Failure(s) to Communicate

There’s an oft-repeated line from that 1967 classic movie “Cool Hand Luke” about a “failure to communicate.”

Now, most of us aren’t trying to convey the consequences of violating prison rules, but there are messages where mere words sometimes fall short of their purpose. There are literal barriers in terms of language, of course—but all too often also barriers built of different life experiences, of cultural references, and certainly of age. Indeed, we frequently use words, or employ metaphors to enhance, or at least provide some flavor to our explanations/instructions—only to have it fall on ears that may hear the words, but lack—or in some cases, confuse—the necessary context (I’m routinely forced to reference the Urban Dictionary to make sure certain words haven’t taken on an unintended meaning).   

Mind ‘Set’

In that spirit, several years back I stumbled across something called the Beloit College Mindset List (a couple of years back it “moved” and was rebranded as the Marist Mindset List). It was a list developed to help college faculty be aware of dated references—to help assure better communications with the incoming class of college freshman. In fact, the focus of the list (and it dates back to 1998) was to provide some perspective on the shifting generational perspectives—the mindset, if you will—of individuals just entering college.

I remember fondly the “can you believe it?” water cooler chats about some of the items on previous lists—kids entering college that had never actually seen a floppy disk (which, ironically, lives on in that “save” icon in Microsoft applications), who might have wondered what “cc” actually stands for in their email (because they have never actually had to deal with a “carbon copy”), who never had to dial a rotary phone, who might never have seen (much less used) a payphone, who never knew a world without the “world wide web” (much less a world in which you could connect to it—wirelessly)—and perhaps most notably of late, weren’t even alive on 9/11. Yes, we’re talking about a generation who can’t fully appreciate just how weird it seems to see people having video calls on their wristwatches—just like Dick Tracy did in comics of old (talk about your dated references!).  

Class of 2027

But, according to this year’s Marist Mindset List,[1] the Class of 2027:

• Are just as likely to be listening to Led Zeppelin as Lana del Rey or Lil’ Baby on their phones (with access to music services like Pandora launched in 2005, the year many of these future graduates were born).
• Will get their news primarily from social media sites like YouTube, Instagram and TikTok (Dan Rather & Ted Koppel both retired in 2005, “effectively ending the reign of network news programs as the primary way younger Americans get their news”).
• Have always lived in a world visibly affected by climate change (harkening back to Hurricane Katrina and Rita—though they wouldn’t be old enough to remember either).
• Will almost exclusively watch their video content on YouTube (which launched in 2005) and similar sites online.
• Will be the first to fully integrate ChatGPT or “Generative Pre-trained Transformer” into their college learning experience (one can’t help but see “fully integrate” as a disarming euphemism for more insidious applications).
• Often quote the TV show “The Office,” although the program ended its run in 2013. The characters are omnipresent in today's college culture and the show is now a cultural phenomenon thanks to its rebirth via Netflix and short-form streaming services (OK—I don’t get the fixation on The Office, either. But who am I to question generational fixations?)
  

Retirement (Re)Set

That said, for those of us who will be working (or living) with the Class of 2027 (once they graduate, if not sooner), well, for them (and those working with them), it might be good to keep in mind:

• There have always been 401(k)s (even if everyone hasn’t had access to them at work).
• They may never have to actually sign up for their 401(k) (thanks to automatic enrollment).
• They may never have had to think about the investments in their 401(k) (due to QDIA/target-date fund defaults).
• There has always been a Roth option available to them, whether 401(k), 403(b) or IRA (and, considering what future tax rates are likely to be, they should take advantage).
• They’ve always been able to view and transfer their balances online and on a daily basis (and so, of course, they mostly won’t).
• They’ve always worried that Social Security wouldn’t be available to pay benefits. (In that, they’re much like their parents at their age…even today).

But perhaps most importantly, they’ll have the advantage of time, a full career to save and build, to save at higher rates, and to invest more efficiently and effectively—and, with luck, access to a trusted advisor to answer their questions along the way...

  - Nevin E. Adams, JD

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[1] Sadly, this year’s list isn’t quite as much “fun” as previous lists have been (at least not to this Boomer)—and this year it comes with some political “commentary” that seems unnecessary (at least to this Boomer). The Marist crowd appears to take themselves more seriously than the Beloit College founders did (or perhaps it’s just the times we’re in).

ERISA Litigation: How Low Will 'They" Go?

