Three ‘Scary’ Things That Give Plan Sponsors Chills

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—and, for plan sponsors, and those who support them, a good time to think about the things that give us pause—that cause a chill to run down our spine… 

Things like…

Changing Providers

OK, they may not exactly be “scared” of changing providers, but it’s certainly not a process for the faint of heart—particularly with all of the competing focus priorities confronting plan sponsors on a daily basis. Industry surveys routinely point to a certain amount of regular provider “churn”—indeed, by some counts as many as 10% of the plans change providers in any given year. That said, industry surveys (and excessive fee litigation) are replete with indications that the vast majority of plans not only don’t change recordkeepers, but may not even undertake a formal review of services, fees and capabilities.

Now, any plan sponsor who has ever gone through a recordkeeping conversion knows that, however smooth the transition, and regardless how improved the experience on the new platform, moving is a lot of work. And, as with relocating your home, the longer you have been in a particular location, the harder it seems to be (there are inevitably a lot of “skeletons” in those closets). Knowing that, it’s little wonder that many plan sponsors make those changes only under a duress of sorts, forced by poor service, a lack of capabilities, (relatively) high fees—and sometimes more than one of the above. 

And that, of course, means that the transition, however badly needed or desired, will likely be rougher—and take longer—than anticipated or desired (see also 3 Things Plan Sponsors Should Know About Changing Providers). And who knows how many intentions to pursue a review have simply petered out on the altar of “not enough time” to do so?

ESG

In fairness, it’s probably not Environmental, Social & Governance (ESG) investing per se that seems to “scare” plan sponsors from offering these options, but rather concerns about their level of accountability for choosing to do so. Indeed, there’s plenty of survey data to suggest that workers, particularly younger ones, want these options. That said, workable, consistent definitions of ESG remain fluid, and perhaps as a result, the adoption rate among DC plans has been tepid—and the take-up rate among participants who have the option is even lower. Indeed, fewer than 3% of plan sponsor respondents included that option on their plan investment menu, according to the Plan Sponsor Council of America’s 63^rd Annual Survey of 401(k) and Profit Sharing Plans, and only about 0.1% of plan assets were invested in those options. Those looking for a counterpoint might note that ESG options were more common among the largest plans (those with more than 5,000 participants) and the smallest (fewer than 50 participants), where 4.2% and 4.4%, respectively, offered that option.

The hesitancy likely comes (at least in part) from confusion about how the Labor Department views these options, or more precisely the prudence of including them as a participant investment option. For a long time there had “only” been Interpretive Bulletins (IBs) (in 1994, 2008 and 2016) and, more recently, a 2018 Field Assistance Bulletin (FAB) on this subject. And while the 2016 IB was read as encouraging consideration of ESG factors (or at least not discouraging it), the 2018 FAB was widely viewed as pulling back on that stance, in the process establishing what had been called the “all things equal” standard, which meant that so long as two otherwise identical investments met all the requisite prudence standards, a fiduciary could (prudently) pick the one that (also) had ESG attributes. 

And then, roughly a year ago, the Trump administration weighed in with a proposed rule that was harshly critical of ESG (unless a “pecuniary”—that is, financial—rationale was evident)– and ultimately a final one that moved off that stance a bit, but still left room for caution. 

After first announcing that it had no intention of enforcing that rule, the Biden administration’s DOL has recently provided a (new) proposed rule that—arguably—puts these options in a more positive light. Indeed, in its current form it actually seems more supportive than the “all things equal” standard put forth by the Obama administration, though it remains a proposed rule, with comments being taken for consideration in shaping a final version.    

All of which arguably (still) leaves plan sponsors contemplating a shift to ESG with a lingering uncertainty. They may not be “scared,” but one can certainly understand a bit of as-yet-unresolved apprehension.

Lifetime Income Options

Speaking of apprehension, while DC plan fiduciaries aren’t exactly scared of retirement income, DC plans have long eschewed providing those options. That despite the unquestioned reality that participants need help structuring their income in retirement—and little doubt that a lifetime income option could help.

There are in-plan options available in the marketplace now, of course, and thus, logically, there are plan sponsors who have either derived the requisite assurances (or don’t find them necessary) or feel that the benefits and/or participant need for such options makes it worth the additional considerations. On the other hand, those industry surveys notwithstanding, for the most part participants don’t seem to be asking for the option (from anyone other than industry survey takers)—and when they do have access, mostly don’t take advantage. Let’s face it, even when DB pension plan participants have a choice, they opt for the lump sum. 

It’s ironic that programs designed to provide retirement income pay so little attention to the realization of that objective; only about half of DC plans currently provide an option for participants to establish a systematic series of periodic payments, much less an annuity or other in-plan retirement income option, and that’s despite the 2008 Safe Harbor regulation from the Labor Department regarding the selection of annuity providers under DC plans (which was designed to alleviate, though it did not eliminate, those concerns), not to mention a further attempt to close that comfort gap in 2015 (FAB 2015-02).

Proponents are even more hopeful that the SECURE Act’s provisions regarding lifetime income disclosures (though many recordkeepers already provide some version of this), enhanced portability (a serious logistical challenge if you ever want to move from a recordkeeper that provides the service to one that doesn’t, though solutions are emerging that claim to have made progress on this front) and, perhaps most importantly, an expanded fiduciary safe harbor for selection of lifetime income providers, will—finally—put those “fears” to rest. We’ll see.

The Standard

Don’t get me wrong—there are plenty of things for ERISA fiduciaries—who are, after all, personally liable not only for their actions, but those of their co-fiduciaries—to be worried about. The standards with which their conduct must comply are (as one court has put it) “the highest known to law,” and with good reason. Prudence is often associated with caution, and fiduciaries generally find more comfort in the middle of the trend “pack” than on its fringes.

That said, the standard is to act (solely) in the best interests of plan participants and beneficiaries—and even though it may be “scary” from time to time… the alternative is surely worse…

- Nevin E. Adams, JD

Are We Ready for Retirement Income?

 It’s ironic that programs designed to provide retirement income pay so little attention to the realization of that objective.

That’s right—for the vast majority of participants today, creating that “paycheck for the rest of your life” remains a DIY undertaking. To this day only about half of defined contribution plans currently provide an option for participants to establish a systematic series of periodic payments, much less an annuity or other in-plan retirement income option. 

However, the need for that solution is widely acknowledged—and there are some new, if somewhat familiar, solutions emerging. 

Earlier this month, BlackRock garnered some headlines with news that not only was it building annuity contracts into a target-date fund series, but also that it had already lined up five large plan sponsors (with some $7.5 billion in assets) to implement the option as a default. 

That followed by a few months the March announcement of a consortium of providers (American Century Investments, Lincoln Financial Group, Nationwide, Prime Capital Investment Advisors, SS&C Technologies, Wilmington Trust, N.A. and Wilshire) that had collaborated on a new in-plan target-date fund series with guaranteed income for life baked in. One that is also purportedly “portable among major recordkeepers where Income America 5ForLife is available”).

