'Tacts' Treatment?

Roth 401(k)s are more prevalent—and popular—than ever. But is that good—or bad—for retirement?

A recent op-ed[i] in The Wall Street Journal explored the potential implications—“What ‘Rothifying’ 401(k)s Would Mean for Retirees”— (subscription required), though the focus is on tax policy as well.

You’ll remember that so-called “Rothification”—essentially the elimination of the pre-tax treatment currently accorded 401(k) contributions—was quite the controversial issue back in 2017 when the Republican-controlled House of Representatives was looking for ways to raise revenue to help pay for tax cuts.[ii] And while it’s not been an active focus of late, it seems likely to resurface as the nation’s budget deficit widens, and the field of 2020 presidential aspirants seem determined to find ways to spend more or, in the case of the incumbent, collect less in taxes.

‘Out’ Comes 

As for the WSJ treatment, I’ll spare you the short read (longer if you actually check out the 36-page paper it was based upon), and summarize it thusly: later retirements (not by choice, but of necessity), less retirement income, and more wealth inequality. Though, at least in the short run, more tax revenue for Uncle Sam.[iii]

Now most of this comes from a key assumption; as the WSJ piece puts it, “Over their lifetimes, workers would accumulate one-third less in their 401(k)s under a Roth system. This is because, with no tax advantage from contributing to a 401(k), workers would save less and those lower contributions would earn less over the years.”

Said another way, without the tax break, the authors conclude that workers won’t save as much, and saving less means that they’ll have less invested, and that  means that they’ll have less retirement income. They also argue that, with Rothified savings, workers would tap into Social Security later—a year later, on average, they claim. They note that with their retirement savings already taxed, wealthier individuals would be inclined to defer taking Social Security (increasing their benefit), widening income inequality.[iv]

‘Less’ on Plan?

The concern about mandatory Rothification was always that workers would, in fact, save less—and this is a concern that employers have expressed, though this was in the context of the ability to save on a pre-tax basis being taken away. That, in turn, seems to be predicated on the notion that workers have a specific dollar amount in mind that they can afford to save, and that if some of that certain dollar amount goes to taxes, there is a dollar-for-dollar offset. Doubtless that’s true for some, particularly among lower-income workers. However, when I have seen savings data, what seems to be the norm is that individuals save a specific percentage of pay, one generally driven either by what’s necessary to earn the employer match, or perhaps that rate at which default contributions are set. In other words, people choose to save 3% of pay, not $50/paycheck.

Now, if that  perception is accurate (feel free to disagree in the comments below if you see things differently), then it seems to me that most individuals might actually save the same amount, regardless of whether it’s pre- or post-tax. And if they were to same at the same rate (and admittedly that’s a big “if”), their retirement outcome might actually be more  secure—because withdrawals (and taxation) wouldn’t be forced on them by RMD calculations, because they wouldn’t have to worry about those contributions—and the earnings that have accumulated on those contributions—being taxed, and, significantly, because the reduction in taxable income wouldn’t undermine (through “means testing”) Social Security benefits.

But key to the analysis is how participants would respond, and the study cited in the WSJ isn’t the only academic consideration on the subject; one in 2015 found no change in savings rates with a voluntary addition of a Roth feature, and in 2017, the non-partisan Employee Benefit Research Institute (EBRI) found that it might help—or hurt—retirement security—and this is key—depending on the response of participants.

It appears that more participants are being presented with that option. Nearly 70% of plans now provide a Roth 401(k) option, according to the most recent survey by the Plan Sponsor Council of America. Perhaps more significantly, that survey, reporting 2018 plan activity, finds that nearly a quarter of participants (23%) elected to contribute to a Roth when given the opportunity, up from 19.5% in 2017 and 18.1% in 2016—an increase of nearly 30% in just three years.

Academic studies notwithstanding, it’s worth remembering that retirement security isn’t just a matter of how much you have saved at  retirement; it’s how much you have available to spend throughout retirement.

- Nevin E. Adams, JD

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[i]The authors of the WSJ article, Olivia S. Mitchell and Raimond Maurer, previously authored a research paper upon which the WSJ piece was based (albeit with a slightly different title, “How Would 401(k) ‘Rothification’ Alter Saving, Retirement Security, and Inequality?”). 

[ii]They weren’t, however, the first to propose such a shift. President Obama did so in 2015.

[iii]However, the authors state that the taxes collected on withdrawals of that money exceed the amount of additional income taxes that would be collected during people’s working lives under Rothification.

[iv]As a side note, the authors in the WSJ article note that not only would this be bad for Social Security funding, but they also conclude that the taxes collected on withdrawals would exceed the amount of additional income taxes that would be collected during people’s working lives under Rothification—ostensibly because of their previous assumption that it would be a larger accumulation of money to be taxed. 

After the Fall

I’ve just passed the fifth anniversary of a small fall that took a big chunk out of my life.

It was one of those little things – carrying that last box of Christmas ornaments to the basement for storage – when, just three steps from the bottom, I missed one. All I could think about in the 2 seconds it took me to tumble to the ground was trying not to fall on the ornaments (it was the last box, but who knew what precious memories were in that one?) – though that focus completely disappeared once I hit the floor.

The ornaments, as it turned out, were safe. My left ankle, not so much.

The next several weeks were discouragingly inconvenient when it came to navigating stairs, opening doors (even the ones that are ostensibly designed to accommodate such things), and – worst of all – showering. But perhaps the most frustrating was my rehab stint. I would not have thought it was possible in the space of just 8 weeks to forget how to walk – and yet, I found myself struggling (mind you, I was in a boot). To this day, I don’t descend a flight of stairs without a shudder running up my spine.

The fall, as falls often are, was fast and unexpected – the recovery long and painful.

At a time when the markets continue to stake out new highs on weekly, it is perhaps unseemly to recall that they can, and do, move in the opposite direction. While participants, generally speaking, appear to ride out such storms, those who sell low and buy high inevitably seem to outnumber those who view the downturns as buying opportunities. That said, in 2019 the S&P 500 rose more than 28% – and the average 401(k) balance – buttressed not only by the markets, but by contributions – ended the year 44.9% higher for those workers aged 25-34 with less than 4 years of tenure, while workers with more than 20 years of tenure, aged 55-64, registered a 24.6% increase, according to estimates by the Employee Benefit Research Institute (EBRI).

