack that expertise are expected to engage the services of someone who does.

Lest they wind up finding that all that shiny wrapping is just covering up what turns out to be a lump of coal instead.

- Nevin E. Adams, JD

Some Thanksgiving Thanks!

Thanksgiving has been called a “uniquely American” holiday, and while that may be something of an overstatement, it is unquestionably a special holiday, and one on which it seems appropriate to reflect on all for which we should be thankful.

So, as I look back at this past year:

• I’m thankful that so many employers voluntarily choose to offer a workplace retirement plan – and that so many workers, given an opportunity to participate, do.

• I’m thankful that a growing number of employers have chosen to automatically enroll valued workers into these programs, and that they are increasingly opting to establish a default contribution rate in excess of the “traditional” 3%.

• I’m thankful that the vast majority of workers defaulted into retirement savings programs tend to remain there – and that there are mechanisms (automatic enrollment, contribution acceleration and qualified default investment alternatives) in place to help them save and invest better than they might otherwise.

• I continue to be thankful that participants, by and large, continue to hang in there with their commitment to retirement savings, despite lingering economic uncertainty and competing financial priorities, such as rising health care costs and college debt.
  

• I’m thankful that more plan sponsors are making it easier for workers to participate in retirement savings programs, and automatically enrolling them sooner and at higher default contribution rates.

• I’m thankful for the strong savings and investment behaviors emerging among younger workers – and for the innovations in plan design and employer support that foster them. I’m thankful that, as powerful as those mechanisms are in encouraging positive savings behavior, we continue to look for ways to improve and enhance their influence(s).

• I’m thankful for qualified default investment alternatives that make it easy for participants to benefit from well-diversified and regularly rebalanced investment portfolios – and for the thoughtful and ongoing review of those options by prudent plan fiduciaries. I’m hopeful that the nuances of those glidepaths have been adequately explained to those who invest in them, and that those nearing retirement will be better served by those devices than many were a decade ago.

• I am thankful that powerful, impactful legislation like the SECURE Act can still pass the often-divided House of Representatives on a robust bipartisan basis – though I can’t help but be disappointed that, for the moment, anyway, the much-needed benefits have fallen prey to other matters.

• I'm thankful for the increase in contribution and benefit limits - so that those who can afford to set aside more for retirement can do so (as we all strive to help our retirement funding keep pace with the cost of living).

• I’m thankful for the development of our new Certified Plan Sponsor Professional(TM) credential, the support of our education partners in not only developing the program, but in partnering with us, and our various advisor networks to help distribute critical education to plan sponsors who, though tasked with an awesome task, are seldom provided the training or education commensurate with that responsibility. 

• I’m thankful that figuring out ways to expand access to workplace retirement plans remains, even now, a bipartisan focus – even if the ways to address it aren’t always.

• I’m thankful that the ongoing “plot” to kill the 401(k)… (still) hasn’t. Yet.

• I’m thankful to be part of a team that champions retirement savings – and to be a part of helping improve and enhance that system.

• I’m thankful that those who regulate our industry continue to seek the input of those in the industry – and that so many, particularly those among our membership, take the time and energy to provide that input.

• I’m thankful for all of you who have supported – and I hope benefited from – our various conferences, education programs and communications throughout the year.

• I’m thankful for the opportunity to acknowledge so many outstanding professionals in our industry through our Top Women Advisor, Top Young Retirement Advisor (“Aces”), Top DC Wholesaler (Wingmen), and Top DC Advisor Team lists. I am thankful for the blue-ribbon panels of judges that volunteer their time, perspective and expertise to those evaluations.

• I’m thankful for the warmth with which readers and members, both old and new, continue to embrace the work we do here.

• I’m thankful for the team at the American Retirement Association, and for the strength, commitment and diversity of the membership. I’m thankful to be part of a growing organization in an important industry at a critical time. I’m thankful to be able, in some small way, to make a difference.

 But most of all, I’m once again thankful for the unconditional love and patience of my family, the camaraderie of an expanding circle of dear friends and colleagues, the opportunity to write and share these thoughts — and for the ongoing support and appreciation of readers… like you.

Wishing you and yours a very happy Thanksgiving!

- Nevin E. Adams, JD

A Valuable ‘Commodity’

I’ve been on the road a lot over the past several weeks – and I’ve noted a remarkably diverse range of prices in gasoline across various locales.

I think it’s fair to label gasoline a “commodity[i]” – what the dictionary describes as “a reasonably interchangeable good or material, bought and sold freely as an article of commerce.”

Oh, sure – you may have a preference for one brand or another, you may not care for the political allegiances of their ownership… but when push comes to shove, it usually comes down to price – because, after all, when it comes to gasoline, it’s pretty much the same stuff.

For years, recordkeeping services – complex and difficult as they can be to provide accurately and consistently (not to mention profitably) – have been characterized (some might say disparaged) as a “commodity,” while fee compression (and the aforementioned complexities) continue to fuel consolidation in that industry.

Honestly, as a former recordkeeper, I’ve never understood how anyone who had any real appreciation for a business as varied, complex, and demanding as that of keeping up – and keeping up accurately – with individual participant accounts over the course of a working career – would be willing to refer to those services as “interchangeable.” Or why any firm that provides those complex services in these challenging times would be willing to let others do so. Certainly any participant, plan sponsor, or advisor who has seen the integrity of that data put at risk by clumsy and inattentive hands can attest to the impact that a failure to do so. Indeed, I’m shocked by the leaders in our industry who label it as such – leaders that I think might well feel differently if they had spent even a small amount of time in those shoes.


Without question, recordkeeping is not only a challenging business, it is expensive to stay current with technology, to keep processes and programs current not only with changes both in the laws and regulations, but the nuances of individual plan designs. And as if that weren’t enough, cybersecurity has recently emerged as a significant threat – little wonder in view of the enormous amount of sensitive financial data to which these “commodity” producers are entrusted.

Where recordkeeping does seem to have been “transformed” into a commodity business is in the pricing of those services. Like the gasoline drawn from a pump, economists would tell you that, since commodity products are “interchangeable,” they compete (only) on price – and to do so (profitably) requires that that you have to achieve economies of scale – and the continued downward pressure on fees for those services continues to force firms to exit or flee to the embrace of larger players.