SECURE ‘Acts’

Those announcements, of course, came in the wake of the SECURE Act, which included three specific provisions designed to overcome the reluctance of plan fiduciaries (and participants?) to embrace these options:

• Portability—generally, it permits special distributions of a “lifetime income investment” when the investment is no longer authorized to be held under the plan, which makes it possible for a participant to keep the investment even if the plan sponsor changes recordkeepers or decides to eliminate the investment from the plan lineup. 
• Disclosures—requires plans to give participants projections of their current account balance as a monthly benefit using assumptions prescribed by the Secretary of Labor, a provision designed to help participants better understand what their projected retirement savings will produce in terms of monthly income in retirement. Or, said another way, to help get them oriented to thinking about turning that retirement savings balance into that proverbial paycheck for life.
• Fiduciary Safe Harbor—which, in essence, provides that a DC plan fiduciary that selects a “guaranteed lifetime income contract” to be offered under its plan, he/she will be deemed to have acted prudently if it follows a series of steps outlined in the law. That means that the fiduciary will not be liable if the insurance company later defaults on its obligation to participants who invest in the contract.

It remains to be seen if all this will actually move the needle—but they do seem to directly confront—and, at least potentially—resolve the issues that have long been put forth as objections to the embrace of lifetime income options on a retirement plan menu. Indeed, both offerings also deal with the more traditional objection to annuity products—their cost—if they actually work.

There’s no question that participants need help structuring their income in retirement—and little doubt that a lifetime income option could help (certainly with some help from a trusted advisor). Wrapping a complicated product (and lifetime income is complicated) in a relatively simple product is certainly one way to ease acceptance. Moreover, doing so with a product in which contributions are defaulted should certainly improve the rate of adoption by participants—if plan sponsors are inclined to make it available on that basis. 

And if advisors are willing to help. 

- Nevin E. Adams, JD

Resource Full?

A great resource to help you grow and expand your business could be right under your nose…

Are you spending time you don’t have trying to work out problems you didn’t create? Let’s face it—good service, or the lack thereof, is widely cited as the most common reason that plan sponsors change providers—and that can affect your relationship as well. Sometimes you chose those providers, other times you inherit them. 

Regardless, every plan has someone in charge of administration and compliance—a third party, if you will, so called because they perform functions that plan sponsors are expected to ensure are performed (and once upon a simpler time many did so themselves). Whether you engaged those services, or find yourself tasked with overseeing them, you know they can be the difference between a smooth-running plan and one that constantly teeters on the brink of blowing up. Wouldn’t it be nice if you could partner with this “third party” administrator to take some of the burden off your shoulders and give you the time you need to spend elsewhere?

Not that the solution is unknown—roughly a year ago, we surveyed NAPA advisors, and found that nearly all (96%) partner with specific third-party administrators; just over half (55%) focus on one to three firms, while a quarter limit it to just one. Not surprisingly, service was cited as the primary consideration in choosing a TPA partner (56%), while fewer than half as many (26%) cited an ability to help with plan innovation. However, nearly half (45%) of the survey respondents said that less than a quarter of their new business is sold with a TPA.  

The reality is, of course, that like advisors, all TPAs are not created equal—they have different strengths and skillsets, and wildly different ideas as to their responsibilities and services. That makes it hard to obtain an apples-to-apples comparison. Indeed, the fact that each recordkeeper has a different process for just about everything makes it easy for things to fall by the wayside if you don’t have a clear assignment of responsibilities with every party.

Do you prefer the simplicity of a bundled solution? Well, they’re also a TPA, though again many define their process and services differently. Ultimately, the value a good TPA can (and arguably should) add to your practice are things like:

• Free up time. With price compression, find ways to leverage partners to provide services so you don’t have to. They’re a—if not the—point of contact for administrative questions, solving the day-to-day problems, things like that. 
• Help you win business. By partnering with you to craft customized solutions, where appropriate, for your customers—and prospects. They can/should be your right hand technical expert both in attracting and retaining good clients.
• Ensure that your client’s plan remains in compliance. At times it seems as though 1,000 different things can go wrong on any given day—and there’s clearly value both in administering the plan competently so that problems are avoided, and knowing how best to remedy the situation when those problems inevitably do arise. They not only bring specialized knowledge, but also the opportunity of providing a single point of contact for technical issues involving plan administration and testing. 

Bundled or unbundled, a good TPA can be a plan advisor’s best friend. Ultimately, the choice to use a TPA—or which TPA is chosen—may depend on the size of a plan or the plan sponsor’s particular needs. As with everything in life, the relationship and cultural fit is paramount. 

In (too) many situations recordkeeper/TPAs seem to be viewed not merely as a third party, but as a third wheel—someone who at best is a necessary evil —and at worst, destructive to its smooth operation. 

That said, a deliberate, thoughtful—dare I say “prudent”—partnership with these “third” parties, one that specifies assignments, roles and responsibilities—in that review meeting, and on an on-going basis can not only free up your time, but provide better service, higher client retention, more sales opportunities, and improved legal and operating compliance for the plan sponsors you serve.

Let’s face it—if they’re not an active, engaged member of your team, they should be.  

- Nevin E. Adams, JD

‘Might’ Makes… Wrong?

 Sometimes the motivations of those attacking the 401(k) are pretty obvious.

The most recent was an article by a Maurie Backman at the Motley Fool titled, “Why a 401(k) isn’t the wonderful savings tool you think it is.” I tried to ignore it when it first (to my eyes) appeared on Forbes (which seems to have a pretty low threshold for contributions these days), and I was no more inclined to read it when it showed up a couple of days later on Fox News. But then folks started sharing it on both LinkedIn and Twitter—some ostensibly to hold it up for ridicule,[i] others as an affirmation—and, with some reluctance, I finally clicked on the article. 

Oddly, considering the title (and, in fairness, editors have been known to tweak headlines such that they bear little resemblance to the article they are attached to), the article spent almost as much space outlining the virtues of the 401(k)—specifically that they are “easier to sign up for” than an IRA, and that they have (much) higher annual contribution limits, even for catch-up contributions.

So, what’s their beef(s)? Backman makes three points:

1. That investment choices in a 401(k) can be limited (specifically that you generally can’t buy individual stocks).
2. That fees in a 401(k) can be high (the issue here seems to be the inclusion of actively managed funds alongside index offerings—and an assertion that “401(k)s plan come with administrative fees that generally are not negotiable. The administrative fees you'll pay with an IRA are typically much lower”—an assertion that doesn’t align with my experience, but is offered without data).
3. That a Roth option isn’t guaranteed (this factual assertion despite the fact that the most recent data from the Plan Sponsor Council of America that more than two-thirds of 401(k)s do currently provide the option).

To sum up: According to the article that claims the 401(k) isn’t a wonderful savings tool, the suboptimal aspects of a 401(k) are: (1) the options might not include individual stocks; (2) the fees can be high; and (3) you aren’t guaranteed to have the ability to save for retirement on a Roth basis—even though, by the author’s own admission, 401(k)s have much higher contribution limits and are easier to access, and thus are much more likely to be used (recall that data indicates individuals are 12-15 times more likely to save in a 401(k) than in an IRA on their own). Oh—and there’s only a passing reference to the employer match, which arguably also isn’t “guaranteed,” but is certainly more likely to be found in a 401(k) than in a stand-alone IRA.  

Perhaps it should come as no surprise that an article penned by the Motley Fool—a platform that purports to help individuals make stock picks—thinks that you’d be better off utilizing a retirement savings plan[ii] that would more readily accommodate their services. 

Yes, sometimes the motivations of those attacking the 401(k) are pretty obvious. The motivations of those choosing to publish such silliness? Not so much.