Indeed, just last week I read that a major target-date fund provider was boosting the equity allocation in its glide paths… explicitly to help deliver improved outcomes. Nor is it the only one to have done so (see Missing the Target). Those moves, ostensibly informed by economic insights and research, are perhaps tempted by the long-running bull market (and doubtless aware that, despite all the cautions to the contrary, that investors – and plan fiduciaries – are often drawn by past performance like moths to a flame).

Now, our industry has long cautioned savers that you can’t invest your way out of a savings shortfall, though surely improving outcomes is a shared goal. Not that it isn’t a tempting recourse – certainly for those who are awakening to financial realities late in their working years. These days the trend is to embrace glidepaths that sail “through” the stated age of retirement (“through” rather than “to”[i]), though one can’t help but wonder if those defaulted onto those paths are cognizant of the difference. Or if, as was the case a bit more than a decade ago, those on the brink of retirement will discover that there can be a significant gap between a glidepath that is “more” conservative, and one that truly lives up to that description.

Because, after all, falls are often unexpected. The recovery slow and painful.

- Nevin E. Adams, JD

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[i] Though the 62^nd Annual Survey of Profit-Sharing and 401(k) Plans from the Plan Sponsor Council of America found a rough 50-50 split among respondents between those relying on target-date fund glidepaths that are “to” versus “through” retirement.

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The End in Mind

Could lifetime income disclosures undermine retirement savings?

Over the past several years, a growing amount of attention has been focused on the decumulations of defined contribution plan balances in retirement – and a sense that the emphasis on account growth, and account balances, glosses over the reality that at some point in the future those savings will need to be turned into a retirement paycheck.

Enter the SECURE Act, which among its numerous retirement-related provisions added the new “lifetime income disclosure” requirements to ERISA’s benefit statement rules. It applies to individual account plan benefit statements and the lifetime income disclosure must be provided in one benefit statement during each 12-month period. Simply stated, the new law requires that the participant’s total accrued benefit be expressed as a “lifetime income stream” in the form of a single life annuity and a qualified joint and survivor annuity, assuming the participant has a spouse of equal age. The assumptions for these disclosures will be provided later by the DOL.

While it’s generally assumed (certainly that was what the authors of SECURE hoped) that this presentation will help participants attain a more realistic perspective on their retirement future (or at least the sufficiency of the financial resources they have amassed for that eventuality), there has been some concern that the reality, certainly in the absence of counsel on how to improve those prospects, will discourage, rather than motivate saving. Indeed, that was a concern expressed at a gathering of ERISA attorneys here in the nation’s capital.

That puzzled me a bit – I’ve currently got my accumulated 401(k) savings spread across the plans of four different providers, and three of them have been projecting my retirement income for several years now. Now, because those balances are in different places, those projections haven’t been especially useful (though I know how to add), but still… providing those type projections may still be on the horizon for some, but it’s hardly a big leap. And I’ve not heard or read about any big slumps in savings rates as a consequence.

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Visit our new SECURE Act resource center!

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Though it’s likely drifted from the recollection of most, back in May 2013, the DOL’s Employee Benefits Security Administration (EBSA) published an advance notice of proposed rulemaking (ANPRM) focusing on lifetime income illustrations. Under that proposal, a participant’s pension benefit statement (including his or her 401(k) statement) would show his or her current account balance and an estimated lifetime income stream of payments based on that balance (sound familiar?). The question then, as now, was – what impact, if any, would that disclosure have on participant behaviors?

Well, the Employee Benefit Research Institute (EBRI) included a series of questions in the 2014 Retirement Confidence Survey that would provide monthly income illustrations similar in many respects to those proposed to be provided by the EBSA’s online Lifetime Income Calculator proposal, and ask workers for their reaction(s).

What impact did that have?

Now, while there are certainly going to be differences resulting from a personal engagement (and there were some  differences in the assumptions,[i]) EBRI asked about their current account balances, and assuming retirement at 65, presented them with a monthly income figure. As it turned out, more than half (58%) felt that the illustrated monthly income was in line with their expectations.[ii] Considering those results, it is perhaps not surprising that the vast majority (81%) of the respondents indicated that they would continue to contribute what they do now after hearing the projected monthly income amount, while 17% replied that hearing this information would lead them to increase the amount they are contributing.

It remains to be seen what difference(s), if any, guidance from the DOL following the SECURE Act’s admonitions might have on the projections some (most?) recordkeepers are already providing, and how individuals, once presented with those  projections actually respond.

That said, the evidence we do have – the EBRI study and the anecdotal sense from the examples already in the marketplace – suggests that that “end in mind” focus will, at worst, have no impact – and at best, might well be the positive influence its proponents have hoped.

- Nevin E. Adams, JD

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[i]Of course, any such projection is necessarily required to make a number of critical assumptions – including future contribution activity, future rates of return, future asset allocation, and future annuity purchase prices. Other changes in assumptions were:

• Rather than using normal retirement age for the calculation, they asked about their expected retirement age.
• Since the age of the spouse was not known for married respondents, only the single life annuity income illustration was used.
• Given that the information was being provided to the respondent during a phone interview, only the projected monthly income (based on the projected account balance given the respondents’ reporting of their current balances) was provided.

[ii]On the other hand, 8% of the defined contribution participants said the monthly amount was much less than expected, though another 19% said it was somewhat less than expected.

Question Err?

“Presumably, if workers earned income in a retirement account, it is safe to assume that they had a retirement account…”.

Ya think?

That somewhat self-evident statement is drawn from a recent Issue Brief by the non-partisan Employee Benefit Institute (EBRI). That it was necessary is a cautionary tale about the blind reliance on data, even from a credible source, that looks suspicious.