The ERISA litigation field in recent years has seen copycat filings, plagiarism in pleadings, factual flaws, and misleading assertions—but to my eyes, we’ve just hit a new low.

I’m speaking of what appears to be a new strategy, at least in this area of the law. Specifically, a California law firm by the name of Lieff Cabraser Heimann & Bernstein is in the midst of what appears to be a pre-trial “shakedown.”

More specifically—brought to my attention by Daniel Aronowitz (writing for The Fid Guru Blog)—Leiff Cabraser is currently engaged in a letter writing campaign to plan sponsors, alerting them to a series of assertions about ERISA litigation, allegations about the fees paid by participants in their plans (relative to a standard that has been repeatedly criticized in that context at trial)—all alongside the fact that they’ve allegedly found an as-yet-unnamed plaintiff-participant in the plan in question that is said to be willing to represent a class action alleging the plan’s fiduciary breach. 

Oh—and the purpose of this campaign? Why, according to the letter, Lieff Cabraser Heimann & Bernstein is “open to discussing our client’s ERISA claims in hopes of reaching an early resolution…before a great deal of time and expense is incurred by any party in litigating this matter.” 

And if the threat of litigation was not sufficient to garner their attention, the letter closes, “This may be the last time that the parties have total control over the outcome of this matter without leaving it up to the Court. A settlement now, before the parties have incurred significant litigation expenses, will benefit both parties.”

Perhaps, but I’m guessing one party in particular.

Sadly, there’s nothing illegal in this approach—even though it smacks of extortion. As for the recipients of these letters, they may well know that the fees their plans/participants are actually paying are much different than the letter suggests, but they may NOT know of the shortcomings in the way the 401(k) Averages Book data is presented (though already noted by more than one court) and applied to their plans (Mr. Aronowitz does an artful job of explaining that, however, and it’s worth a look!). However, they probably ARE aware of the headlines that appear with distressing regularity tracking this type of litigation and may well have a sense of the multi-million-dollar settlements—whose pace and frequency seem to be quickening with each passing month. 

Looking at the arguments presented in most of these actions, it’s hard to dismiss the feeling that most are, in fact, (just) playing for that quick settlement; half of their filings (and most are pretty short) are simply a cut and paste regarding ERISA’s obligations alongside an inference (and sometimes more than an inference) that the plan fiduciaries in question (and those who appointed them) have fallen short of those obligations. They cite plans that are supposedly comparable (at least in size and participant count), extract numbers from government filings that don’t capture the full picture of costs (or services), lay those down next to data from sources known to have shortcomings for those purposes, toss in some “best practice” commentary from a trade publication or two, and rely on the forbearance of the judiciary to open the door to the more intrusive (and costly) process of discovery, deposition, and at some point, trial. 

That’s been the way of this type of litigation for awhile now, where it is simply easier—and, sadly, cheaper—for plan fiduciaries (and their insurers) to just settle and move on, though that process inevitably serves to fund the plaintiffs’ bar’s next “foray.”

Consequently, it’s been refreshing of late to see some federal district courts require more to establish a “plausible” argument to get past that point—to call for not only an accounting of fees, but of the services rendered for those fees. That surely complicates matters for the plaintiffs’ bar—but then, why should they be able to drag firms through the arduous process of discovery and depositions with no more than regurgitated copy, sweeping generalizations, and a table or two cobbled from unrelated sources? 

But now it seems that this law firm at least doesn’t even want to go through that exercise—and why should they if they can simply unleash a correspondence campaign that stands to bring in a payoff from who knows how many plans without even the bother of a court filing or appearance?

I know it’s easy to sit here and carry on as to why plan fiduciaries need to stand up to this kind of practice—to applaud the actions of federal judges who can see what’s going on here, and hope they continue to demand more than mere allegations and flawed assumptions. Unfortunately, this most recent undertaking is perhaps an obvious progression of a sad, regrettable trend.

But I can promise you that if this “works”—it won’t be the last.

- Nevin E. Adams, JD

The Biggest Surprise About (My) Retirement

My “retirement” isn’t even a year old—and for the most part, it’s played out pretty much as planned.  There was, however, an area that caught us a bit flat-footed.

For us (and this has very much been a joint effort between me and my wife), that surprise was…Medicare. 

Don’t get me wrong; to date the coverage has compared favorably with what we had pre-retirement—mostly because we coupled “standard” Medicare with a Medicare Advantage plan (which has actually provided some nice enhancements over our pre-retirement coverage). 