- Nevin E. Adams, JD

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[i] Memo to those who did—clicking on the article is the whole point; sharing it only exacerbates the problem.  

[ii] To add to the irony, the article sums up its advice thusly: “What you should do in that case is contribute just enough money to your 401(k) to snag your full employer match, if one is offered, but then put the rest of your savings into an IRA. Doing so could help you invest more appropriately, avoid high fees, and enjoy the perks of a Roth saving option.” 

5 Plan Committee Missteps

There is frequently a difference between doing what the law requires and doing everything that you could do as a plan fiduciary. That said, there are things that plan fiduciaries must do—and things that, while not required, can keep the plan, and plan fiduciaries out of trouble.

Let’s get started.

1. Not having a plan/plan investment committee

ERISA only requires that the named fiduciary (and there must be one of those) make decisions regarding the plan that are in the best interests of plan participants and beneficiaries, and that are the types of decisions that a prudent expert would make about such matters. ERISA does not require that you make those decisions by yourself—and, in fact, requires that, if you lack the requisite expertise, you enlist the support of those who do have it. 

You may well possess the requisite expertise to make those decisions—and then again, you may not. But even if you do, why forego the assistance of other perspectives?

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

2. Not HAVING committee meetings

Having a committee and not having committee meetings is potentially worse than not having a committee at all. In the latter case, at least you ostensibly know who is supposed to be making the decisions. But if there is a group charged with overseeing the activities of the plan, and that group doesn’t convene, then one might well assume that the plan is not being properly managed, or that the plan’s activities and providers are not prudently managed and monitored, as the law requires.

3. Not keeping minutes of committee meetings

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

More significantly, those minutes can provide committee members—both past and future—with a sense of the environment at the time decisions were made, the alternatives presented, and the rationale offered for each, as well as what those decisions were. They also can be an invaluable tool in reassessing those decisions at the appropriate time and making adjustments as warranted—properly documented, of course.

4. Not having an investment policy statement

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

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

5. Not removing ‘bad’ funds from your plan menu

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

Being a plan fiduciary is a tough job—and one that, it’s probably fair to say—is underappreciated, if not undercompensated. Despite that, in my experience, most who find themselves in that role I think do an admirable job of living up to the spirit, if not the letter, of their responsibilities.

If you’re taking the time to read this, odds are you are probably doing a better-than-average job as a plan fiduciary (or at least the person who shared it with you is). I hope you find this list informative, and that you draw insight and comfort from its contents, as well as a reminder of the awesome responsibilities of an ERISA plan fiduciary.

- Nevin E. Adams, JD

Never Forget

 While the past 18 months have often felt like we’re living through an episode of The Twilight Zone—never more so that to realize that this week marks the 20^th anniversary of the September 11 attacks. 

It’s hard to believe that there are today people in college—and in the workforce –that weren’t even alive on that most horrific of days. In fact, it’s been labeled a defining event for Millennials—a date marker between those who were alive on that date and those (Generation Z) who weren’t. That said, the passage of time has surely dimmed the memory for many who did live through it. More’s the pity.

Early on that bright Tuesday morning in 2001, I was in the middle of a cross-country flight, literally running from one terminal to another in Dallas, when my cellphone rang. I was annoyed—the hour was early, my flight in had been late, and the bugger between that and the next uncomfortably short—particularly for a flight that was in another terminal.  

It was my wife—I assumed she was simply checking to see if I had landed safely—and she was, though not for the reasons I thought. I had been on an American Airlines flight heading for L.A., after all—and at that time, not much else was known about the first plane that struck the World Trade Center on that fateful day. I thought she had to be misunderstanding what she claimed to have seen on TV. 

Would that she had…

My first thought was to try and get on a flight back home—fortunately my travel agent’s first thought was to get me a hotel room. Sure enough, on that most awful of days—I wound up stranded hundreds of insurmountable miles away from family and friends. It was, without a doubt, the longest day—and loneliest night—of my life. 

In fact, I was to spend the next several days at that Dallas hotel. There were no planes flying, no rental cars to be had—nowhere to go for what turned out to be three interminably long days. As that long week drew to a close, I was finally able to get a rental car and begin a long two-day journey home. It was a long, lonely drive, but one that gave me a lot of time to think, though most of that drive was a blur, just mile after endless mile of open road with nothing but AM talk radio to fill the void.

And then, somewhere in a remote section of Arkansas, I spotted something approaching in my rearview mirror. Not surprisingly, there wasn’t much traffic out—and it had been a couple of hours since I had seen anyone at all, so the movement caught my eye. Coming up fast behind me was a group of bikers—at least a couple of dozen of them, spread out across the highway—led by a particularly “scruffy” looking guy with a long beard and lots of menacing tattoos on a big bike. Out in the middle of nowhere, all alone on this deserted highway—well, I was nervous to say the least as they pulled alongside. 

And then, as the lead cyclist pulled past me—I saw unfurled behind him on that big bike—an enormous American flag. 

At that moment, for the first time in 72 hours, I felt a sense of peace—the comfort you feel inside when you know you are going… home.

I’ve thought back on that day—and that feeling—many times since then. Without question this year and change has been one of extraordinary pain and suffering; one full of tensions, grief and anger that seems at times destined to pull our nation apart at the seams. But two decades on, I not only can still feel that ache of being kept apart from those I love as if it were yesterday—but also the calm I felt when I saw that biker gang drive by me flying our nation’s flag. 

On not a few mornings since that awful September day, I’ve thought about how many went to work, how many boarded a plane, not realizing that they would not get to come home again. How many on that day sacrificed their lives so that others could go home. How many still put their lives on the line every day, here and abroad, like those 13 souls in Afghanistan, to help keep us and our loved ones safe.

We take a lot for granted in this life, nothing more cavalierly than that there will be a tomorrow to set the record straight, to right wrongs inflicted, to tell our loved ones just how precious they are. The reality is, we don’t know—and if nothing else these past 18 months should remind us that we shouldn’t depend upon it. 

So, this weekend, as we remember that most awful of days, and the loss of those no longer with us, let’s all take a moment—together—to treasure what we have—and those we have to share it with still.

Peace.

- Nevin E. Adams, JD

Limiting Fiduciary Liability (Costs)

A recent survey of insurers highlights the criteria that a number of the nation’s leading fiduciary liability insurers identified as the biggest sources of fiduciary risk—within the control of plan fiduciaries. 

Now, arguably, the report—titled “What Drives Fiduciary Liability?”—might have been more accurately titled “What Drives Fiduciary Liability Insurance Costs?”—or even more precisely “What Drives Fiduciary Liability Insurance Costs That You Can Do Something About?” Indeed, the report’s authors note that it was specifically focused on sources of risk that are within the control of fiduciaries. That’s key, because there are things that attract litigation (such as plan size or even stock price) that aren’t. 

Moreover, the survey respondents (there were 8 of the 12 that Aon said account for 85% of the total gross written premium placed by the firms in 2020) were asked only to evaluate pricing criteria as having a significant, small or nonexistent impact—though one might want to find something between significant and small, at least.