It relates to the Current Population Survey (CPS), Annual Social and Economic Supplement (fielded in March of each year) to the CPS, conducted by the U.S. Census Bureau – a report that had long been one of the most cited sources[i] of income data for those whose ages are associated with being retired.

‘Bold’ Move

The problem appears to have its roots in a well-intentioned attempt to provide a more accurate read on income from DC plans. Responding to research that indicated that the CPS misclassified and generally underreported income, particularly pension income, the Census Bureau in 2014 conducted a redesign of the CPS questionnaire that altered and added to questions on income in order to better capture income from pensions.

To do so, the authors of this survey added (IN BIG BOLD LETTERS) an instruction that respondents NOT INCLUDE DISTRIBUTIONS OR WITHDRAWALS FROM IRAS, 401(k)s, or SIMILAR ACCOUNTS. This “clarity” does, in fact, seem to have produced a more accurate read on that specific question. The reporting of pension income that year, and in subsequent iterations, has risen.

However, beginning with that version of the CPS, there was a commensurate sharp drop in both the overall percentage of workers participating in a retirement plan, a decline in the number of workers participating, and declines in participation among those most likely to participate. This result, by the way, was counter to other reputable data sources, including the upward trend in the number of active participants in private-sector plans according to tabulations of Form 5500 filings by the Employee Benefits Security Administration, findings on retirement plan participation from the Bureau of Labor Statistics’ National Compensation Survey (BLS-NCS).

Fall ‘Call’

How much did it drop? The EBRI report explains that for full-time, full-year wage and salary workers ages 21-64, the percentage participating in 2013 under the traditional questionnaire was 54.5% vs. 49.3% under the redesigned questionnaire. This number fell to 39.9% in 2018 despite a slight uptick to 41.4% in 2017. Moreover, the number of full-time, full-year wage and salary workers ages 21-64 estimated to be participating in an employment-based retirement plan decreased from 51.4 million in 2013 (under the traditional design) to 41.0 million in 2016. By the way, the number of active participants increased from 89.9 million in 2014 to 94.6 million in 2017 according to 5500 data.

So why did the question regarding pension income translate into such enormous declines in participation? Well, you have to engage in a bit of speculation, but the trend and the timing suggest that individuals responding to the CPS, told to exclude 401(k)s, 403(b)s, IRAs, etc. on the question regarding pension income basically applied that direction to questions regarding their participation in a plan.

Gap ‘Flap’?

The good news is that this aberrant result was caught almost immediately by EBRI, and later by groups such as the Investment Company Institute. And, when a subsequent version came out with the same aberrant results, those groups once again held that up to scrutiny. And yet, that CPS data was still “out there,” and for some constituted the “official” version of the state of retirement plan participation in the United States.

That said, the newest iteration of the CPS included a new question that might be a step along the way to a more accurate assessment. Specifically, EBRI researcher Craig Copeland notes that in the 2019 dataset, the CPS added variables relating to income earned in a retirement account – and that addition, coupled with the assumption that began this post, provides some hope for an accurate data read.

That additional question simply posits whether the respondent received interest income, and from what source(s) – including 401k, 403b, among other retirement accounts. Copeland has taken the number of workers who responded that they received income from one of the employment-based retirement accounts and added that to the number of workers who reported having a pension plan under the traditional questions (accounting for those responding yes to both) to provide an adjusted overall estimate of employment-based retirement plan participation.

What’s the Impact?

Recall for a moment the data on fulltime, full-year wage and salary workers ages 21-64, that had indicated a 54.5% participation in 2013, only to drop below 40% in 2018 with the new questionnaire. However, taking into account the information from the new question, Copeland finds that the adjusted percentage participating jumps to 59.0% for this group in 2018. Similar, positive results are found for the other categories as well – results, it should be noted, that are much more in line with other data sources.

Now, despite those positive results, Copeland cautions since this is just one year of data, “a trend is obviously indeterminable.”

That said, I can’t help but be reminded about that old story about the optimistic child who awakens on Christmas morning and finds a heap of horse manure under the tree, rather than the anticipated – and still responds, “With all this manure, there must be a pony somewhere!”

Seems as though Dr. Copeland has found a pony in this data, after all.

- Nevin E. Adams, JD

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[i]See Data ‘Minding. Compounding the issues, for participation data, the NIRS draws on the Current Population Survey (CPS), even though the report’s own footnotes acknowledge that “the 2014 redesign of CPS produced much lower participation rates for working Americans in years after 2014 (participation in 2014 was at 40.1% but at 31.7% in 2017), which has not been fully explained.” They aren’t the only ones to take note of this aberration (see CPS Needs a New GPS and Commonly Cited Participation Gauge Misses the Mark, Study Says), but decide, for reasons not fully explained, to rely on the data there anyway. Indeed, a June 2018 report on the impact of the changes in the CPS by the nonpartisan Employee Benefits Research Institute (EBRI) cautions that “the estimates from the most recent surveys could easily be misconstrued as erosions in coverage, as opposed to an issue with the design of the survey.”

Will your portfolio be fortified by a 49ers win – or get chipped by the Chiefs?

That’s what adherents of the so-called Super Bowl Theory would likely conclude. 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 40 of the 53 Super Bowls, in fact.

Not that it hasn’t had its shortcomings. One need look back no further than last year’s win by the AFC’s New England Patriots over the NFC champion Los Angeles Rams to find an exception – the S&P 500 was up more than 30% in 2019. And then it was just the year before that a win by the NFC champion Philadelphia Eagles against the AFC Champion Patriots (who once were the AFL’s Boston Patriots) also turned out to be a loser, marketwise, with the S&P 500 down more than 6% (though for most of the year it was quite a different story). Ditto the year before when the epic comeback by those same AFC Champion Patriots against the then-NFC champion
Atlanta Falcons didn’t forestall a 2017 market surge.

Nor is it always the Patriots who play Super Bowl Theory spoilers – the year before that the AFC’s (and original AFL) Broncos’ 24-10 victory over the Carolina Panthers, who represented the NFC, also proved to be an “exception.”