Further fueling those trends, the plaintiffs’ bar has latched onto the “commodity” concept, having (apparently) determined that it is “appropriate” to be compensated for these services by a flat per-participant charge ($35 seems to be their notion of “reasonable,” at least for the multi-billion-dollar plans targeted, though the courts don’t seem ready to buy into that presumption just yet).
I know that over the years there has been an ongoing attempt to “functionalize,” to break the complex process of recordkeeping (I tend to think of it as participant accounting) down into component parts like some kind of mass assembly line – and perhaps some quarters have done so successfully. Perhaps then, at least in some venues, that once ornate, vibrant (though often complicated and tedious) process has actually been reduced to one so regimented and segmented, so parsed out between segregated operational touchpoints that it might there truly be considered a “commodity.”

But my personal experience is that those who find themselves working with a service provider or TPA that views those critical services as a “commodity” will, in short order, wish they weren’t.

- Nevin E. Adams, JD

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[i]Now, if you’ve ever had the opportunity to shop for groceries in different parts of the country, you pretty quickly become aware of some incredible price differences in a variety of items, including things as basic as produce or milk. But it’s gasoline that tends to draw my attention, not only because it’s something I buy regularly, but because I don’t even have to walk into a store to compare prices.

A Bitter Pill?

I’ve never had very healthy eating habits – even as a child.

And while this wasn’t a concern of mine at the time, my parents were quite insistent that either I start taking vitamins or improve my eating habits. Figuring that it was the lesser of two “evils,” I went for the pill.

Well, until I saw THE PILL.

Mind you, this was no kid-friendly Flintstones chewable – no, it was some big, ugly black monstrosity – a real “horse pill.”  And just looking at it I was sure that there was no way it could possibly make it down my poor 5-year old throat (I wasn’t altogether sure it would even fit in my mouth).

However, and despite my vehement protestations, my parents were determined that I would ingest it. And, for the next 15 minutes or so (it felt like forever) I was as close to being waterboarded as I will ever want to be – as my parents proceeded to hold me down, tilt my head, and attempt to flush the pill down my throat with copious amounts of water. But sure enough – and as I had tried to tell them, that darned pill just wouldn’t go down. 

I wonder sometimes if that isn’t how workers view the admonitions about how much they are supposed to be saving, and/or how much they are supposed to have accumulated in order to retire. And, as if that weren’t overwhelming enough, there are a handful of ginormous projections about how much more you’ll need to take care of health care expenses.

How much? Well, Milliman projects that a healthy 65-year-old couple[i]retiring in 2019 is projected to spend $369,000 in today’s dollars ($551,000 in future dollars) on health care over their lifetime. Fidelity puts the number for a 65-year-old couple at $285,000 in health care and medical expenses throughout retirement, up from $280,000 in 2018. The Employee Benefit Research Institute (EBRI) says that some couples could need as much as $400,000. You get the picture.

That’s no small thing – particularly when survey after survey suggests that it’s health care costs that loom largest as a concern – not just for those for whom retirement awaits, but for those already in retirement (who, most surveys still find to be pretty comfortable with their other retirement expenses).

Several weeks back I stumbled across an interesting report aptly titled “A New Way to Calculate Retirement Health Care Costs.” The report, authored by T. Rowe Price’s Sudipto Banerjee, acknowledges that while health care costs are a significant retirement expense, it may be more practical to look at health care as an annual expense incurred over the 20-30 years you’ll actually incur those expenses, rather than as a lump sum.

The paper offers an eye-opener that says that if you were to view that $150/month cable bill as a retirement lump sum, you’d want to have $86,000 set aside.

Closer to the subject of retirement, the paper takes the example of a 65-year-old couple – a couple that has saved $400,000, and now has a combined monthly Social Security benefit of $2,000. How are they going to afford that $300,000 for health care costs? Well, as Banerjee points out, that $2,000/month Social Security benefit actually (with a 2% annual cost-of-living adjustment), that adds up to approximately $583,000 in Social Security benefits in the next 20 years.[ii]

Let’s face it, the costs of health care in retirement – or retirement overall – can look like a big pill to swallow as a lump sum – but it can go down a lot easier when you can take it in smaller pieces.[iii]   

- Nevin E. Adams, JD

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[i]Of course, those are averages – and for some context, you might check out “Why an Average 401(k) Balance Doesn’t ‘Mean’ Much.” 

[ii]It’s not just that that approach puts things in an apples-to-apples light – the paper explains that since fixed monthly premiums make up the bulk of annual costs, most of those costs are predictable – and can be budgeted, and paid for, from monthly income. It’s the out-of-pocket expenses that can vary widely, from month to month and from individual to individual.

[iii]Oddly, my parents never thought to cut that pill into smaller pieces. And I certainly wasn’t going to suggest it…

What’s Holding Back Financial Wellness?

Financial wellness – it remains a hot topic among advisors – but among plan sponsors?

For all the coverage that the subject engenders – and it’s considerable in this space – it’s not unusual to find awareness gaps among plan sponsors, with perspectives ranging from ignorance to ambivalence to downright skepticism.

About a year ago, the Employee Benefit Research Institute (EBRI) conducted a survey of 250 large employers. At the time, the report claimed that while many employers were interested in offering financial wellness programs to their employees, there didn’t appear to be a consensus on the approach.

So, what’s changed in in the past year? Well, as it turns out, not much.

Once again EBRI surveyed large plan sponsors – this time in June 2019, the online survey of 248 full-time benefits decision-makers from companies with at least 500 employees (17% had more than 10,000). Last year’s survey canvassed employers with an “expressed interest in financial wellness initiatives” – and the 2019 version also notes that a “key criterion for participating in the survey was that employer respondents were screened to ensure that had some interest in offering financial wellness initiatives.”

Fertile ‘Grounds’?

And yet, even among a group that would seem to be fertile ground for these programs:

• Only about half report currently offering financial wellness initiatives (about the same as a year ago) – and though 20% say they are actively implementing and 29% interested in doing so – that’s also about the same as a year ago.
• Only one in four (23%) have created a score or metric. 
• Only a third (32%) have done a financial wellness needs assessment

Moreover, making a business case to management surged as a challenge for the programs, cited by 42% of respondents from 24% in last year’s survey. Little wonder since “Lack of Ability/Data to Quantify Value Added of the Initiatives” was cited as a top challenge by 41% of respondents, compared with 25% a year ago. And then there was “Lack of Staff Resources to Coordinate/Market Benefits” – cited by 43% of respondents, versus 27% in 2018.

Ultimately, there’s (still) apparently no real consensus around the definition of financial wellbeing; about a third defined it as (just) having access to assistance and resources that enable good financial decisions, about one in five (21%) defined it as (just) being equipped to achieve retirement security through planning and savings. Only 3 in 10 defined it as (actually) being comfortable or financially secure overall.