That said, here are some things we’ve learned along the way that we either didn’t know or hadn’t thought about “before”:

Medicare isn’t free. 

Well, technically speaking, some of Medicare comes without additional premiums/cost, at least if you’ve worked at least 10 years and paid into that system. 

There are two “core” parts to Medicare; what are affectionately referred to as Part A (hospital coverage)—which is “free” (in that your historical payroll deductions fund it) and Part B (medical insurance, which covers outpatient care, services from doctors and health care providers, some preventative services)—which, like your current health insurance, has premiums that you have to pay.  More on that in a minute.

While certainly of benefit, those coverages won’t replace everything covered by the health insurance you’ll have carried pre-retirement (those are likely included in what are called Part C (vision, hearing, dental, and Part D (prescription drug coverage). The bottom line here is that your post-retirement spending plans need to include something for health insurance (more precisely, your Social Security benefit will be reduced by that amount). You can find out more at: https://www.medicare.gov/basics/costs/medicare-costs

You (may) need to apply for Medicare before you “take” Medicare.

Once you start receiving Social Security benefits, you are automatically enrolled in Medicare A. But if you work past age 65 (as I did) and don’t start taking Social Security (like me), then you have to sign up for Medicare—even if you’re still working, have insurance, and don’t plan to use Medicare (this will, of course, confuse your current health care providers, at least momentarily. Everyone assumes when you turn 65, you’re on Medicare). 

There’s a seven-month initial enrollment period that begins three months before the month you turn 65 and ends three months after your birthday month. Now, there are some exceptions to that timing, but—the bottom line is, you’ll likely find it to be less complicated to sign up around your 65^th birthday, and then you don’t have to worry that you’ll run afoul of deadlines that can cost you a lot later on.

There are no Medicare “family” plans.

You may be accustomed to choosing workplace health insurance based on the needs of your family, or at least you and your spouse. For years I have “delegated” that responsibility to my wife, who has always had a better sense for the family doctors and our coverage needs. But we each had to sign up for Medicare separately (though we did “coordinate”).

That said, there can be complications if you are retiring at a different time than your spouse, particularly if you’ve shared coverage under a family plan. We had planned to let my wife (who is the same age, though she maintains that the five-month differential in our dates of birth makes her younger) go on Medicare while I continued with my workplace plan. Now, there is a process that allows for this, but it’s a bit of an exception and—well, we got close to the deadline, and rather than have coverage at risk, we just waited until we could both switch at the same time.

Your Medicare premiums are based…on your income.

One of the biggest surprises (to me, anyway) was to find my Medicare health insurance premiums were based on income. And if you’ve filed jointly, BOTH of your premiums are based on your adjusted gross income (AGI). But that wasn’t the biggest surprise… 

Your Medicare premiums are based on your income…from two years ago.

When it comes to figuring out your income for establishing your Medicare premiums, you might expect that a government agency would turn to an official government record of your income—and that turns out to be your AGI, as noted above. The jaw-dropper (this was the biggest surprise) was that it was our AGI from TWO YEARS AGO. 

Now, mind you, we’ve planned our retirement income needs just fine—but my AGI this year is going to be significantly less than it was when I was employed full time. And that makes a BIG difference in those monthly Medicare premiums. 

Fortunately, there is an appeals process—and even more fortunately, with my wife’s persistence we were able to rectify that situation BEFORE the first premium came due. It’s something you’ll want to get a jump on, as gathering the data/proof, getting it to Social Security—not to mention getting it to the attention of someone at Social Security—can be time consuming. For more information on that process, see https://www.ssa.gov/medicare/lower-irmaa or on the issue here.

The bottom line is that you want to start thinking about Medicare BEFORE you start filing for it. 

- Nevin E. Adams, JD

Does TikTok Really Hate the 401(k)?

A recent MarketWatch article poses the intriguing question: “Why does TikTok hate the 401(k) so much?”

Now, as social media platforms go, I’ve pretty much avoided TikTok. Oh, I’ve swung by it from time to time just to see what the “fuss” is, but generally speaking (and even in “retirement”), I’ve better ways to spend my day than scrolling through two-minute videos of—well, to my eyes, pretty insipid stuff.