Market Makings

That string, however, was an unusual break in the streak that was sustained in 2015 following Super Bowl XLIX, when the AFC’s 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 legacy AFL Denver Broncos, and in 2013, when a dramatic fourth-quarter comeback rescued a victory by the Baltimore Ravens (over the San Francisco 49ers, it should be noted) – 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 – yes, those New England 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. According to the Super Bowl Theory, 2011 should have been a good year for stocks (because, regardless of who won, a legacy NFL team would prevail).

But as you may recall, while the Dow gained ground for the year, the S&P 500 was, well, flat.
And then there was the string of Super Bowls where the contests were all between legacy NFL teams (thus, no matter who won, the markets should have risen):

• 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.

Sure enough, 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 (yes, those  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” (well, until this past year – oh, and the year before that  – and the year before…).

Patriot Gains

Times were better for Patriots fans in 2005, when they bested the NFC’s Philadelphia Eagles 24-21. Indeed, according to the Super Bowl Theory, the markets should have been down that year – but the S&P 500 rose 2.55%.

Of course, Super Bowl Theory proponents would tell you that the 2002 win by the 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 probably nobody except Patriots fans and disappointed Panthers advocates remember 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 (couldn’t resist).

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 (that have now returned to the City of Angels) 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 (though “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 (see below). 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 49ers have been here before – this is their seventh appearance, having won 5 (and being the first team to do so), but having fallen short their last time. If they do prevail, that sixth Lombardi trophy will tie them with the Patriots and Steelers in the all-time list. As for the Chiefs, well, it’s been a half-century drought for them in the Super Bowl, though the last time they appeared (January 11, 1970 – Super Bowl IV) they were victorious (over the heavily favored Minnesota Vikings). Only the New York Jets (51 years) have endured a longer stretch in between titles. The Chiefs did appear in what was subsequently dubbed Super Bowl I (but at the time more simply the AFL-NFL Championship Game).

Trivial “Pursuits’

Super Bowl LIV will be played at Hard Rock Stadium in Miami Gardens, Florida. While it’s the sixth Super Bowl to take place at the stadium, it’s had a different name for almost every championship -- Sun Life Stadium (XLIV, 2010), Dolphin Stadium (XLI, 2007), Pro Player Stadium (XXXIII, 1999), Joe Robbie Stadium (XXIX, 1995).

This happens to be the first time a Super Bowl will feature two teams with red as a primary uniform color, although it’s the “home” town Chiefs who will be in their traditional home red jerseys with white pants for the game. That said, dating back to 2005 with the Patriots in Super Bowl XXXIX, the team wearing white jerseys has won 12 times.

All in all, it looks like it should 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

Note: 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.

BTW, in case you were wondering, the Super Bowl is measured in Roman numerals because a football season runs over two calendar years.

The 'Cutting' Edge?

Are employers necessary for a successful retirement system? A new proposal suggests that their role be “jettisoned.”

Not one to simply “bash” the 401(k), and to his credit, Morningstar’s John Rekenthaler, who recently opined that the 401(k) had outlived its usefulness,[i] now offers an alternative that he considers to be a superior alternative, something he titles “the New American Retirement Plan.” Despite the shortfalls his previous column attributed to the 401(k), this proposal in most of its elements seems relatively modest, at least structurally. It’s (basically – in 25 words or less), a national DC plan for all employers, probably with mandatory employee contributions, no requirement for employer contributions, and tighter restrictions on withdrawals.[ii]
Make no mistake, though – the devil, and there’s mischief aplenty here – lies in the details.

Rekenthaler’s basic premise – one that he describes not only as “the first,” but the “most important” step – is to “jettison the employer’s responsibilities,” noting that “expecting companies to sponsor retirement plans is like demanding that a dog dance; it may comply, but neither well nor happily. Companies run businesses. That is what they are created to do.”

I get it. How much simpler would business be if you, as an employer, didn’t have to worry about the cost, aggravation, and yes – liability – associated with providing benefits? But let’s set aside for a moment the impact that benefits clearly have, in terms of not only job choice, but job retention.[iii] Let’s turn our attention to a program already in existence that, as Rekenthaler suggests, “jettisons” the employer’s responsibilities. Specifically, let’s consider for a moment the OregonSaves program – the longest running, and arguably quite successful – state-run programs for private sector workers. Two years in, and admittedly absorbing a part of the workforce – smaller businesses – that is perhaps lower paid, and less tenured – that program has a participation rate of approximately 70%, and an average deferral of 5.5%. 

Now, that’s 70% better than the participation rate of those individuals previously, and that 5.5% saved is almost certainly an improvement from the 0% these workers were likely setting aside from retirement before the advent of the program. Those results, however, pale in comparison with those reported in the 62^nd annual Plan Sponsor Council of America (PSCA) 401(k) survey. We’re talking record high contribution rates of 12.2% (5.2% of that from employers, by the way) and opt-out rates of generally less than 5%, compared to the 27% or so in the state-run program. 

And yet while Rekenthaler’s initial premise regarding the 401(k)’s “expiration” claims the current system has failed to deliver on its promise, here there’s not even an attempt to quantify what this “new” approach would produce in terms of retirement income adequacy, nor any notion of what level of mandatory employee contributions might be required to offset the loss of employer contributions. Could an unmandated employee contribution-only account produce “enough?”
Rekenthaler leaves open for “discussion” whether employee participation should, in fact, be mandatory, or mandatory only up to a certain level, and whether there should be a voluntary employer match or not. But adequacy of retirement funding isn’t even mentioned.

Despite the concerns raised (and acknowledged in a subsequent post) regarding the adequacy of the current system, he seems content to put forth a program he considers to be superior in design, apparently assuming it would also produce superior, if not sufficient, results – leaving it to the rest of us to work out – and presumably live with – the details.

Indeed, with as many opportunities for misuse, abuse, and underuse as the current voluntary system contains, it’s nothing short of amazing just how successful it has been in helping provide, in conjunction with Social Security and personal savings, the prospects for a financially secure retirement, nurtured by select tax incentives and bounded in by nondiscrimination rules and eligibility tests.