Of course, some of that (apparent) ambivalence might be explained by the reality that 29% of respondents describe their level of concern about employees’ financial well-being as “low” (another 49% say they have a “moderate” level of concern).

Or perhaps it’s the reality that while two-thirds (68%) of employers said that more than half of their employees were eligible for the financial wellness initiatives provided, only one-third (36%) of employers thought that a majority of their employees would actually make use of the benefits.

In fact, the top two challenges in offering financial wellness benefits were a lack of interest among employees (38%, compared with 43% a year ago), and complexity of the programs. This year the survey took that complexity question and found that while (just) 31% were concerned about the programs being complex for employees that utilize them – most of the concern had to do with complexity for the employer; just over a quarter (27%) cited complexity in implementing programs, and another quarter (25%) cited complexity in choosing the programs. Employers, it seems – even those with a propensity to consider these offerings – (still) find the (potential) complexity daunting.

Don’t get me wrong. The logic behind these programs is pretty straightforward; it’s about staving off bad financial health, which contributes to (and/or causes) a bevy of workplace woes: stress, which can lead to things like lower productivity; bad health and higher absenteeism; and even a greater inclination toward workplace theft, not to mention deferred retirements by workers who tend to be higher paid and have higher health care costs. It’s a here-and-now focus that speaks to the bottom line, even if the modest amount of academic research on the subject still struggles to make a quantifiable case.

But, at least in the EBRI survey results, it seems as though even the most engaged plan sponsors still don’t quite get it.
And until they do, they won’t.

- Nevin E. Adams, JD
 
See also: “What Plan Sponsors Want to Know About Financial Wellness,” “Building a Bottom Line on Financial Wellness,” and “8 Things to Know About the State of Financial Wellness.”

5 Things Plan Sponsors (Still) Screw Up

Plan sponsors have a lot of responsibilities and often rely on others to help them keep their plan operating in accordance with the law. And yet, even with the most attentive plan sponsors, mistakes (still) occur. Here’s a list of some of the most common missteps:

1. Not using the plan’s definition of compensation correctly for all deferrals and allocations.

The term “compensation” has several different applications in qualified retirement plan operations, depending on the particular compliance goal. For example, a plan may use one definition of compensation to allocate employer contributions and a separate, distinct one for testing whether employee salary deferrals are nondiscriminatory. Note that one of the top plan compliance concerns identified by the IRS is a failure to identify and apply the correct definition of compensation in a particular scenario.

Note that while plans often use different definitions of compensation for different purposes, it’s important to apply the proper definition for deferrals, allocations and testing. A plan’s compensation definition must satisfy rules for determining the amount of contributions.
You should review the plan document definition of compensation used for determining elective deferrals, employer nonelective and matching contributions, maximum annual additions and top-heavy minimum contributions. Review the plan election forms to determine if they're consistent with plan terms.

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

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

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

Oh – and don’t forget that we now have some updated final regulations on hardship distribution and conditions.

3. Not depositing contributions on a timely basis

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

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

4. Failing to obtain spousal consent.

The IRS has long noted that a common plan mistake submitted for correction under the Voluntary Correction Program (VCP) is the distribution to a participant of a benefit in a form other than the required QJSA (e.g., a single lump sum) without securing proper consent from the spouse.

This often happens when the sponsor’s HR accounting system incorrectly classifies a participant as not married (or when the participant was not married at one point and subsequently got married – or remarried). The failure to provide proper spousal consent is an operational qualification mistake that could cause the plan to lose its tax-qualified status.

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

Plan sponsors are frequently interested in what expenses can be paid from plan assets. It’s important to keep in mind, however, that the first step in that determination involves making sure that the plan document actually allows the payment of any expenses from plan assets.

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

Administrative expenses include fees and costs associated with things like amending the plan to keep it in compliance with tax laws, conducting nondiscrimination testing, performing participant recordkeeping services, or providing plan information to participants.
ERISA imposes a duty of prudence on plan fiduciaries that is often referred to as one of the highest duties known to law – and for good reason. Those fiduciaries must act “with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.”

Oh – and if you’re not “familiar with such matters” – or aren’t certain of that status – it’s a good idea – one might even say “prudent” – to engage the help and support of someone who is.

p.s.: Oh, and when a mistake does occur, check out the IRS Fix-It Guide at https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide.

- Nevin E. Adams, JD

"Make" Shift

Financial literacy has long been touted as something of a “silver bullet” in helping workers make better financial decisions – and now there’s a call to make it a mandatory employment offering. 

Now, we all know that lots of workers get their first (and for many only) exposure to financial markets via their workplace retirement plan. Ditto their only education about investing, diversification, or even mutual funds. Little wonder that those who are tasked with delivering those lessons have long championed the need for some basic level of financial education in school curricula.

The issue was most recently raised earlier this year in a paper titled “Defined Contribution Plans and the Challenge of Financial Illiteracy.” Authored by Jill Fisch of the University of Pennsylvania Law School, as well as financial literacy icon Annamaria Lusardi and Andrea Hasler from George Washington University School of Business, the paper compares the relative financial acumen of what it terms “workplace-only” investors with active investors.

The report notes that the former (some 28% of the investor group) only have investments through an employer-sponsored plan, the latter have private retirement accounts that they have set up themselves and/or other investments. Arguably, and as the paper acknowledges, some of those in the latter group may well have begun their investment experience in workplace plan, but have now rolled those investments into an IRA (the paper says that about half of this group have both a self-directed account and “other financial investments”).

Mandate State?

It’s this combination – what they claim are big gaps in financial literacy coupled with a reliance on a defined contribution-oriented retirement system that is so dependent on individual choices – that has now led these academics to call on for a mandate on employers to fill the gap with financial literacy programs.

Specifically, they propose that employers be required to provide a self-assessment “enabling their employees to measure their financial knowledge and capability.” They suggest that the Labor Department “could introduce minimum requirements as to what should be included in a program to provide the working knowledge and skills necessary to navigate the defined contribution system” – requirements that could, they note, “include both specific information about the 401(k) plan, the investment options contained in that plan, and the process of saving and investing for retirement,” but that could also “extend to more general components of personal financial decision-making that contribute to an employee’s financial well-being.”

‘Big’ Deal

I think it’s fair to say that there are lots of retirement plan savers who aren’t very investment savvy, though I’ve a sense that the academics are overly broad in their characterizations, and perhaps lack a full appreciation for the education that is currently provided in the context of workplace plans. Further, for their assessment of financial literacy (more precisely, the lack thereof), they rely on the responses to a “big three” set of questions. 