On the other hand, I’ve long “dabbled” in social media platforms, and by dabbled, I mean I have established accounts, moseyed around, and ultimately “engaged” (some of you may (hopefully) even have noticed that I’ve been doing two-minute videos on LinkedIn for the past several months)—it’s just never been my “day job.” I’ve been on Twitter since 2008—LinkedIn even longer. Facebook (yes, I AM a Boomer, after all) since my kids got on it, and Instagram once Mr. Zuckerberg shackled that app to Facebook. I’ve read books on the subject of social media, attended conferences and training sessions (live and online) about how to use/leverage these tools—and still spent a lot of time over the past couple of decades waiting for the day when the actual response to a LinkedIn (or Twitter) post…mattered. I don’t mean the “likes” that Twitter shares, or the “impressions” or number of “followers” these platforms attribute to one’s account. They’re valuable metrics, of course—widely shared (and sometimes trumpeted). 

But as much as I enjoy social media—and relish the relationships that I have found and fostered there, in my experience it's still a bit of an echo chamber—one (still) frequented by people who are already “on” social media. Indeed, it seems for the very most part the people who are “there” are there to promote the use and value of social media to those not yet in that “club.” Not that you won’t find valuable content there—but plan sponsor clients? Participants?

That may be changing, of course. Published reports claim that TikTok has over 1.677 billion users globally out of which 1.1 billion are its monthly active users as of 2023. By any measure, that’s a lot of eyeballs. 

Setting aside the number (or quality) of those eyeballs, DOES TikTok really “hate” 401(k)s? Well, at least according to the article, it’s frequently cast as how the 401(k) menu limits your access to more “exotic” investments, and sometimes how hard it is to tap into those retirement savings. They even pillory the notion that you’ll eventually have to pay taxes on those withdrawals (glossing over the taxes you DIDN’T pay on the contribution and subsequent earnings)—one guy actually disparages (as one of FOUR reasons) 401(k)s as an effective retirement plan because it wasn’t INTENDED to be a retirement plan.  And yes, he has a product to sell/pitch.

That said, the “anti-401(k)” messages to be found on TikTok (and they still seem few and far between) are pretty much the same ones you find on any number of personal finance “guest contributors”—the type frequently crafted by individuals who would very much like to help you find your way to their “better” solution. Even on TikTok there ARE, of course, helpful messages as well—and a number of recordkeepers have already staked out some real estate on that platform.[i] But sadly, there appear to be no barriers or knowledge filters here, nothing to indicate that the purveyors of these solutions have, or should be accorded, any credibility on the topic(s) on which they hold forth. Rather, it seems that all you need is a short, snappy message, a rhythmic dance track in the background, and a steady camera (sometimes not even that) to garner attention.       

As noted above, I’ve been ON TikTok, but not established an actual account as I’ve been sensitive to the cautions about data sharing and privacy associated with that platform (though I’m only a tad less concerned about what American HQ-ed platforms do on that front). Overall, some parts of the TikTok “universe” may well be focused on sneering at the value of 401(k)s—and with audience numbers like those above—and a global reach, it’s easy to understand the appeal to any number of shucksters out there.    

But what I’d advise TikTok users to remember is P.T. Barnum’s observation…a man who knew something about shucksters—that there’s a sucker born every minute. 

- Nevin E. Adams, JD

 

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[i] Though their followings seem to be pretty modest, and their messages pretty superficial.

 

A Day to Remember

It’s hard for me to believe that next week we’ll mark the 22^nd anniversary of the 9/11 attacks. 

Harder still to comprehend that there are individuals now in the workplace who weren’t even alive on that day, and others so young that they have no memory of it. Other significant dates on the calendar have names affixed to them, two decades later—and likely forever—this one remains simply “nine-eleven.” 

While the events of that day remain seared in my memory, human beings are, for the most part it seems, wired to forget, to “move on,” from our worst memories. Not that that’s necessarily a bad thing, though this is one day I never will.   

In fairness, that wasn’t a “normal” day for me. I was flying—cross-country—on an American Airlines flight to speak at a conference in California. I learned about the attacks while I was running from one terminal to another in Dallas, Texas. Oh, I had out of the corner of my eye wondered why everyone was gathered around those airport TV monitors so early on a Tuesday morning—but it wasn’t until my wife called on my cell (while I was running) to make sure I wasn’t on one of those planes…that I learned the awful truth.