Sure, there’s still room for improvements in the current system – but mostly it seems to me that the problem with the current system seems to be that there’s not “enough” of it. As for the wisdom of cutting the support of employers from the current system – well, that seems to me like cutting off your nose to spite your face…

- Nevin E. Adams, JD

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[i]His columns are generally thoughtful and thought-provoking, his perspectives rational and well-reasoned, his commentary nearly always not only interesting, but entertaining. But on this one – well, let’s just say we disagree.

[ii]As for leakage – well, Rekenthaler’s solution there is a simple one: “Forget tax penalties; they do not sufficiently deter foolishness. Instead, ban early withdrawals outright. After all, retirement-plan investors receive a benefit from the government for deferring taxes. It is only fair that they give something back.” Only consider for a moment – if you knew as a matter of course when the money was being automatically deducted from your paycheck that you would never again be able to access it for anything pre-retirement – how might that affect your  opt-out decision? (My guess is you’d hold back some, if not all.)

[iii]Not to mention the widespread availability and applicability of Social Security, which, though technically an insurance, not an account-based program, ostensibly already has many of the attributes Rekenthaler prizes, while drawing 12.4% of all wages up through $137.700/year.

Has the 401(k) Passed its ‘Expiration Date’?

That’s the premise behind a recent column by Morningstar’s John Rekenthaler, who writes that “the plans are as good as they can be under the current framework – and that's not good enough.”

I had the pleasure of meeting John a number of years back – and I’ve been keeping up with his writing ever since. His columns are thoughtful and thought-provoking, his perspectives rational and well-reasoned, his commentary nearly always not only interesting, but entertaining. But on this one – well, let’s just say we disagree.

John acknowledges that his views on the 401(k) have “evolved,” and that while he has long been in the camp that called for improvements in the current system, a “defender” of the 401(k) – but now, apparently, he’s calling for an “overhaul.”

‘Leaky’ Assumptions

He doesn’t fault the current system for its perceived shortcomings; he notes that the 401(k) wasn’t designed to be a solution for the general public’s retirement, saw the growth in the 1980s and 1990s as “modest,” and while he apparently saw the advent of automated design solutions as “solving half the country’s problems,” that confidence seems to have been shaken by a couple of academic studies. And that’s where things begin to get shaky.

“Whether auto-enrolled or not, leakage from 401(k) accounts, caused by early withdrawals, is substantial,” he writes, going on to cite one paper that “shows for households under the age of 55, average 401(k) outflows equal 40% of the inflows. Another study, by Laibson's co-researcher Beshears, estimates that, within the first four years, 25% of the benefits of automated-enrollment programs are consumed by early withdrawals.”


Now, John’s not the first to have logic waylaid by respected academics. One of these “studies” got picked up in the Wall Street Journal back in 2018. I encourage you to revisit my analysis of that survey at your leisure, but here’s the salient part(s): this study is based on activity at a single firm. One. Granted, it’s described as a large (approximately 7,500-participant), Fortune 500 financial services firm – but it’s one that even the researchers concede has high turnover. It’s also, based on the salary information provided, one with relatively modest income workers. However, even with those impediments, automatic enrollment did “work” – transforming the plan’s participation rate from 62% to 98%.

That said, you can imagine what happened when the employer in question adopted automatic enrollment in a plan of modest income workers; you get more, albeit arguably smaller, account balances (also their contribution default was just 2%). And with a workforce that has high turnover – those smaller balances are more likely to be cashed out – and then create “leakage.” And apparently in this isolated circumstance, with contribution rates (and amounts) so low and turnover so high you can actually get a result that allows you to conclude with a straight face that the withdrawals add up to 40% of the inflows. A conclusion that might well be transformed by the casual reader into an assumption that the result could rationally be imputed to the 401(k) system at large  And then (with a similarly straight face) hold that  out as though that is in any way representative of the 401(k) system overall.

All in all, Rekenthaler’s issues with the 401(k) appear to be two-fold: the aforementioned issue with leakage[i] – and coverage. The former he apparently wants to rectify by “replacing early withdrawal tax penalties with a stronger deterrent.” However, since he appears to want to preserve a participant’s right to “opt out” of this new design, it seems fair to worry that restricting access to those funds will almost certainly diminish the amount(s) that workers are willing to set aside in those accounts. In other words, there may be less coming out – but then, there might well be (much?) less going in.  

Access Able?

As for coverage, Rekenthaler apparently wants to solve with some kind of program such that “Every worker at every company, in every state, in every industry, will have access to a New Retirement Plan.” Apparently he’s not referring to Social Security, though of course, it already extends that far.

However, when it comes to coverage, I share Rekentaler’s concern. As we’ve commented before, with all of its success, and expansion, with all the trillions of dollars now set aside for retirement, coverage remains an issue. We’ve estimated that nearly 5 million employers nationwide do not provide a retirement plan to employees, and as a result some 28,280,000 full-time employees still do not have access to an employer provided retirement plan.

Now, Rekenthaler’s hinted at a solution (he promises to unveil it today) – that involves “removing the employer from the system.”
And that’s where I think he makes a (really) big mistake.

There’s no doubt that a system that relies both on voluntary action on the part employers and an active response by workers will inevitably miss some – and indeed there’s no getting around the reality that, 40 years on, retirement plan coverage has, basically, “flat-lined”.

That said, there’s already a version of “removing the employer from the system” in place, of course – it’s the state-run programs for private sector workers in Oregon, and more recently in California. Proponents tout the contribution and participation rates of those programs as a success and – relative to their non-participation outside those programs–,that’s a fair assessment.

Of course, those contribution (5.5%) and participation (approximately 70%) rates pale in comparison to private sector plan experience, where participation rates in automatic enrollment plans typically exceed 90% and where the 62^nd annual Plan Sponsor Council of America (PSCA) 401(k) survey recently found a combined employer/employee contribution rate of 12.2%.

The involvement of the employer is even more compelling when you consider that even workers of relatively modest means (those earning $30,000-$50,000/year) are 12 times as likely to save for retirement ina tax-advantaged account if they have access to a plan at work.