Now, those “big three” questions have been utilized in academic circles for years as an assessment as to whether an individual is financially literate or not. I’ll accept at face value the belief of gifted individuals who have studied the subject of financial literacy in far more detail, and with more expertise in such matters than I, that a correct response to those questions constitutes a level of literacy in financial matters.

I’m happy to say that I have, for years, been able to accurately answer those “big three” questions that purport to provide an accurate gauge of financial literacy[i] – but to this day I am unable to articulate exactly how those specific knowledges would help me answer the questions that seem most pertinent to achieving retirement financial security; notably how much should I save, how should I invest those savings, when should I rebalance, and – ultimately – how (and when) do I draw down those savings in retirement.

The studies I have seen – and a point made by the authors of this proposal – suggest that timing is critical to retention. In other words, teaching someone about investments years before they actually have any investments probably won’t have much retentive impact. That’s why the best financial wellness programs are effective – because, rather than one-size-fits-all education, they focus on specific people and targeted groups of people who have specific needs – and do so in a manner proximate in time to either when those decisions must be made, or will have an impact.

It’s hard to argue that a greater focus on financial literacy wouldn’t be of some benefit – though I would say preferably sooner and more consistently than is likely in the employment context. That said, I’m skeptical about the impact of a financial literacy campaign mandate on employers. First off, the vast majority of employers who sponsor a plan already provide some level of education (does anyone not?), on their own, or with the assistance of a recordkeeper, TPA or advisor. A growing number are doing so with the broader emphasis on outcomes and financial wellness. The Labor Department might well be able to craft a more practical set of financial literacy guidelines than the academics, but I doubt it – and that’s assuming they’d even want the job.

Putting that obligation on employers ignores decades worth of experience that many, perhaps most, individuals don’t take full advantage of the education materials already furnished. Moreover that they appreciate – and in most ways and many cases are better served by the convenience of plan design solutions – like automatic enrollment and qualified default investment alternatives – that counter human misbehaviors and help even the financially literate make better choices than busy lives often allow.[ii] 

More significantly, I suspect that a financial literacy mandate on employers who sponsor plans would only mean fewer employers sponsoring plans – and that’s before we consider the potential for a brand new angle for the plaintiffs’ bar.

In sum, there seems little to be gained from a financial literacy mandate on employers. But it’s worth keeping in mind that those who currently participate in those employment-based retirement programs have something to lose.

- Nevin E. Adams, JD

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[i]The Big Three
Consider that, even in making the case that there is a financial literacy gap, the academics rely on what they call the “Big Three” financial literacy questions, specifically:

1. Suppose you had $100 in a savings account and the interest rate was 2% per year. After five years, how much do you think you would have in the account if you left the money to grow?

A. More than $102, B. Exactly $102, C. Less than $102 

2. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After one year, how much would you be able to buy with the money in this account?

A. More than today, B. Exactly the same, C. Less than today

3. Please tell me whether this statement is true or false: “Buying a single company’s stock usually provides a safer return than a stock mutual fund.” 
♦True ♦False

[ii]Those are mostly accumulation options, however. On the drawdown/withdrawal side, while there are certainly many alternatives, there is arguably still a gap.

It's About Time

Most of the surveys and research in our industry focus on the shortcomings – a lack of savings, of diversity in investment, of failure to maximize the employer match, or to have access to the programs that support those opportunities. There is, however, a shortfall that doesn’t garner much attention.

I’m talking about time.

And while time is often treated as an “enemy” of retirement planning (sometimes under the “longevity” label), certainly when there is a concern about outliving one’s resources, or perhaps when too little time remains to make preparations, there is another aspect: a retirement cut short.   

This is heavy on my mind of late – not just because this week marks the anniversary of the Sept. 11 attacks, though that’s certainly a factor.

My recollections of that awful day notwithstanding, I’ve been particularly mindful of the untimely passing of three individuals of my acquaintance in recent weeks: a relative, a colleague, and an associate here. Two were not even thinking about retirement when their time came – one had been eagerly looking forward with anticipation to a retirement she’ll never have.

Now I’m not privy to the particulars of the financial plans of these individuals – the needs that their unexpected passing may present for others – or what steps, if any, they may have taken to ease the financial circumstances for those they left behind. I hope they had that opportunity, but know all too well that many don’t.

People die tragically and prematurely every day, of course. Most of them are unknown to us, and nearly all are unnamed to us. And as the recent mass shootings remind us, on any given day, any one of us could go to work, or to the store – and simply not come home.

Ironic as it sounds, death is a part of life. Thoughtful individuals prepare for the possibility of death –through faith, sacrifice and, with luck, sound financial planning. However, most don’t dwell on those realities, and that’s doubtless a good thing.

In this business, we spend a lot of time worrying about the risks of outliving our retirement savings. In fact, surveyed workers increasingly seem to rely on an assumption that they will work longer, or save more later, to make up for their current shortfalls.

However, and perhaps particularly on this anniversary eve of the Sept. 11 attacks, it’s worth remembering that we don’t always have as much time as we might think – or want.

It’s time we did.

- Nevin E. Adams, JD

How Gen Z's Retirement Will Be Different

Those “kids” who were just dropped off at college for the first time? By their sophomore year, their generation will constitute one-quarter of the U.S. population. How will their retirement be different?

That’s according to the authors of the so-called Mindset List – now housed at Marist College, having relocated from Beloitt College – has been published each August since 1998. Originally created as a reminder to faculty to be aware of dated references, the list provides a “look at the cultural touchstones that shape the lives of students entering college.” Not to mention those who will go on to be workers and – eventually – retirees.

This fall’s college class of 2023 is the first class born in the 21st Century (2001) – and thus lack a personal memory of the September 11 attacks. According to the authors of the Mindset List:

• This group has never used a floppy disk (heck, they’ve probably never even seen one, except at that “save” icon).
• Their phone has always been able to take pictures.
• They’ve always had Wikipedia as a resource.
• Oklahoma City has always had a national memorial at its center.
• As air travelers they’ve have always had to take off their shoes to get through security (well, unless they have TSA pre-check).
• PayPal has always been an online option for purchasers.
• There’s always been a headlines scrawl on TV.
• They have always been able to fly Jet Blue.
• Troy Aikman’s play calling has always been limited to the press booth.
• They’ve never been able to watch Pittsburgh’s Steelers or Pirates play at Three Rivers Stadium.
• Monica and Chandler from “Friends” have always been married (May 17, 2001).

Despite those differences, the class of 2023 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 Social Security will play, and – eventually – how and how fast to draw down those savings.