I wasn’t on those planes of course, though I might well have been.[i] There were, after all, a couple of hundred individuals that boarded early flights just like mine that had no comprehension as to how that day would end, not to mention those already at work in the World Trade Center and Pentagon. And of course, there were the 343 members of the New York City Fire Department and 71 law enforcement officers whose work took them to the World Trade Center that fateful day. A day they went to work—but never came home. 

On not a few mornings since that awful day—and pretty much every time I’ve boarded an airplane since—I’ve thought about how on that horrible day so many went off to a normal day of work, how many boarded a plane—as will many on this anniversary—not realizing that they would not get to come home again. How many sacrificed their lives that day so that others COULD go home. How many put their lives on the line every day still, here and abroad, to help keep us and our loved ones safe. Let’s face it—planning for a long retirement is a laudable goal—but sometimes those plans are… “interrupted.”  And more often than not by things as “normal” as a traffic accident, a drunk driver or an unanticipated heart attack.       

We take a lot for granted in this life, perhaps nothing more cavalierly than that there will be a tomorrow to set the record straight, to right wrongs inflicted, to tell our loved ones just how precious they are.

As we remember that most awful of days—let’s also remember to take a moment to treasure what we have—and those we have to share it with still.

- Nevin E. Adams, JD

 

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[i] I’d spend the next three days living out of a hotel room in Dallas, with flights all cancelled for the foreseeable future, and me unable even to find a car to rent—literally separated from home and family by hundreds of insurmountable miles for three interminably long days. As that long week drew to a close, I finally was able to acquire a rental car and begin a long two-day journey home. During that long, lonely drive, I had lots of time to think, to pray, and yes, to cry. Most of that drive is a blur to me now, just mile after endless mile of open road. I’ve shared before the story of that drive home—where, somewhere in the middle of Arkansas, a large group of bikers was coming up around me—the kind you generally aren’t happy to see coming up behind you on a lonely, deserted highway. But unfurled behind the leader of that group on his Harley was an enormous American flag. And 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.

Happy Birthday, ERISA!

Pensions were not on my mind in 1974, certainly not on Labor Day of that year. 

While I was pondering my new college textbooks (and trying to figure out how I was going to pay for $.55/gallon gasoline), President Gerald R. Ford, less than a month in that role—and, appropriately enough on Labor Day, signed into law the Employee Retirement Income Security Act of 1974—better known to most of us as ERISA.

Little did I know at the time that that law—and the structure it provided to the nation’s private pension system—would, in the years to follow, play such an integral role in my life. And yet, in a wide variety of positions, and a handful of different organizations and locations, from that first college internship in 1977 to—well, today—retirement has been my career.

ERISA did not create pensions, of course; they existed in significant numbers prior to 1974. A major motivation for ERISA was the termination of the Studebaker[i] pension plan for its hourly workers in 1963.  At the time, the plan covered roughly 10,500 workers, 3,600 of whom had already retired and who—despite the stories you sometimes hear about Studebaker—received their full benefits when the plan was terminated.

However, some 4,000 workers between the ages of 40 and 59—didn’t. They only got about 15 cents for each dollar of benefit they had been promised, though the average age of this group of workers was 52 years with an average of 23 years of service (another 2,900 employees, who all had less than 10 years of service, received nothing). And so, armed with the real life example of those Studebaker pensions, highlighting what had been a growing concern about the default risk of private sector plans (public sector programs weren’t seen as being vulnerable to the same risk at that time)—well, it may have been a decade before ERISA was to become a reality, but the example of Studebaker’s pensions provided a powerful and on-going “real life” reminder of the need for reform.

In fact, ERISA was designed to regulate what was there and would yet come to be—to protect the funds invested in those plans for the benefit of participants and beneficiaries with a consistent set of federal standards. And, as part of that protection, to establish the Pension Benefit Guaranty Corporation (PBGC).  As President Ford said at the time, “It is essential to bring some order and humanity into this welter of different and sometimes inequitable retirement plans within private industry.”

Has ERISA “worked”? Well, in signing that legislation, President Ford noted that from 1960 to 1970, private pension coverage increased from 21.2 million employees to approximately 30 million workers, while during that same period, assets of these private plans increased from $52 billion to $138 billion, acknowledging that “[i]t will not be long before such assets become the largest source of capital in our economy.” Today, that system has grown to exceed $12 trillion (and another 11.5 trillion in IRAs, much of which came from that private retirement system), covering more than 97 million active workers (142 million in total) in more than 746,000 plans. 