There’s something to be said for making it easier to transport those accounts from one employer to another, for making it easier to roll them over into an IRA than to simply take the distribution in cash. That said, the problem seems not to be the 401(k) plan, but the lack of 401(k) plans – plans that thrive because of the support and encouragement of employers – not just in enrollment and education, but in the matching contributions which often accompany such undertakings. 

It’s been said that there’s no use crying over spilled milk. But it seems to me that discarding the 401(k) as “expired” would be like throwing out milk weeks ahead of its “best if served by” date.

- Nevin E. Adams, JD

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[i]With regard to leakage, while it’s an issue of some concern, none other than the non-partisan Employee Benefit Research Institute (EBRI) has previously considered the issue, and found that cashouts at job change were found to have a much more serious impact on 401(k) accumulation than either plan loan defaults or hardship withdrawals (even with the impact of a six-month suspension of contributions included, and though thanks to recent legislation, that should be less of an issue going forward. How much more? Well, cashouts at termination were approximately two-thirds of the leakage impact. 

‘Still’ Standing: 6 Key Industry Trends to Watch

The Plan Sponsor Council of America recently released its 62nd Annual Survey of Profit-Sharing and 401(k) Plans, documenting a record high rate of savings, alongside an uptick in Roth contributions and other trends. However, sometimes the things that don’t change can be just as telling…

Target-date trends (still) dominate, but… 

Let’s face it – target-date funds are one of the most common items on a plan investment menu today (the PSCA survey noted that it’s the option in which assets are most frequently invested) and – in no small part due to their prevalence as a default investment alternative – continue to garner a lion’s share of new contribution dollars, if older savers (perhaps more precisely, longer-tenured savers) haven’t embraced (or more accurately, been defaulted into) the option with as much enthusiasm. That said, while more than two-thirds (68.6%) of respondents offer a target-date fund option, that’s actually down 5% in the past two years.

Interestingly enough, the PSCA survey found a rough 50-50 split among respondents between those relying on target-date fund glidepaths that are “to” versus “through” retirement. Additionally, actively managed TDFs outnumber passive by more than two-to-one among plans with fewer than 5,000 participants. That is reversed among plans with more than 5,000 participants.

Robo-advice (still) isn’t making much headway.

Just 1 in 10 (10.9%) of plan sponsor respondents provide participants with access to a robo-advisor, and if that’s somewhat higher (approximately 15%) among larger programs, the vast majority do not.

However, it may be worth noting that 15.6% who don’t currently say they are considering the option, particularly among smaller programs – though in last year’s survey, that was 17.2%.

Automatic enrollment (remains) a large-plan feature.

Fewer than a third (30.5%) of the smallest programs offer the feature, and only about half (56%) of plans with 50-199 participants, compared with roughly three-quarters among larger programs. On the other hand, roughly a decade ago – when the Pension Protection Act of 2006 was new – only about a third (35.6%) of respondents to the PSCA survey offered automatic enrollment. But then, it’s now been a decade… 

Not that it’s not been considered – but asked why those that didn’t offer the feature had made that choice, the predominant reason given was satisfaction with participation rates.

However, among the largest (> 5,000 participants), the most cited rationale was… cost.

Once participants are enrolled, they (still) tend to “stick.”

The percentage of participants who opt out of automatic enrollment programs in private sector retirement plans has always been relatively small, generally 5-10%, and in this year’s PSCA survey some 70% say that the opt-out rate remains 5% – or lower.

That stands in some contrast with the data we have seen with the early state-run plan options, where the opt-out rate has been in the 25% and higher range, though those programs lack an employer match and the nurturing that employment-based plans typically provide. And, arguably, the 75% who “stick” there are better off than with no plan at all.

Financial wellness is (still) largely a large plan feature. 

While nearly half (45.8%) of the largest (5,000 or more participant) programs claim to have a “comprehensive financial wellness program,” only about a quarter (27.1%) of those with 1,000-4,999 participants do, as do only 22% of those with between 200-999 participants.

For all the coverage that the subject engenders – and it’s considerable in this space – it’s not unusual to find awareness and interest gaps among plan sponsors, with perspectives ranging from ignorance to ambivalence to downright skepticism, even among large plan sponsors. The data here (and in other surveys of plan sponsors) suggest that the concept/focus is far from universal.

Traditional success measures (still) dominate.

Participation rates remain the dominant success measure of plans of all size: 87.6% overall, and more than 95% of the largest programs, cite that benchmark. Deferral rates rank second – 75.8% overall, but higher among larger plans, with average account balances a distant, but (to my eyes, anyway) a remarkably robust third.

For all the talk about an expanding focus on outcomes, income replacement ratios are a distant fourth, although 42% of the largest programs (those are the ones with the financial wellness programs, after all) do track this benchmark. Of course, particularly with a voluntary approach to retirement saving, employers may well be hesitant to establish as a benchmark of success the attainment of a goal that is not only unique to each individual, but generally outside of their ability to control or influence.

Though we can hope that participants – who do have some control over that outcome – are paying attention.
Industry surveys, particularly those with a broad range of plan types and providers and the perspective of decades that PSCA’s survey spans, provide an invaluable sense and appreciation of not only where things stand, but also how far we’ve come.

And sometimes, even when the trend is more or less status quo, and perhaps even more so, their real value lies in helping us see where we need to be.

- Nevin E. Adams, JD
 
More information about the Plan Sponsor Council of America’s 62^nd Annual Survey of Profit Sharing and 401(k) Plans is available at www.psca.org.

‘Things,’ Remembered – 2019

It is something of a tradition this time of year to look back, to reminisce about past events and lessons learned, and sometimes to look ahead – and who am I to buck that trend? Here’s a look back – and some “things” that I hope will help lay the groundwork for a productive and prosperous 2020 for both you, and those you serve.

‘THINGS’ FOR PLAN FIDUCIARIES

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.

6 Things That Scare Plan Fiduciaries

Halloween is the time of year when one’s thoughts turn to trick-or-treat, ghosts and goblins, and things that go bump in the night. But what keeps – or should keep – plan fiduciaries up at night? Well, there are the things like…

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.