And yet, when it comes to retirement, the Class of 2023 also stands to have a different perspective. For them:

• There have always been 401(k)s.
• There has always been a Roth option available to them (401(k), 403(b) or IRA).
• They’ve never had to sign up for their 401(k) plan (since, particularly among larger employers, their 401(k) automatically enrolls new hires).
• They may never have to make an investment choice in their 401(k) plan. (Their 401(k) has long had a QDIA default option to go with that auto-enroll feature.)
• They’ve always had access to target-date funds, managed accounts, or similar vehicle that automatically allocates (and, more significantly, re-allocates) their retirement investments.
• They’ve always had fee information available to them about their 401(k). (It remains to be seen if they’ll understand it any better than their parents.)
• There have always been plenty of free online calculators that allow them 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 view and transfer their balances online and on a daily basis (and so, of course, they mostly won’t).
• They’ve always worried that Social Security wouldn’t be available to pay benefits. (In that, they’re much like their parents at their age.)
• Many have never had to wait to be eligible to start saving in their 401(k). (Their parents typically had to wait a full year.)

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

And, with luck, access to a trusted advisor to answer their questions along the way...

- Nevin E. Adams, JD

A Hallmark Holiday?

I don’t know about you, but I’ve always had a certain ambivalence about what are generally termed “Hallmark holidays.”

You know the ones I’m talking about – the ones that seem crafted for the sole purpose of generating sales for greeting card sellers. Of course, after a while you no longer question their existence – and if one still struggles to remember exactly when “Grandparent’s Day” is, well, we’ve pretty much got Mother’s Day, Father’s Day, and Valentine’s Day down to a science (one that might not be on your calendar is National Slap Your Irritating Co-Worker Day, October 23). Indeed, these days there are months on the calendar devoted to a whole series of acknowledgements and remembrances.

There are also a number of occasions set aside to recognize the importance of saving (America Saves Week –February ), the importance of planning for retirement (National Retirement Planning Month – July, and National Retirement Planning Week – April), and the issue of retirement security generally (National Retirement Security Week – October). There’s even a National Financial Literacy Month (April) and National Financial Planning Month (October).

While I’ve had some involvement with most of those during my career (mainly to remind folks about their occurrence) and, sadly, for many those events are often dismissed as “Hallmark holidays” – even for those of us who have made a career-long commitment to helping improve the nation’s retirement prospects.

That said, one that has stuck with me – even prior to our affiliation with the Plan Sponsor Council of America – is 401(k) Day. This year it falls on Friday, September 6 – a date chosen in acknowledgement of the fact that, as retirement follows labor, this focus on retirement follows Labor Day (fans of history or trivia may appreciate that then-President Gerald Ford signed the Employee Retirement Income Security Act (ERISA) into law on the day after Labor Day, 1974).

Of course, these days the focus has broadened, and incorporates a focus on financial wellness ahead of retirement, as well as preparations for that time yet to come. Like retirement itself, the preparations are best attended to on an on-going basis, rather than a single date on the calendar.

Readers of this publication are all too aware of the challenges that confront our nation’s retirement savings system – widespread financial illiteracy, a persistent coverage gap, and looming shortfalls in the underpinnings of Social Security. That “familiarity” with these complex issues perhaps makes it too easy to dismiss the opportunity that an occasion like 401(k) Day represents.

Sure, we’re talking about these issues every day – but as a friend reminded me long ago, even a Hallmark holiday can provide an opportunity to pay attention to the people – and things – we often take for granted.

So, this year, let’s (all) take advantage of the “occasion” – all year long. You can find out how at https://www.psca.org/401kDay

- Nevin E. Adams, JD

6 Things That People Get Wrong About Retirement

Retirement planning can be a complicated process – and surveys suggest that most workers haven’t even attempted a guess. But even those who have can overlook some pretty significant factors that can have a dramatic impact on retirement readiness.

Here are some critical factors that are easy to get “wrong.”

The Cost of Inflation

Twenty or 30 years from now, prices are likely to be different than they are today, and for many, those prices will increase – and perhaps particularly costs of critical life aspects like health care. Consider that, overall, the average inflation rate for 2018 was 1.9%. It’s not that all prices will always go up – but they often do, and might increase faster than your income. Think of it as the “magic of compounding’s” evil twin…

There’s a calculator that you might find interesting at http://www.usinflationcalculator.com/.

The Cost of Taxes

A key part of the incentive for retirement saving in a 401(k) is the ability to postpone paying taxes on those salary deferrals. The operative word there is, of course, “postpone.” Sure enough, as those retirement savings are withdrawn in retirement, you can bet that Uncle Sam will be expecting his cut – and on a frequency dictated by the required minimum distribution schedules of the IRS.

In fact, every time I see one of those reports about the average 401(k) account balances of those in their 60s, I can’t help but think that somewhere between 15% and 30%, and perhaps more – won’t go toward financing retirement, but will instead go to Uncle Sam and his state and municiple counterparts.

After all, that’s one of those pre-retirement expenses that doesn’t end at retirement. And, while it may well be at lower rates than when it was deferred pre-tax – it may not be.

The Cost of Long-Term Care

Long-term care is one of those retirement cost variables that can be very complicated to predict – which perhaps explains why the vast majority of retirement needs projections models fail to take it into account (the Employee Benefit Research Institute’s being a notable exception). The data suggests that most of us will have some exposure to this risk – but also suggests that only a minority will get hit with a truly catastrophic bill against their retirement savings.

The question is, which group will you fall within? And can you afford to be wrong? 

What You’ll Get from Social Security

Ask any young worker today about their expectations regarding Social Security, and you’ll likely encounter a fair amount of skepticism; a recent Pew Research report notes that roughly half of Americans (48%) who are younger than 50 expect to receive no Social Security benefits when they retire. Indeed, according to the 2018 Retirement Confidence Survey published by the Employee Benefit Research Institute, today’s workers are almost half as likely to expect Social Security to be a major source of income in retirement (36%) as today’s retirees are to report that Social Security is currently a major source of income (67%).

As things stand today, Social Security’s future is far from certain, though even under a worst case scenario, retirees are likely looking at a reduction, rather than a cessation of benefits. That said, as things stand now, those who retire at full retirement age today would be looking at a maximum of….

When You’ll Retire

Perhaps the most important assumption is when you plan to quit working; today most Americans are doing so at 62, though 65 seems to be the most common assumption – and while using 70 (or later) will surely boost your projected outcomes (it both gives you more time to save, and reduces the time that you will be drawing down those savings), it may not be realistic for many individuals. The 2019 Retirement Confidence Survey found that more than 3 in 10 (34%) workers expect to retire at 70 or beyond or not at all, while only 6% of retirees report this was the case.