The composition of the plans, like the composition of the workforce those plans cover, has changed significantly over time. While much is made about the perceived shortcomings in coverage of the current system, the projections of multi-trillion dollar shortfalls of retirement income, the pining for the “good old days” when (people act like) everyone had a pension (that never really existed for most), the reality is that ERISA—and its progeny—have unquestionably allowed more Americans to be better financially prepared for a longer retirement. Indeed, the Labor Department recently reported that plans disbursed $266 billion more than they received in contributions[ii] during 2020.

Forty-nine years on, ERISA—and the nation’s retirement challenges—may yet be a work in progress. But it’s hard to imagine American retirement without it, and the individuals who gave it “birth.” 

Happy birthday, ERISA!

- Nevin E. Adams, JD 

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[i] I’d wager that a majority of Americans have never even heard of a Studebaker, and the notion that a major U.S. automobile maker once operated out of South Bend, Indiana would likely come as a surprise to most. The Studebaker brothers (there were five of them) went from being blacksmiths in the 1850s to making parts for wagons, to making wheelbarrows (that were in great demand during the 1849 Gold Rush) to building wagons used by the Union Army during the Civil War, before turning to making cars (first electric, then gasoline) after the turn of the century. Indeed, they had a good, long run making automobiles that were generally well regarded for their quality and reliability (their finances, not so much) until a combination of factors (including, ironically, pension funding) resulted in the cessation of production at the South Bend plant on Dec. 20, 1963.

[ii] Though in total, contributions (DB and DC) increased by 3.2%, to $694.2 billion.

 

What’s Top of Mind for Retirement Plan Advisors?

One of my favorite parts of the NAPA 401(k) Summit is a comprehensive annual survey we do of advisors in attendance at the Summit I call the Summit Insider.

It’s a unique opportunity to get the perspective of hundreds of retirement plan-focused advisors in a unique window of time. A chance, if you will, to see what’s on the collective minds of a very special group of individuals.

Like the networking experience of the Summit itself, it’s a chance to see what is actually on the minds and driving forces for the nation’s leading advisors. Sometimes it’s a validation—sometimes a repudiation—but it’s always insightful, all the more so in view of this year’s (record-breaking) response to the Summit Insider questionnaire.

Over the past couple of weeks, I’ve shared some insights in the NAPA-Net daily—but if you’re looking for a quick sense of the advisor perspective(s) on business practices, industry trends, team building, or future focus—well, here you go:

• There have been BIG shifts in sentiment regarding cryptocurrency (from positive to negative game changers) and state-run IRAs (ditto). 
• Managed accounts continue to be viewed negatively—a sharp and sustained turnabout from three years ago (when they were actually seen as a positive game changer).
• ESG remains the most over-hyped trend—but advisors are split as to whether it is a negative or positive game changer.
• Indeed, when it comes to over-hyped trends, ESG has demonstrated remarkable “staying” power, having topped that most over-hyped list for (now) four years running—and this year drew nearly THREE times as much support for that categorization (last year it was only twice as supported) as the #2—which was, again, cryptocurrency. MEPs/PEPs crept up to the #3 slot, while actually declining in overall ranking from its placement the past two years. 
• Cost loomed large as the biggest hurdle for managed accounts, though not far ahead of “participants lack understanding of how they work.” Most see the future of these as being offered by the advisor’s firm.
• Plan sponsor interest in retirement income options really hasn’t changed, hovering somewhere between “minimal” and “occasional.” Something else that hasn’t changed; portability remains the dominant advisor concern with these solutions. 
• Roughly two-thirds are now incorporating HSAs (health savings accounts) into financial wellness curriculums—though a third of those do so only if they consulted on the specific solution. 
• Nearly a quarter (24%) say their team’s work/life balance is “better than ever.”
• “Attracting and retaining talent” alongside “scaling your practice” remained the big issues for advisor practices over the next 12 months. Perhaps somewhat ironically, succession and advisor consolidation were in the “not important” category.
• Among support from DC wholesalers, “plan tools and resources” slightly edged out “competitive info” as valued services.

Thanks once again to all who took the time to share those (your?) perspectives and insights on the pages that follow. Thanks for being part of the 2023 NAPA 401(k) Summit—and thanks particularly to the sponsors of this year’s NAPA Summit Insider!