4 Fiduciary Lessons from the Game of Thrones

I was late to the Game of Thrones – and though its final season seems a bit “rushed” – there has been plenty to not only watch, but mull over in its eight-season run. And yet, as the series wound to a close on Sunday night, I kept thinking there were some lessons for retirement amidst the mayhem.

5 Things Your Plan Committee Members Need to Know

Over the past decade and change, there have been a number of high-profile excessive fee suits brought against retirement plan fiduciaries, notably the plan committees that oversee these programs. Here’s what your plan committee members should know.

‘THINGS’ FOR PLAN PARTICIPANTS/WORKERS

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.”

5 Things Your Retirement Can (Still) Learn From Game of Thrones

Whether you are a Game of Thrones aficionado – or haven’t watched a single episode – there are lessons to be learned nonetheless.

4 Things Those Who Aren’t Saving for Retirement Should Know About Saving for Retirement

While there are plenty of good reasons to save, we all know that it can be tough to start. But in that spirit, here are four things that those who aren’t (yet) saving for retirement should know.

11 Ways 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?

- Nevin E. Adams, JD

ERISA Litigation – The Year in Review

There were a lot of ERISA litigation settlements in 2019 – but how are those trending?

An analysis by Bloomberg Law finds that class settlements in employee benefit disputes hit $449 million in 2019 – a figure that they noted was up significantly from 2018’s $291 million, but well short of the $559 million in settlements recorded in 2017.

That said, “only” about half of the 2019 “tab” – some $193 million – came from excessive fee suits, according to the report. The average of such settlements? $12 million.

In March, the parties in Tussey v. ABB, one of the oldest (2005) excessive fee suits, came to terms for $55 million. Other settlements announced included:

• Northrop Grumman ($16.5 million); 
• a 2017 stable value suit settlement finally approved; 
• the settlement terms of two fiduciary breach suits involving Safeway’s 401(k) plan, its investment structure, plan consultant, and selection of target-date funds have been submitted for court approval; 
• another suit involving the $2.3 billion 401(k) and 403(b) plans of the Allina Health System (which was for $2.425 million); and 
• a $1.2 million settlement with the $96.5 million 401(k) plan of Gucci America Inc. This settlement pales in comparison to the normal multi-billion dollar plans that normally draw the attention of the plaintiffs’ bar, but even here the plaintiff cited the plan’s “substantial assets” and said that the plan fiduciaries “…have significant bargaining power and the ability to demand low-cost administrative and investment management services within the marketplace for administration of 401(k) plans and the investment of 401(k) assets.” 

‘Excessive’ Forces

Another grouping came with the so-called excessive fee suits involving university 403(b) plans. The year saw five of those settled, the largest – and in many ways the most bizarre (allegations of a quid pro quo between the University and recordkeeper Fidelity, whose CEO Abigail Johnson sits on the university’s Board of Trustees) – was with MIT, which settled with plaintiffs represented by Schlichter Bogard & Denton for $18.1 million – and, what seems to be emerging as a trend in these cases, a series of non-monetary commitments for RFPs, changes in revenue-sharing practices, and even training for plan fiduciaries.

The largest settlements prior to MIT were with Vanderbilt University, which in April 2019 announced a $14,500,000 cash settlement, as well as a long list of process/procedural changes that were also to be monitored over a three-year period, and Johns Hopkins, which settled for $14,000,000, also alongside a number of plan design/procedural changes. In March, Brown University settled for $3.5 million, as well as “other, structural relief” – and a $10.65 million settlement, also alongside a series of changes in plan administration was approved in February.

However, on that “score,” it’s worth noting that St. Louis-based Washington University, New York University and Northwestern University have thus far prevailed in making their cases in court. The University of Pennsylvania, which in 2017 won at the district court level, in 2019 had that decision partially overturned by an appellate court. The plan fiduciaries’ motion for an en banc review of that decision was rebuffed earlier this year, but just ahead of the holidays, they petitioned the nation’s highest court to weigh in on the threshold for getting to trial.

‘Self’ Serving?

Financial services companies that included their own funds in their 401(k)s also found themselves a target of litigation in 2019, among those striking deals were SEI ($6.8 million), MFS ($6.875 million), Eaton Vance ($3.45 million), Franklin Templeton ($4.3 million, announced in 2018) – though the terms in the latter, particularly as regards the attorney fees – were not without controversy.
In November, the parties in a suit involving Invesco announced a settlement, but those terms haven’t yet been announced.

As it turns out, those settlement numbers are lower than those seen in 2018, according to Bloomberg. However, it’s also worth noting that we began the year with a big victory by the American Century plan fiduciaries where many of the allegations that have been widely made in these excessive fee cases were refuted by testimony and documentation that revealed the kind of thoughtful, ongoing, due diligence process that plan fiduciaries are often counseled to undertake.

But if you’re wondering where the “big” money was in ERISA litigation in 2019 – there was $100 million by Dignity Health to end a church plan lawsuit (though that settlement hasn’t yet been approved, pending a resolution on the issue of attorneys’ fees), and SSM Health Care Corp. and St. Anthony Medical Center Inc. settled church plan lawsuits for $60 million and $4 million, respectively, according to the report. These (and a number of 2018 settlements) came in the wake of a 2017 decision by the U.S. Supreme Court regarding these programs at religiously affiliated hospitals that treat their pension plans as ERISA-exempt “church plans.” The lawsuits alleged that the hospitals abused ERISA’s religious exemption to significantly underfund their pensions.

What Next?

It seems likely that proprietary fund suits will continue to emerge (as a couple did in Q4), and while the American Century case would seem to provide a solid roadmap for defense, settlement – and settlement on the scheduled date of trial – seems to be becoming the order of the day. While the university suits seem likely to continue, that could change if the Supreme Court takes up, and decides in favor of the University of Pennsylvania defendants. As for whether excessive fee litigation will (finally) move down market – there’s evidence (the Gucci case noted above) that such things remain possible, though the contingent fee nature of compensation for the plaintiffs’ bar may serve to hold such things in check for a while longer. And yet, there are smaller law firms just now entering the “fray”… 

Advisors? Well, they’ve mostly avoided being drawn into the crosshairs of ERISA litigation – but not always.