In fact, the RCS has consistently found that a large percentage of retirees leave the workforce earlier than planned (43% in the 2019 RCS). Many who retired earlier than planned did so because of a hardship, such as a health problem or disability (35%), and a similar number did so due to changes at their company (35%) – in other words, events not within their control, and likely not foreseeable (admittedly, 33% did so because they could afford to do so).

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

How Long Your Retirement Will Last

Needless to say, the sooner your retirement starts, the longer it might last. But the length of retirement is also a function of what the academics refer to as “longevity,” and what regular people call “life.” 
Indeed, the good news we are living longer – but that means that retirements can last longer, and medical costs can run higher. And while we’re living longer, studies indicate that we tend to underestimate how much longer we will live. The Social Security Administration notes[i]that a man reaching age 65 today can expect to live, on average, until age 84; a woman turning age 65 today can expect to live, on average, until age 86.5.

But those are just averages; about one out of every three 65-year-olds today will live past age 90, and one in seven will live past age 95.

Though it’s also worth noting that the averages include a fair number of individuals who won’t make it that “far.”

Ultimately, of course, it’s not what you get wrong about life and retirement – it’s what, and how much, you get right.

 

- Nevin E. Adams, JD

---

[i]The Social Security Administration has an online calculator that, based only on gender and birth date (and there are a lot of additional factors to consider), can provide a high-level estimate.

A Change in Providers

We really hadn’t been focused on making a change, though the subject had come up from time to time. 

In fact, considering how long we had been thinking about making a change without actually doing anything about it, the change itself felt almost accidental in its suddenness. So sudden, in fact, that, in hindsight, I found myself wondering if we were “hasty” – perhaps too hasty.

Make no mistake – we had been happy enough with our current provider, certainly at first. In fact, we had been with them for a number of years and had, over time, expanded that relationship to include a fully bundled package of services. That made certain aspects simpler, of course – though we discovered pretty quickly that the “bundle” was presented as being more seamless than it actually was. Still, net/net, we were ahead of the game financially, and certainly no worse on the delivery side; we were just a bit disappointed in the disconnect between the sale and the service levels.

And all was fine for a while – or so it seemed. Looking back, there were signs of trouble that we could have seen – if we had been looking. There were unexpected charges on the invoices, and services that we were sure had been described as being part of the bundle that turned out not to be. There was the monitoring service that was supposed to be in place that we found out wasn’t – quite by accident, and months later. Over time we cut back on the services included, but the prices just kept going up. We were, quite simply, getting less and paying more, and getting less than we thought we were paying for. And it grated on us.

In hindsight, perhaps we should have been more vocal about our discontent. I’ve wondered what might have happened if we had called up and questioned those invoice charges, or made a bigger fuss about the sporadic outages. But, in the overall scheme of things, the charges weren’t large, just not what we expected. We figured that perhaps we had been the ones to misunderstand – and didn’t want to look “stupid” by calling to complain about a charge that some fine print in some document somewhere said was perfectly legitimate. Meaning always to go check that out sometime, the time to do so never materialized. Instead, we grumbled among ourselves about how aggravating it was – and how we should do something about it… sometime.

Unfortunately, change is painful and time-consuming. The emotional and fiscal toll these changes took, while annoying, simply wasn’t enough to put change at the top of the to-do list. So, we talked about a change – and every so often asked friends and acquaintances about their experience(s). Of course, it was hard to find someone else who was in exactly the same situation – and a surprising number simply empathized with our plight, being stuck in much the same situation themselves. All of which conveyed – to us, anyway – a sense that, uncomfortable as we might be with the current service package, we were probably about as well-positioned as we could be.

Then, one day, out of the blue, an opportunity presented itself. We weren’t looking for it, as I said earlier, but the months of frustration left us open to a casual message from an enterprising salesman – one who not only knew his product, he clearly knew the problems that others like us had with our current provider.

He did more than empathize with our situation. He did not pump me for information about what I was looking for, or what I didn’t like about my current situation. Rather, he was able to speak about the features/benefits that his firm offered… and, to my ears anyway, essentially ran through the list of concerns I had – but had not articulated – with our current situation. In fact, before our conversation was done, he had pointed out to me things that his firm offered as a matter of course that the current provider hadn’t even mentioned in all the years we had been associated – things I had assumed we couldn’t get, or couldn’t get without paying a lot more.

We made the change two weeks ago – and while it’s early yet, I’m thrilled with the results.

Ultimately, our former provider set themselves up by taking our business for granted, for (apparently) caring more about attracting new customers than in attending to our concerns, and for (apparently) assuming that “quiet” meant satisfied.

Provider changes can be fraught with uncertainty, if not peril. Little wonder that it often takes a pretty serious misstep (or a consistent history of smaller missteps) on the part of an incumbent to warrant such a response. So, are your clients happy, content, and “quiet”?

Or have they just quit complaining?

- Nevin E. Adams, JD
 
Note: For the record, the provider change recounted above involves my cable company.

Plan Sponsors Are From… Mars?

Do plan sponsors really know what participants want?

Back in the early 1990s, there was a very popular “self-help” book on relationships titled “Men Are From Mars, Women Are From Venus.” The basic premise, of course, was that men and women have different means and styles of communication – that, in essence, they might as well be from different planets (hence the title).

It suffers, as most such works do, from over-generalizing (to say the least – the hidden points system ostensibly maintained by each gender struck me as truly bizarre, even in the 1990s) – but it no doubt stimulated some relationship conversations, and if it opened some of those doors – well, that’s a good thing.

The relationship between plan sponsors and participants isn’t generally fraught with the same layers of complexity, but every so often a survey comes out that makes me think otherwise.

The latest was a report by American Century which surveyed (separately, but both during Q1 2019) 1,500 respondents between the ages of 25 and 65, currently working full-time outside the government and 500 defined contribution plan decision makers.

The survey found that only a small minority of plan participants (14% of those ages 25-54) wanted employers to "leave them alone" when it came to help with retirement savings – about half the number that plan sponsors thought felt that way. And, according to the survey, more than 80% of participants wanted at least a "slight nudge" from their employers (though, let’s face it, plan fiduciaries might well be reluctant to go too far).

On target-date funds, some 40% of responding employers felt that investment risk pertaining to market movements was the most important factor in target-date investments – while a comparable number of employees were more concerned about longevity risk (in fairness, investment risk wasn’t far behind).