The survey’s authors identified five key takeaways—and while there are more elements discussed in the report, that seems a good place to start:

1. Fees are very important.

Well, to quote Homer Simpson, “doh.” Indeed, the only surprises here are that (only) 88% of the respondents identified periodic fee benchmarking reviews by the investment committee as a “significant” driver of insurance premiums; (just) 75% said it was significant if the plan uses revenue-sharing or Sub-TA type revenues; and (a mere) 63% said that using retail mutual fund share classes would fall in that category. Granted, with only 8 respondents (albeit with big market share), we’re talking small numbers.

Moreover, note that these points aren’t about what the fees are, and certainly not what they are relative to the services provided (the true measure of “reasonable”), but about fee structures and process. It is, in other words, about what might be seen as the “appearance” of impropriety. Indeed, as has been borne out in litigation, there’s no legal issue with any of the foregoing—but all of these practices (or, in the case of the review, non-practices) have been challenged as if they were themselves a violation, or at least an indicator, of a fiduciary breach. 

Suffice it to say that if the plan is currently doing (or not doing, in the case of a review) these things, you should be sure to have prudently considered the reasons—and to have documented that consideration—but can likely expect to pay more in insurance premiums, regardless. 

2. Committee minutes are important, but it matters less who takes them.

Only a third of the survey respondents said that taking formal minutes was a “significant” factor (the rest said the impact was “small”—bearing in mind that the only other option was “nonexistent”), so I have a feeling that the Aon report authors exercised a little editorial “discretion” in positioning that as important. In fact, that seemed very low to me, certainly in view of the impact in persuading a judge (much less a DOL auditor) that you do, in fact, have a prudent process in place. Perhaps it reflects what still seems to be a consistent caution from the legal community: that such things can be a “smoking gun” in litigation. On the other hand, I’ve seen committee minutes be effective shields in having cases dismissed at the pleading stage, so…

The report does indicate that there is no particular advantage in having an advisor or legal counsel act as scribe, though the latter might well limit the “smoking gun” risk.

3. Investment advisors are viewed as a moderate influencer of premiums.

This one was a bit of a head-scratcher as well—perhaps reflecting the varying quality and expertise of the investment advisors whose expertise might be tapped. The Aon report said the responses were split almost evenly among the impact of an advisor being deemed as significant, small or nonexistent, and even when going on to qualify that statement (with the quality of the advisor), only a quarter (that’s two firms) said it would have a significant impact on pricing. (Half described the impact as “small.”) 

There were some qualifiers here—the impact was seen as small by one “unless related party in which case significant impact” (and I’m assuming a negative one), another stated that an “experienced advisor is expected,” and still another cautioned that while this was a factor, “…outside vendors are not foolproof and the insured retains fiduciary liability with respect to them.” 

4. Employer stock in DC plans remains a top concern for insurers.

This one appears to matter—a lot. Then again, it wasn’t unanimous—88% rated it as a significant factor, though that figure dropped to 50% when there is a limit on the size of the investment, which is increasingly common. Indeed, so-called “stock drop” suits seem to (still) crop up every time there is a disappointing earnings announcement or some piece of bad PR that drives down the stock price. 

That said, it’s one thing to bring suit—and yet, it remains a hard suit to win based on recent case history. 

Not mentioned: the inclusion of proprietary funds. It’s seldom a standalone rationale for bringing suit, but—well, it’s increasingly common, at least among organizations that have that capability.

5. Environmental, social and governance (ESG) options in DC plans play a minor role in pricing fiduciary liability insurance.

The inclusion of this particular item was a bit of a head-scratcher, though the results—62% said it had no impact on the premium pricing—were not. In fairness, and as noted by the survey’s authors, the survey was fielded after the Biden administration’s announcement that it was not going to enforce the rule put in place by the Trump administration, but my guess (and theirs) is that it simply reflects the relatively small take-up rate by plans and the tepid adoption by participants. Indeed, one of the survey respondents commented that the impact “depends on the % of plan assets or # of investment options offered. As well as if the plan were to attempt to force a requirement to its participants.” 

Ultimately, and as one of the survey respondents noted, “While we look at a number of items that are in the survey, the problem is that there is pressure to settle, in some cases because the cost to defend would be greater than the settlement value. Defense costs and settlement amounts in the so-called fee cases are incredibly high, even where the client has robust fiduciary processes.”

Still, forewarned is forearmed. Like vaccines, addressing those issues might not completely forestall litigation—but it would surely make for a less painful set of “symptoms.”

- Nevin E. Adams, JD

Attention Getters

I was recently taken to task for last week’s column about retirement savings regrets.

More precisely, my column about the regrets expressed in a recent American Century survey drew the attention of Faith Teope in a LinkedIn post titled, “Dear Finance Experts: We Would Listen, But We Don't Care.” In fairness, it wasn’t so much my column (“boring but true”), or even the American Century survey’s findings that came in for criticism, but more the head-scratching that the survey set off among financial professionals (including, I suppose this one) as to why people aren’t paying more attention to things like… saving for retirement. Her premise—that we’re using language that doesn’t resonate with those we hope to motivate—is, frankly, unassailable. 

In fact, it’s a topic I broached (at least at a high level) earlier this year in a post titled, “Is it Time to Retire Retirement?” As I noted then, for all but the most financially astute, trading off a here-and-now need (or want) for some obscure future notion like “retirement” is a hard sell. And, let’s face it, the further you are from that future event, the harder it is to “sell.” 

But arguably the problem runs deeper than the label(s) we affix to the concept of the ultimate goal. Let’s face it, financial freedom is a laudable, evergreen objective—but for most of us it’s not a short-term goal—and without a “how” to go with the “what,” it might not matter. 

In her post, Faith states that our current messaging is “…not working because that’s not how humans are wired. We are wired to survive and that drives the urges for happiness, the desire to live, to buy, to bucket-list, to binge-watch, to prime-delivery. We are not wired to plan for an unknown future with an unknown time frame and no magic 8-ball to what will even happen tomorrow much less 25+ years from now.”

To her credit, she put forth some suggestions, conversation starters of a sort—something that ostensibly might motivate people to “care”—things like:

• The Life You Want—Top 5 questions to help you take control of your life
• 3 Ways to Legally Pay Less in Taxes
• The One Debt That Pays YOU interest—401k loans and a few perfect reasons to tap into them

Now, as someone who spends a good part of his day crafting (what he thinks are) compelling headlines and (obsessively) tracking clicks, that approach has some allure. (I mean, who wouldn’t want to know how to legally pay less in taxes?) That said, it’s not clear to me how much of this kind of thing is already out there, though I imagine in a world increasingly reliant on TikTok, Instagram, Twitter and YouTube to communicate complex (and sometimes farcical) messages, it’s a burgeoning field—or should be. 

Indeed, the more I considered the subject, the more it occurred to me that the essence of some pretty compelling messages are already imbedded (obscured?) in most of today’s benefit communications. Wouldn’t you be intrigued by the following topics?

• How to get the free money you’re missing out on
• Turn $5 a month into $50,000
• You can get a pay increase without asking for it

There are some potential shortfalls, of course—there’s often a fine line between making complex things simpler and making them overly simplistic. But when all is said and done, to me, it’s not so much about simplifying our messages (though there’s that), but about getting people’s attention. But as I look at the bullets above, they strike me as short, near-term in focus, snappy, and ultimately action-oriented. Clickbait? Sure—but if you can get people’s attention, even for a minute, that’s an opportunity, a door-opener… a start… 

Of course, “starts” notwithstanding,[i] what matters isn’t just getting people’s attention, but motivating action—anything from a quick readiness assessment to taking steps to automatically increase their rate of contribution, or to make sure they are contributing at a rate sufficient to receive the full company match.