If we’ve learned nothing else from this year of litigation, it’s what we’ve always known: a prudent process (eventually) prevails.

But sometimes it’s (apparently) cheaper to just settle.

- Nevin E. Adams, JD

A Retirement Savings Santa Claus?

A few years back — well, now it’s quite a few years back — when my kids still believed in the reality of Santa Claus, we discovered an ingenious website that purported to offer a real-time assessment of their “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 we said or did 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) was on the verge of tears, worried – after a particularly cautionary status - that he'd find nothing under the Christmas tree but the coal and bundle of switches he so surely “deserved.”

In similar fashion, must of those responding to the ubiquitous surveys about their retirement confidence and preparations don’t seem to have much in the way of rational responses to the gaps they clearly see between their retirement needs and their savings behaviors. Not that they actually believe in a retirement version of St. Nick, but that’s essentially how they behave. That despite the reality that a a significant number will, when asked to assess their retirement confidence, express varying degrees of doubt and concern about the consequences of their “naughty” behaviors.

Indeed, one could certainly argue that many Americans act as though at retirement some kind of benevolent elf will drop down their chimney with a bag full of cold cash from the North Pole. They carry on as though, somehow, their “bad” savings behaviors throughout the year(s) notwithstanding, they'll be able to pull the wool over the eyes of a myopic, portly gentleman in a red snowsuit.

Unfortunately, like my son in that week before Christmas, many worry too late to influence the outcome.

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 truly expected it to modify their behavior (though we hoped, from time to time), but because we believed that children 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 — that those possibilities are frequently bounded in by the reality of our behaviors. And while this is a season of giving, of coming together, of sharing with others, 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 personal behaviors – including our savings behaviors.

Yes, Virginia, as it turns out, there is  a retirement savings Santa Claus — but he looks a lot like you, assisted by “helpers” like your workplace retirement plan, the employer match, and your retirement plan advisor.

Happy Holidays!

- Nevin E. Adams, JD
 
P.S.: Believe it or not, the Naughty or Nice website is still online, at http://www.claus.com/naughtyornice/index.php.htm.

Easy Come, Easy Go?

Earlier this year, I commented that it would be interesting to see how expanded access to hardship withdrawals might impact that activity. Now we have some answers.

There’s more than a little irony in a legislative body that has long bemoaned both the paucity of retirement savings and the nefarious impact of “leakage” (pre-retirement withdrawal of retirement savings) opening those floodgates a little wider – but mostly the new law, and clarifying regulations[i] seemed to provide plan sponsors a bit more flexibility in administering these programs, some welcome latitude in helping their workforce navigate choppy financial waters.

What remained unknown was – would participants take advantage – or, more precisely, would they abuse the privilege.

The first sign – and it was a bit of an eye-opener – came from Fidelity who, in a white paper, claimed to have seen a shift in participant behavior. Not in the percentage of participants taking loans and hardships overall, but - at least among Fidelity-recordkept plans, there were fewer loans and more hardships. Less than 6 months after the law took effect, based on the evidenced trends, they predicted that the annual loan rate for 2019 would dip slightly to 9.2%, while the annual hardship rate would rise to 4.4% – up from about 3% in 2018 and an average rate of 2.2% since 2009, according to their data.

Intrigued, I posed the question to NAPA-Net readers in early October – and the responses indicated that while the move to embrace the option was underway, it was – well, it was still underway. Just over a third (35%) said the rules were already in place at most of their clients, and nearly a quarter (24%) said they were already in place at all of their clients, while another 23% said they were in place at “some” of their clients. The rest were in “not yet” territory. The most surprising aspect (to me, anyway) was the lack of plan sponsor response to the impact of the changes (at least in earshot of their advisors).

Now we have a direct response from plan sponsors, courtesy of a “snapshot” survey on the subject by the Plan Sponsor Council of America. The PSCA found that nearly two-thirds (65%) of respondents already have adopted the new hardship provisions. However, most (73%) reported no change in the number of hardship withdrawals since the new provisions were implemented. Fewer than one in five (17.8%) noted an uptick in hardship withdrawals in 2019 – but even among those that did, the vast majority (92%) are not considering any changes to their provisions at this time. Indeed, most plan sponsors amended their plans even where change was not mandatory; 65.1% eliminated the requirement to take plan loans before taking any hardship withdrawal, and 59.6% expanded the assets available for hardship withdrawals to include earnings on 401(k) contributions. More than half (52.3%) voluntarily expanded the list of reasons that qualify for a hardship distribution.

It's still early to assess the long-term impact of these changes, of course, though plan sponsors appear to have embraced them without much hesitation. And if the recent take up rates have been pretty much status quo – well, the markets and unemployment numbers have been good, and the natural disasters that often produce upticks in financial hardships have been muted of late. Yes, it’s early to evaluate the impact – to see if greater access will mean more access, to see if removing barriers does, indeed open floodgates, or if knowing that it will be easier to access the money, individuals are less inclined to do so.

In sum, to see if addressing the hardships of today wind up creating hardships down the road.

- Nevin E. Adams, JD

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[i]The expanded access, of course, came courtesy of the Bipartisan Budget Act of 2018, which, among other things, set aside or made optional several of the penalties and restrictions that had long been in place to discourage usage, and/or to ensure that the request was “serious.” This included aspects like the requirement to take a plan loan first (it’s now optional), and more significantly, the suspension of contributions. The changes not only broadened not only the categories of contributions eligible for hardship (it now includes matching contributions and non-elective contributions, as well as earnings on those accounts), but also included changes in the ability to qualify for a hardship distribution in the case of casualty losses and losses associated with federal disaster areas. The IRS also loosened the rules for determining the status of a hardship – arguably lessening the burden of both requesting and approving these distributions (final regulations were published in September).

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