Speaking of investments, nearly all – 90% - who either already offered or were considering offering ESG investments thought their participants would be interested (and why wouldn’t they), while two-thirds of sponsors say their retirement plan advisor is currently or should be recommending ESG solutions.

However, only 37% of participants actually expressed some interest in ESG options – and we’ve seen plenty of industry surveys (including the Plan Sponsor Council of America’s, among others – and that interest, not surprisingly, was apparently at least somewhat dependent on performance comparable to the average product. Ultimately, American Century found that while sponsors believed that 88% of workers were at least somewhat interested in the option, fewer than 40% actually were.

Sometimes the disconnects aren’t even between different parties; the American Century survey found that 82% of plan sponsors believe it was at least “very important” to measure how ready employees are for retirement – and yet only 46% formally did so.
Over the years, we’ve seen similar “disconnects” in the benefit priorities, availability of retirement income options, and, in fairness, we’ve also seen disconnects between what individuals say they would do – and what they seem to actually do given an opportunity. Not to mention those between plan sponsors and providers – and yes, between plan sponsors and advisors.

There are, of course, any number of rational explanations for those apparent gaps. We can be reasonably sure that these surveyed plan sponsors and participants aren’t coming from the same place - literally. We also know that different industries, and different employers, and even different geographic locations seek to hire and attract different kinds of workers – who are, in turn, motivated and attracted by different things – which they may or may not choose to share with their employer.

Sometimes people are more inclined toward openness with an anonymous survey – which may present option(s) they hadn’t even considered. And sometimes, of course, they’re “led” by questions designed to produce a certain outcome. Plan sponsors glean their sense of their workforce from any number of sources with a wide range of reliability – everything from personal experience, to industry surveys to the headlines in the press…to the inevitable “squeaky wheels” that (too?) often darken the door of HR with their latest complaint and/or suggestion.

That there are different perspectives should come as no real surprise – and, if the occasional survey highlights some apparent discrepancies in priorities, well one hopes that should spur some constructive consideration and engagement.   

Because, ultimately, what matters isn’t what “planet” you’re coming from – but that you’re speaking the same language.

- Nevin E. Adams, JD

Half A Chance...

I’ve never played the lottery. But there are days…

I tell myself it’s because I know how remote the odds are, that the rules are too complicated, that they “feed” on the aspirations of people who should be spending their money on “better” things – and even that I don’t have enough “lucky” numbers to bet on consistently. But those are rationalizations.

The simple fact, despite the screaming billboards and nightly news reminders about the size of the latest “mega” jackpot, is that I simply find it inconvenient. Oh, it’s not like I never frequent the convenience stores or even grocery checkouts that these days beg for the cash/credit card that hasn’t yet been put away. I’ve never really regretted walking away from those “temptations.” And yet…    

As an industry, we spend a lot of time focused on a wide variety of considerations that impact the likelihood of having a financially satisfying retirement. But what about those who don’t have access to a retirement plan?

Now, even thoughtful industry insiders have been known to push back on the notion that people don’t have access to a retirement plan. And, in fact, you don’t have to be an industry insider (though it helps) to know that anyone who doesn’t have access to a retirement plan at work can stroll down to your local bank or financial services outlet and open an IRA – heck, these days you can just boot up your computer and do that online. And yet people don’t. This isn’t really a surprise – but even among modest income workers ($30,000-$50,000/year), we’ve seen that workers are 12 times more likely to save via a workplace retirement plan than to open that individual IRA.

Last week, we unveiled a state-by-state analysis that highlighted the coverage gap – that more than 5 million employers in the United States still don’t offer a workplace retirement savings benefit, a generation after the 401(k) plan design was first introduced. And what that means is that more than 28 million full-time workers don’t have an opportunity to save for retirement in a 401(k) – and that doesn’t include more than 23 million part-time workers who don’t have that opportunity.

That is, of course, the coverage “gap” that the so-called state-run automatic IRA programs are designed to close. And, though it’s still relatively early in that particular vein, they do seem to be having a positive effect. In Oregon (whose OregonSaves program has just commemorated its second anniversary), they’re reporting more than 6,856 employers now participating – who ostensibly didn’t offer a plan before – with some 95,704 employees – who, ostensibly, weren’t saving for retirement previously. And if the opt-out rate is high (approximately 30%) compared with the 7-9% rates typical of automatic enrollment plans administered in the private sector, well it not only lacks the support of an employer match (not to mention the support of workplace education or an advisor), but it also has a (still) relatively high 5% default contribution rate, though recent surveys suggest that the default rate standard is rising in 401(k)s.

There are, of course, issues with the emergence of multiple, and potentially contradictory, state-run versions – particularly for employers who draw workers from multiple states. But in just this last year, the program has begun offering traditional IRAs and has been opened to the self-employed, gig economy workers and cannabis businesses. The program is now more than halfway through its statewide rollout, which will be completed by mid-2020, with more new “features and improvements” in the works. Similar programs in Illinois and California are underway, or nearly so – and Rep. Richie Neal (D-MA), Chairman of the House Ways & Means Committee, has previously proposed a federal version. 

Much of the coverage gap can be laid at the door of smaller employers, which arguably have a different focus on such matters than larger organizations. And, sure enough, a 2013 analysis by the nonpartisan Employee Benefit Research Institute (EBRI) found that when you adjust for access to a plan – the percentage participating divided by the percentage working for employers that sponsor a plan – you find that participation rates between larger employers and smaller ones largely disappear. For example, while data indicates that just 16.9% of those full-time, full-year employees who work at smaller employers participate in a plan – that turns out to be about 86% of the 19.5% of workers in that category whose employer sponsors a plan. And that is nearly identical to the participation rate of private-sector employers with 1,000 or more employees.

A few years back I remember hearing a lottery motto, “Gotta be in it to win it.” That’s a motto that those worried about retirement finances should always take to heart.

But if they’re going to have (more than) half a chance, there’s something to be said for improving the odds – by having a chance to “play.”

- Nevin E. Adams, JD

How Much (Should) a New Committee Member Know?

A recent federal court decision should remind us all of the importance of plan committee education.

The case involved a suit by participants in the SunTrust 401(k) plan (see Is Fiduciary Responsibility Retroactive?) that challenged the initial selection of, and subsequent acquiescence with, an ostensibly imprudent plan investment menu. The court’s decision focused on one aspect of the case: the liability of “new” plan committee members for actions that predated their involvement on the committee, but continued after their involvement. The court, in a decision that will likely be viewed favorably by new committee members, excluded them from liability for committee moves that predated their participation, at least to the extent they lack “actual knowledge” of imprudence.