In sum, it’s one thing to get people’s attention—but then we have to keep it. 

- Nevin E. Adams, JD

[i] And thanks to automatic enrollment and qualified default investment alternatives (like target-date funds), millions of American workers have gotten a good start at saving and investing for retirement even if they don’t always appreciate it.

Regret Able

 A new survey once again highlighted a consistent regret among American workers. 

According to the survey by American Century Investments, they wish they had saved more for retirement. 

Now, only about a third shared that regret—but it was more than twice the number that had regrets about career, personal relationships, not doing enough to enjoy life—not to mention “not being a better person overall.”[i]

Now, we all have regrets about certain life decisions. There are regrets about that “Reply All” email that was perhaps a little too honest, the hours spent at work at the expense of family, perhaps the cessation of piano lessons, and even a (too) sedentary lifestyle and bad diet. Some we regret immediately—while some come only after the passage of time. Some we learn from—and vow never to repeat. And some—unfortunately—come too late to do anything but live with the consequences. And then there are those regrets—that could be remedied—but aren’t. 

Regrets about retirement savings tend to be in the latter category. People often talk about the retirement crisis in this country, but like a tropical storm still well out to sea, there are widely varying assessments as to just how big it is, and—to (continue to) borrow some hurricane terminology—when it will make “landfall,” and with what force. Most of the predictions are dire, of course—and while they often rely on arguably unreliable measures like uninformed levels of confidence (or lack thereof), self-reported financials and savings averages—it’s hard to escape a pervasive sense that as a nation we’re in for some rough weather, particularly in view of the objective data we do have—things like coverage statistics and retirement readiness projections based on actual participant data.

As we’ve certainly experienced anew over the past 18 months, life is full of uncertainty, and events and circumstances, as often as not, happen with little if any warning. Even though hurricanes are something you can see coming a long way off, there’s always the chance that they will peter out sooner than expected, that landfall will result in a dramatic shift in course and/or intensity, or that, as with some (like Katrina)—the most devastating impact is what happens afterward. In theory, at least, that provides time to prepare—but, as the recent advent of COVID and the response—sometimes you don’t have as much time as you think you have, want or will need.

Doubtless—and as the recent survey findings suggest—a lot of retirement plan participants are going to look back at their working lives as they near the threshold of retirement with some regrets. They’ll perhaps remember the admonitions about (and their good intentions to) saving sooner, saving more, and the importance of regular, prudent reallocations of investment portfolios (they may even remember reading about surveys expressing those regrets). Thankfully—and surely because of the hard work of advisors and plan sponsors—many will have heeded those warnings in time. But others, just as surely—and particularly those without access to a retirement plan at work—may not.

The end of our working lives inevitably happens for different people at different times, in different ways, and to those in different states of readiness for that “event.” But we all know that it’s coming—and those who put off preparing for it are likely destined for a retirement full of regret. And that, not just for them, but for all of us, is… regrettable.

- Nevin E. Adams, JD

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[i] In fairness, it’s entirely possible that they’ve been more attentive and/or successful in those life avenues, and thus regrets weren’t required.

The "Magic" of Compounding

Some numbers were put in front of the Senate Finance Committee last week—numbers that even the chairman of that powerful body called “jaw-dropping.”

The numbers were 51 million and $6.2 trillion—the former the potential number of new retirement savers, the latter a separate projection of the potential new retirement savings (over a 10-year period) that could result if two pieces of existing retirement legislation were implemented, specifically the combination of some key provisions of the Automatic IRA Act and the Encouraging Americans to Save Act.

Those projections—presented in testimony by American Retirement Association CEO Brian Graff—were the work (and rework) of many late (and early) hours by a number of individuals over a period of months.

Key Assumptions 

Now, predicting the behavior of human beings decades into the future may seem like the stuff of science fiction, but it can be parameterized. However, the key to a projection that aligns with reality likes in the assumptions. Here the key provisions (and assumptions applied) were that:

• All employers with 10 or more workers that don’t currently offer a plan do so.
• All those new plans offer automatic enrollment (no employer contribution for a new plan).
• Those new automatic enrollment plans start deferrals at 6%, and auto-escalate to 10%. 

Oh—and with regard to those new participants, a 20% opt-out rate was assumed in the first year, similar (though actually somewhat less, because we assumed that the new Saver’s Match would dampen the rate of opt-outs) than that experienced by the state-run programs like OregonSaves. And yes, that’s higher (about double) the rate experienced by 401(k) plans in the private sector with automatic enrollment.  

As for the Enhanced Saver’s Credit (let’s call it the Saver’s Match for clarity), we simply assumed that everyone eligible would get it (except, of course, for those that opted out), in the amount(s) provided in the (then proposed) legislation. We even factored in self-employed and “gig” workers, a still small, but growing element in the economy.

Why it Matters

We’ve long highlighted the issue with access to a retirement plan at work—“coverage”—alongside data that supports the fact that even modest income ($30,000/year to $50,000/year) workers are 12-15 times more likely to save for retirement via a workplace plan than on their own. While a growing number of states have embraced the notion of a “mandate” on the part of employers to provide payroll deduction to a state-run plan, extending that concept on a national level is a real game-changer in terms of providing that opportunity. 

Doing so combined with automatic enrollment (also a provision of most of the current state-run plans) helps workers get off to a good start, and providing a Saver’s Match seems likely to encourage most to stay with it—and perhaps, particularly among smaller employers, without requiring the financial impact of an employer contribution. 

Moreover, not only do the expanded levels of eligibility for the enhanced Saver’s Match mean that more individuals will be eligible, making it refundable means that more will be able to claim it—and, with so many more having access to retirement accounts, they will now have a retirement-oriented place in which to put it.

In our business, we often talk about the “magic” of compounding, and when retirement savers see how that early contribution can grow and build on itself, it does truly seem magical. In fact, no less a personage than Albert Einstein is reputed to have said that “Compound interest is the eighth wonder of the world.”[i]

Indeed, taken together, the compounding impact of these two sweeping proposals look to produce a retirement result worthy of that accolade—if they can make it into law.

- Nevin E. Adams, JD

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[i] He went on to say: “He who understands it, earns it; he who doesn’t, pays it,” but that’s a story for another day.

"Certain" Circumstances

 My wife and I recently celebrated our wedding anniversary—it was a “big” one, one of those that almost takes your breath away thinking about how rich your life together has been.

If someone had asked on my wedding day if I thought I’d still be alive and married this many years hence, I’m sure that I would have expressed confidence, likely strong confidence, in both outcomes. However, if someone on that same day had asked me to guess then where I would be living now, what I would be doing for a living, or what my income would be (or need to be)—well, my responses would likely have been much less certain—and trust me, I would have been… wrong.

Not that there haven’t been bumps along the road—life is a series of zig-zags, after all—and no matter how carefully you try to plan—well, life is what happens to you while you’re making other plans, right? There was the wedding limo with faulty air conditioning on the hottest July day in history, the flat tire in the middle of nowhere with a packed family van (not the best time or place to learn where the “new” jack was located), the emergency appendectomy of a child halfway across the world (not to mention that of another child several hundred miles away at college), the cross-country trip where the rental vehicle had been chosen with an eye toward the size of the family—without taking into account the luggage said family would require for that trip, the “discovery” while trying to rush for a late flight that (apparently) my son’s relatively common name had flagged him for special scrutiny by TSA—and the night spent sleeping in the family van near the Grand Canyon because—sometimes and someplaces you really can’t find a hotel room at the very last minute without a reservation.

As uncertain as life’s paths can be, there is at least some rational science to retirement planning, but even then there’s the unknown as to the “when” you’ll retire, the how much you’ll want—or need—not to mention the “what” you’ll need/want to be able to afford once you’ve crossed that threshold. Not that there aren’t those kind of decisions throughout one’s career—but once that post-work threshold has been crossed—what we still tend to think of as “retirement” (though some might have another word for it these days)—well, it feels like one’s options are fewer, even if they needn’t be.

“Disruptions” are the bane of a fixed income, of course. Just when you think you have it all balanced out, you have to spend (a lot) more for gasoline, pay a higher real estate tax bill, scrape up some money for a new prescription drug, deal with the financial consequences of an unexpected medical emergency. That—despite the experience of the past several months—this can happen at the same time that your investment portfolio is taking a sustained “hit,” or that you are told the house you are living in is worth a lot less than it was (on paper, anyway) a year ago—and all of a “sudden” inflation raises its ugly head—well, it all contributes to a sense of economic uncertainty.

Throw in the gyrations of a global pandemic that can impact not only your employment options, but your portfolio value, and your longevity… well, it’s an environment that can leave one feeling that the notion of living on a “fixed” income might not be up to the task over the next couple of decades—and with some justification.

It’s been said that the only sure things are death and taxes—but the lesson for those of us still drawing a paycheck—and planning for the time when we won’t—is the importance of preparing for that third “sure” thing: uncertainty.

- Nevin E. Adams, JD

Where’s Waldo? (and Mary…and Joe…and Pat)

Every plan has participants—and, sooner or later, will therefore have “ex” participants—and sometimes those participants go…missing. And that can be a real problem for retirement plan fiduciaries.

While most are likely aware of the fiduciary obligation to keep accurate records, many are less aware that there is also an obligation to take “appropriate steps” to ensure that the participants and beneficiaries are paid their full benefits when due. But what are the “appropriate steps”?

Why It Matters

This is a growing concern of regulators; in fact, (now former) Principal Deputy Assistant Secretary of Labor for the Employee Benefits Security Administration Jeanne Klinefelter Wilson has noted that, “In fiscal year 2020 alone, EBSA’s investigators helped missing and nonresponsive participants recover benefits with a present value in excess of $1.4 billion.”

The good news is, the Labor Department has published some guidance on the subject—in fact, it’s a triple dose of guidance related to helping retirement plan fiduciaries meet their obligations under the Employee Retirement Income Security Act (ERISA) to distribute retirement benefits to missing participants.

What You Can—and Should—Do

Plan fiduciaries will likely find most helpful the first document in the package. Titled “Missing Participants—Best Practices for Pension Plans,” the document outlines those key best practices that you will want to make sure are a part of your process in keeping up with those missing participants. Those best practices are outlined under four broad headings: 

• Maintaining accurate census information for the plan’s participant population. This includes contacting participants (current AND retired, as well as beneficiaries) on a periodic basis to confirm or update their contact information—including putting contact information change requests in plan communications—along with a reminder to advise the plan of any changes in contact information and flagging undeliverable mail/email and uncashed checks for follow-up.
   
• Implementing effective communication strategies. This includes things like using plain language and offering non-English language assistance when and where appropriate, and building steps into your onboarding, exit and enrollment processes to confirm or update contact information, confirm information needed to determine when benefits are due and to correctly calculate the amount of benefits owed, and to advise employees of the importance of ensuring that the plan has accurate contact information at all times.
   
• Documenting procedures and actions. Every good plan fiduciary knows and appreciates the importance of documentation—both as a record of actions taken and as a roadmap for future consideration. As with other plan procedures, when it comes to keeping up with missing participants, this not only means writing it down and keeping it current, but you will also want to be sure that your recordkeeping provider does their part—in maintaining plan records and participant communications and documenting those practices as well.
   
• Conducting missing participant searches. Despite your best efforts to maintain contact, participants often move and/or change names without communicating that information or even leaving a forwarding address.[i] This is where the rubber hits the road for most plan fiduciaries.  The beneficiary information can provide some solid leads, and the reality today is that if you can track down your grade school sweetheart on Facebook, there is a pretty good chance you can leverage social media to do some of the heavy lifting—and even broad-based search engines like Google can be a valuable resource, as well as paid services that can use credit searches and such. 

But the place you should probably start—and one cited in the Labor Department guidance—is the National Registry of Unclaimed Retirement Benefits. It is a free public service designed to help employers or plan fiduciaries and former employees locate each other so the former employees can claim their overlooked or abandoned retirement money.

What better way to not only find “Waldo,” but to ensure that your ex-participants are reunited with the benefits they have earned—to fulfill your responsibilities as a plan fiduciary—and to avoid potential issues with federal agencies down the road.

- Nevin E. Adams, JD 

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[i] And, of course, there are some other good tips here: https://www.penchecks.com/what-to-do-with-missing-participants-and-required-minimum-distributions/        

'Hacking" Stances

A couple of Saturdays back I discovered that one of my online accounts had been “hacked.” 

The good news is that I “discovered” this via transaction emails confirming what appeared to be purchases—a half dozen of them… for various, small-ish (though not small) amounts… all about 4:00 a.m. on a Saturday morning. And trust me, while the pandemic has certainly fueled my online purchases, both the number and the timing were not normal behaviors (nor was the Chinese text in those emails).

The even better news was that I was able to flag those transactions via the provider—and via my credit card company—almost immediately (apparently the foreign hackers and I were the only ones awake at that hour). Even though there was no damage done by this incursion (aside from some temporary heartburn), it brought home to me again the importance of protecting all of my online accounts.

Like many, perhaps most, of you, I have long found managing the sheer volume of online passwords and varying criteria daunting. Oddly, the ever more complex (and varying) password requirements—different lengths, different combinations of caps, numbers and “special” characters, not to mention forced resetting of those passwords—has, if anything, tended to leave me being more casual than I should be regarding some of the practices I know are important. That said, and while I am far from a cybersecurity expert, I try to stay current on the latest advice from those who are—and trust me, it’s a moving target. 

As it turns out, the Labor Department recently issued a set of guidance on the issue of cybersecurity,[i] and while our more immediate focus here has been on the expectations of plan sponsor/fiduciaries, advisors and recordkeepers (particularly in view of the recent reports of Labor Department audits on these practices), my recent experience reminded me that it’s worth noting—and sharing here—the list of “online security tips” for participants included in that guidance. 

Use Strong And Unique Passwords

The most detailed of the tips is also perhaps the most important. The Labor Department recommends that you “use letters (both upper and lower case), numbers, and special characters”—which is increasingly mandated anyway—and to “use 14 or more characters.” We’re also advised not to use letters and numbers in sequence (like “1234” or “abc”), to change passwords every 120 days (or if there’s a security breach—p.s. you probably won’t hear about it until at least 30 days after it’s been detected), and—despite all these strictures—to not only not write it down, but not to “share, reuse, or repeat passwords.”