Along the way to that determination, Judge Orinda D. Evans of the U.S. District Court for the Northern District of Georgia incorporated the testimony of those new committee members as to the training/information they received as they joined. While it may reflect their recollection more than the reality, they convey[1] a very strong sense of being handed reading materials, and left to their own devices to fill in the blanks.

The deposition questions were doubtless focused on the particular aspect of fund selection, and perhaps dealt with nothing beyond that. Indeed, several of the committee members did recount both an exposure to the plan document itself and some awareness of the importance of their role as a plan fiduciary.

As a baseline, I have long maintained that every plan committee member needs to know that:

You are an ERISA fiduciary.

Even if you consider yourself to be a small and relatively silent member of the committee, you direct and influence retirement plan money, and fiduciary status is based on one’s responsibilities with the plan, not a title. Simply stated, if you (or the committee you are part of) 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.

You are responsible for the actions of other plan fiduciaries.

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

As an ERISA fiduciary, your liability is personal.

If they didn’t hear this message out the outset, the onset of litigation surely brought this reality home to the committee members. A committee member may be required to restore any losses to the plan or to restore any profits gained through improper use of plan assets. Now, you can obtain insurance to protect against that personal liability – but that’s probably not the fiduciary liability insurance you may already have in place, or the fidelity bond that is often carried to protect the plan against loss resulting from fraudulent or dishonest acts of those covered by the bond. If you’re not sure what you have, find out. Today.

The plan’s investment policy matters.

Note that I didn’t say the plan’s investment policy statement. The law (ERISA) doesn’t require that you have a written investment policy statement, but that same law does expect that the plan’s investments will be monitored as though one was in writing. Indeed, the vast majority of plans do have a written IPS – more than 90%, according to the Plan Sponsor Council of America’s 61st Annual Survey of Profit Sharing and 401(k) Plans.

More than that, generally speaking, you should find it easier to conduct the plan’s investment business in accordance with a set of established, prudent standards if those standards are in writing, and not crafted at a point in time when you are desperately trying to make sense of the markets. In sum, you want an IPS in place before you need an IPS in place.

And a suggestion for you: have a formal “on-boarding” process for plan committee members.

Every plan, and every plan committee is unique. But the responsibility, and the prudent expert standard to which those responsibilities must be held applies uniformly – and it has been called “the highest known to the law.” In forming and conducting the committee it’s imperative not only that the members be selected wisely, but that they be informed and engaged so that they can adequately and fully discharge those responsibilities.

One recent court decision (Wildman v. Am. Century Servs.) in favor of the plan committee defendants explains that the committee met regularly three times a year, and had “special meetings if something arose that needed to be discussed before the regularly scheduled meetings.” Moreover, the defendants testified that those meetings “were productive and lasted as long as was needed to fully address each issue on the agenda. On average, the meetings lasted an hour to an hour and a half.”

The plan provided “training and information about their fiduciary duties, including a ‘Fiduciary Toolkit,’ which outlined their duties as fiduciaries, as well as a summary plan document, and articles regarding fiduciary duties in general.” That kit included a copy of the current Investment Policy Statement, and the court noted that “the Committee members read these materials and took their responsibilities as fiduciaries seriously.”

Arguably the personal interests of the new plan committee members in the SunTrust case were, at least at this stage, “well-served” by their lack of education (more specifically, the lack of “actual knowledge”) regarding the background of the decisions made prior to their appointment. However, this is only one set of issues, and they may yet be held to account for their subsequent affirmation (be it active or passive) in the continuance of those decisions.

And that’s when ignorance of your duties as a plan fiduciary can be really expensive.

- Nevin E. Adams, JD
 
Footnote

1. Defendant Jerome Lienhard stated in his deposition that he received binders describing the funds in the Plan “presumably” containing documents describing fiduciary standards, that he spoke with Defendants Donna Lange and Ken Houghton about being a Benefits Plan Committee member and, upon becoming a member of the Benefits Plan Committee in August of 2006, familiarized himself with the Plan document. However, he did not recall taking action to determine whether previous breaches of fiduciary responsibility had been committed.

Defendant Christopher Shults said that he received training regarding the funds in the Plan when he became a Benefits Plan Committee member, and that he was “directed… to meet with an investment consultant representative "to become more educated about the investment decisions made by the Benefits Plan Committee.” However, he did not "remember any of the details of specificity around what we discussed" and he did not recall discussing previous investment decisions by the Benefits Plan Committee with the representative. Nor did he recall learning about selection decisions made by the Benefits Plan Committee prior to his becoming a member.

Defendant Mimi Breeden remembered that she “would have talked to subject matter experts and [her] staff and others to come up to speed on what the committee’s work was” and “what key priorities were,” that she “probably” had knowledge of the history of the Plan before 1997 but could not recall it or any information about the 1996 selection of Affiliated Funds, and that she could not recall whether she ever knew about the initial selection of Plan funds in 1996.

Defendant Mary Steele was sure she had read the Plan document at some point while a member of the Benefits Plan Committee and that Defendant Donna Lange briefed her regarding her fiduciary responsibilities as a Benefits Plan Committee member and “the most important things that [she] need[ed] to know about the committee,” and that while she did not remember how the SunTrust proprietary funds first came to be offered in the Plan, but that the 1996 change in the Plan from common trust funds to mutual funds “sound[ed] familiar.”

Defendant Thomas Kuntz did not recall whether he received any training regarding his duties as a Benefits Plan Committee member or whether he reviewed prior meeting minutes, though he recalled that the Benefits Plan Committee, “[a] s a matter of course,” “reviewed all the funds in the plan ... for appropriateness.” In a disposition he explained that he believed the proprietary funds in the Plan were appropriately included because “[t]hey looked to be reasonable choices based on assessments that [he] might have had at the time,” though he did not recall what those assessments were.

Defendant Donna Lange said that she was not aware of the process used in initially selecting the Affiliated Funds in 1996, just that “the approved funds were in place when [she] arrived.” As for that 1996 fund selection, Lange went on to say that she did not "recall studying this other than being aware “this is the plan, this is what we started with.” She did state, however, that she knew the Plan was only using proprietary funds when she arrived.

Defendant Aleem Gillani stated in his deposition that he does not recall ever being briefed or “brought up to speed” on the Benefits Plan Committee's decisions prior to becoming a member, and that he had no knowledge of them when appointed to the Benefits Plan Committee.

Finally, Defendant William H. Rogers, Jr. stated in his deposition that he has no knowledge of the initial Affiliated Funds selection in 1996, 1999, and 2001.