This is both the most obvious—and in my experience—most nettlesome of the recommendations. Of course, the more complicated the password, the less likely a hacker is to be able to “hack” it. And, unfortunately, the less likely you are to be able to remember it. I’ve seen suggestions on how best to manage this—most commonly these days (including from the Labor Department) the suggestion to use a password “manager.” 

But for those who find that process intimidating (or inconvenient), what I’ve found most useful is the idea of using phrases that are familiar or meaningful to you, but would amount to gibberish in a password field. Something like (for those who took typing classes in high school) “thequickbrownfoxjumped,” particularly if combined with some kind of numerical reference (perhaps “thequickbrownfoxjumpedh1.” You can also use a random combination of words like “fleetwoodChicago1978” (which happens to be when/where I saw Fleetwood Mac perform), or maybe a random combination of month and year (though avoid birthdates, anniversaries, and such)—perhaps something like “januarY2019” (I try to capitalize something other than the first letter). One other neat trick is to use spellings that may mean something to you, but aren’t in the dictionary—like dixshunary, or Septimber. 

The challenge, of course, will be remembering which (random) combination(s) you used for what. But if that leads you to write it down, keep that in a safe place—and don’t store it on your computer! 

Use Multi-Factor Authentication

The very first thing I did with the account that had been hacked (once I had reestablished control) was to set up multi-factor authentication. I have made a practice of doing this with all my accounts, and can only assume that years back, when I set up the account in question, they either didn’t have it available, or I considered it too much of a hassle to set up. No more.

Basically, this means that when you log on and/or initiate a transaction, the system requires the confirmation of a second credential. The most common set up would be to send you a code via text (to a phone number you’ve established on file) or to an email address. If you don’t have this set up yet on your online accounts—do it right away. It’s a life (and savings) saver. And always, always, always, be sure that you are set up to receive notifications any time your account or account information has been changed! Oh—and it bears noting here that the password to your email account is perhaps the most important—because if they hack your email account as well, they can intercept those confirmation emails, and delete them before you even know it has happened! 

Keep Personal Contact Information Current

Odds are the accounts you access with some frequency have current contact information. The problem is, retirement savings often don’t fall into the “with some frequency” category. Let’s face it, we’ve long been advised that we shouldn’t be constantly checking in on our retirement savings, but there’s nothing that says you can’t look without touching. Particularly if you have left some 401(k) balances “behind” with a prior employer.  

Close Or Delete Unused Accounts

It’s unfortunately not uncommon for folks to use the same password(s) for multiple accounts—but using those same passwords for accounts you don’t use (or perhaps don’t even remember using) and ones with current, and perhaps monetary implications, can leave you exposed. You may have gotten one of those (badly spelled) emails from individuals who claim to have accessed your webcam and/or planted some kind of “trojan horse” on your PC, and by way of proof—show you the password that they’ve stolen. While those kind of intrusions are certainly possible, odds are what they did instead was tap into your email—and password—from an old blogging account or such that you simply walked away from years ago. 

There are a couple of easy ways to check out your potential vulnerability—https://haveibeenpwned.com/ or https://monitor.firefox.com/. 

One the DOL ‘Missed’

Now, for all the value in the tips provided, there is some irony in one they missed—the importance of logging on to your 401(k) account(s) regularly. 

If you have an online account—and these days you may have more than one—and particularly following a change in recordkeepers (and with the recent wave of consolidation there’s been a lot of that[ii]), it is imperative to log on ASAP, and not only establish the unique password noted above, but also set up the multi-factor authentication, provide answers to key security questions, and make sure that you are set up for electronic notifications of any changes to your account. Did I say ASAP? I mean now. 

After all, if you don’t lay claim to that account—quickly—it’s all the easier for a hacker to do so.   

- Nevin E. Adams, JD

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[i] It’s worth acknowledging here that recently there have been numerous situations where plan fiduciaries have been sued for various account intrusions, including participant accounts at Abbott Laboratories (Split Decisions in 401(k) Theft Suit for Plan Sponsor, RK), Estee Lauder (Recordkeeper, Plan Sponsor Charged in 401(k) Account Theft), MandMarblestone Group (Court Backs TPA Counterclaim on Plan Sponsor in 401(k) Cyber Theft Case) and Boeing (Man Charged with Retirement Account Thefts).

[ii] As an additional note of caution, I have now had two of my 401(k) accounts converted (by and from different providers) without the beneficiary information. Now, sooner or later, should it become necessary, the paperwork I submitted once upon a time will surely suffice (and since my spouse is my beneficiary, it shouldn’t matter)—but it’s a good idea to double check such things while you are setting up that password, etc.

The 'End' in Mind

I was discussing the subject of retirement over the long holiday weekend with family. 

There was a lot of talk about Social Security (or the looming lack thereof), the impact(s) of inflation, and how the markets (stock and housing) had boosted prospects, but ultimately decided we weren’t sure when that would happen, we weren’t even positive that it would happen (the so-called “great resignation” notwithstanding), or if it might consist of a gradual slowdown/pullback. Moreover, we really didn’t know what “it” would be like if and when it did happen, or where we might be living even if and when. Finally—it had been a pretty hectic week, after all—I somewhat playfully suggested that the best definition of retirement would be the absence of time-critical deadlines and Zoom meetings. Ah, now that’s something to look forward to!

However, and as those who are already ensconced there can attest, retirement has its own set of pressures, and they go well beyond bucket list “bingo.” But the “difficulty” that my family discussion had in actually describing what we would “do” is a real problem in retirement planning. After all, if you don’t know what you are going to “do” (or from where you will be doing it), it’s really hard to develop a plan, certainly not an effective one. Let’s face it, the things we are accustomed to saving for—a car, a house, the kids’ college tuition, a vacation trip—generally are not only things we can envision, they have a very specific price tag—and sometimes a specific deadline.

Now, of course, retirement—more precisely, living in retirement—also has a price tag, if not a specific deadline (though the latter can certainly influence the former). Anyone who has an interest in knowing what that is can turn to any number of readily available calculators capable of revealing that number, or at least a range of numbers. Unfortunately, those disembodied figures don’t shed much light on defining what we’ll get for our money—and even then they tend to be so large that the normal reaction is, “Isn’t there a cheaper model?” (or perhaps a higher assumed return).

The sad reality is that too few take the time to make that calculation before making that decision. In fact, according to the Employee Benefit Research Institute/Greenwald & Associates’ 2020 Retirement Confidence Survey, just over 4 in 10 (44%) have (ever) estimated[i] how much income they and your spouses would need each month in retirement—a pretty consistent finding from the RCS, which began asking that question way back in 1993. 

Doubtless some of the reluctance is the sheer complexity of the “ask” (not to mention the variables), the press of more immediate concerns, perhaps even a fear of what the answer will be. For years now, a number of providers have produced an estimate of how much monthly income one’s current account would yield on participant statements, a feature (somewhat) codified in the SECURE Act. That said, and with its many assumptive flaws, I’ve never found that focus particularly useful, though it’s an improvement over the traditional lump sum “need” that most calculators provide, and certainly better than a mere account balance. Personally, I think we’d do a better job of paying that retirement “bill” if participants set an annual target—a budget for retirement, just like we have for the mortgage or the car payment. That would give them a shorter-term target that could still be part of the larger, often apparently unassailable goal. Too often, retirement savings is a function of what is left over after everything else is paid. And that means that, too often, particularly when things like health care costs, groceries, and filling the tank cost more than we had planned, we not only don’t pay that retirement “bill,” we don’t even see it as overdue. 

Retirement planning needs to start with the “end” in mind, of course—but to be effective it also needs a constructive road map to help chart the way there. 

- Nevin E. Adams, JD

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[i] Worse—and this data point was not in the 2020 RCS—when you ask how people had made some kind of assessment of their retirement income needs, a jaw-droppingly large percentage indicated they… guessed.

History’s Lessons for Plan Fiduciaries

 

The study of history is a passion of mine, and while it seems a bit trite, the old adage that those who don’t remember the past are doomed to repeat it seems more apropos by the day. Regardless, I never cease to be touched by the experience of walking the grounds where famous individuals or great historic events took place. 

A few years back I had the opportunity to be in Philadelphia for a few days beyond the customary speaking event “fly-by,” and was thrilled to be able to tour Independence Hall where, in 1776, the Continental Congress crafted what we will shortly celebrate as the Declaration of Independence. Those who think that partisan divides, cynical self-interest, and political acrimony are recent “innovations” in government would perhaps be shocked to learn that regional tensions have always been part-and-parcel of our republic… even before it was a republic. 

The room was smaller than I had imagined—and I couldn’t imagine what it must have felt like on a July day with no air conditioning. The chairs (though doubtless replicas) looked… uncomfortable, to say the least. The idea that the debates—and ultimately the consensus (of sorts) that was wrested from this group of disparate individuals with varied (and competing) objectives in that room was—to me, anyway, nothing short of extraordinary. To this day the reality that our nation was born from—and has survived—those contradictions is a testament to the power of the ideals expressed on that July day in 1776, even if some would require the passage of time (and a Civil War) to achieve. 

But, as we commemorate this Independence Day holiday, there are, I think, lessons to be learned from that experience that can be applied to our work with retirement plans, particularly those who serve those plans as fiduciaries. 

Inertia is a powerful force.

By the time the Second Continental Congress convened, the “shot heard round the world” had already been fired at Lexington, but many of the representatives in Philadelphia still held out hope for some kind of peaceful reconciliation. Little wonder that, even in the midst of hostilities, there was a strong inclination on the part of several key individuals to put things back the way they had been, to patch them over, rather than to take on the world’s most accomplished military force.

As human beings we are largely predisposed to leave things the way they are, rather than making abrupt and dramatic change. Whether this “inertia” comes from a fear of the unknown, a certain laziness about the extra work that might be required, or a sense that advocating change suggests an admission that there was something “wrong” before, it seems fair to say that plan sponsors are, generally speaking, and in the absence of a compelling reason for change, inclined to rationalize staying put.

Little wonder that we often see new fund options added, while old and unsatisfactory funds linger on the plan menu, a general hesitation to undertake an evaluation of long-standing providers in the absence of severe service issues, and reluctance to adopt potentially disruptive (and, admittedly, often expensive) plan features like automatic enrollment or deferral acceleration.

While many of the delegates to the Constitutional Convention were restricted by the entities that appointed them in terms of how they could vote on the issues presented, plan fiduciaries are bound by a higher obligation—that their decisions be made solely in the best interests of plan participants and their beneficiaries—regardless of any other organizational or personal obligations they may have outside their committee role.

Selection of committee members is crucial.

The Second Continental Congress was comprised of representatives from what amounted to 13 different governments, with delegates selected by processes ranging from extralegal conventions, ad hoc committees, to elected assemblies –with varying degrees of voting authority granted to them, to boot. Needless to say, that made reaching consensus even more complicated than under “ordinary” circumstances.

Today the process of putting together an investment or plan committee runs the gamut—everything from simply extrapolating roles from an organization chart to a random assortment of individuals to a thoughtful consideration of individuals and their qualifications to act as a plan fiduciary. But if you want a good result, you need to have the right individuals—and, certainly in the case of ERISA fiduciaries, if those individuals lack the requisite knowledge on a particular issue, they need to access that expertise from individuals who do.

Know that there are risks.

Those that gathered in Philadelphia that summer of 1776 came from all walks of life, but it seems fair to say that most had something to lose by signing on to a declaration of independence. True, many were merchants (some wealthy, including President of Congress John Hancock), and perhaps they could see a day when their actions would accrue to their economic benefit. Still, they could hardly have undertaken that declaration without a very real concern that in so doing they might well have signed their death warrants. As Ben Franklin is said to have commented just before signing the Declaration, “We must, indeed, all hang together, or most assuredly we shall all hang separately.”

Despite the threat of litigation, it is not quite that serious for ERISA plan fiduciaries. However, there is the matter of personal liability—not only for your actions, but for those of your fellow fiduciaries—and thus, you might be required to restore any losses to the plan or to restore any profits gained through improper use of plan assets. So, it’s a good idea not only to know who your co-fiduciaries are—but to keep an eye on what they do, and are permitted to do.

It’s important to put it in writing.

While the Declaration of Independence technically had no legal effect, with the possible exception of the Gettysburg Address (which was heavily inspired by the former), its impact not only on the establishment of the United States, but as a social and political inspiration for many throughout the world is unquestioned, and perhaps unprecedented. Putting that declaration—and the sentiments expressed—in writing gave it a force and influence far beyond its original purpose.

Plan fiduciaries are sometimes cautioned (often by legal counsel) about committing to writing certain decisions, notably an investment policy statement. In fairness, the law does not require one, though ERISA basically anticipates that plan fiduciaries will conduct themselves as though they had one in place. And, generally speaking, plan sponsors (and the advisors they work with) 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—rather than being crafted at a point in time when you are desperately trying to make sense of the markets. That said, and in the defense of caution, if there’s something worse than not having an IPS, it’s having an IPS that isn’t followed.

There is an old ERISA adage that says, “Prudence is process.” However, an updated version of that adage might be “prudence is process—but only if you can prove it.” To that end, a written record of the activities of plan committee(s) is an essential ingredient in validating not only the results, but also the thought process behind those deliberations. More significantly, those minutes can provide committee members—both past and future—with a sense of the environment at the time decisions were made, the alternatives presented and the rationale offered for each, as well as what those decisions were. 

Those might not serve to inspire future generations—but they can be an invaluable tool in reassessing those decisions at the appropriate time(s) in the future and making adjustments as warranted—properly documented, of course.

Actions can speak louder than words.

As dramatic and inspiring as the words of the Declaration of Independence surely were (and are), if they never got beyond the document in which they appeared, it’s unlikely we’d be talking about them today. Indeed, it’s likely that, without the actions committed to in that Declaration, their signatures on the document would have only ensured that they wound up on the gallows.

Anyone who has ever had a grand idea shackled to the deliberations of a moribund committee, or who has had to kowtow to the sensibilities of a recalcitrant compliance department, can empathize with the process that produced the Declaration of Independence we’ll commemorate this week.

Yes, Independence Day is a great opportunity to reflect and remember that our actions have consequence(s)—and that while plan committee meetings and deliberations may sometimes seem like little more than obligatory (and tedious) reviews of arcane information, it’s worth remembering that those decisions affect people’s lives—and, ultimately, their financial independence. 

- Nevin E. Adams, JD