And please—like, share and comment! Check out the rest of the 2023 NAPA Summit Insider at https://bit.ly/23Summitinsider1

See you (all) in Nashville April 7-9 for the 2024 NAPA 401(k) Summit!

- Nevin E. Adams, JD

The True ‘Cost’ of ‘The True Cost of Forgotten 401(k) Accounts’

An update of a so-called “study” has been making the rounds—again—and its authors have doubled-down (and then some) on the assumptions in an updated version.

I’m referring to something called “The True Cost of Forgotten 401(k) Accounts (2023)”—an update to a report circulated about a year ago of the same title (sans the “2023” qualifier) by a firm called Capitalize. The first report claimed that there was $1.35 trillion in “forgotten” 401(k) accounts—the latest iteration has upped that number to $1.65 trillion.

That’s right, $1.65 TRILLION.

Not that the report’s authors make it hard to be incredulous about their results. Their executive summary claims that a full 25%—that’s a full QUARTER—of all 401(k) plan assets are, by their definition, “forgotten.” And if you’ve ever “left behind” a 401(k) account at a previous employer—well, apparently you’ve “forgotten” that account by their definition.  

Now if that definition of “forgotten” winds up being more credible than the one hinted at a year ago—the notion that these balances were truly lost, a.k.a. the “orphan” accounts that individuals truly have lost track of—a category that the Employee Benefit Research Institute (EBRI) has estimated[i] at $1.5 trillion OVER A 40-YEAR TIME PERIOD—well, the underlying assumptions—not to mention the mathematical extrapolations based on those underlying assumptions—are not. 

The authors mostly took the baseline they conjured up a year ago (see “Compounding the Problem(s))—this includes some assumptions not only about the rationale for the decision[ii] to leave the account where it is, but an alleged fee differential between IRAs and 401(k)s (they claim IRAs are less expensive), make a swag assumption about the average size of those accounts, and cut that alchemy in half (to be “conservative”). The new version builds on that shaky foundation by applying some assumptions about job turnover from the Great Resignation—and, no surprise, job turnover (apparently) means (even) more 401(k) accounts “left behind.”

The Assumptions

At a high level, they assume: 40% of workers cash out[iii] their 401(k) (with no apparent allowance for account balance), say they used IRS data on rollovers to determine rollovers, assume 2-3 million workers rollover their 401(k) (based on GAO data that said 401(k) to 401(k) rollovers account for 10-15% of total rollovers, and “impute” (their word) the number of “newly forgotten 401(k)s based on the difference between the total number of 401(k) accounts tied to job-changers and those who cash out, roll over to IRAs, or roll over into 401(k)s.” Bearing in mind that they will then take the number of accounts, and multiply THAT by the average account balances they derived earlier. 

Now, that might explain why they wind up with a number that represents a jaw-dropping quarter of 401(k) balances allegedly “forgotten”—but fails to explain why any credence should be put on that derivation. It is, quite simply, math that takes questionable assumptions, pulls a number out of the middle of those, and multiplies it by other questionable assumptions, producing a large number that is then said to be drawn from credible sources. But even credible sources are quickly waylaid by bad assumptions concocted from some kind of unarticulated triangulation.

Yet another example is the $115 BILLION they say is the “potential collective opportunity cost” from these accounts left behind—the result, they claim, “as a result of poor allocation and above average fees these accounts could experience.” To get to that number, they take the number of accounts they’ve conjectured (29.2 million in 2023) and then multiplied THAT “by the foregone savings one of these accounts would experience in a single year based on our scenario analysis (~$3,900).” “One of those accounts” being that $55,000 average they started with. I kid you not.   

The Motivation?

That said, this time around, the motivations behind the report from Capitalize are to my eye more obvious than they were a year ago. Their assertions are primarily that these balances left behind are paying fees in excess of what they might—presumably in the warm embrace of firms such as firms like Capitalize that offer a rollover solution. This time the report wastes no time highlighting the potential issues with leaving your 401(k) balances “behind”; that it becomes harder to track fees, allocate funds, and that your fees may be larger if you leave it with the plan of a smaller employer. They even invoke the notion that “unlike retail accounts” you may have limited choice with regard to fees “or other preferences.”

Honestly, I have tried to ignore this aberration. The number is nonsensical on its face, even with the most liberal definition of “forgotten.” But, it’s August—a slow news month—and journalists scrambling for a catchy lead apparently just can’t resist the opportunity. More distressing (at least to me) is the number of ostensibly well-meaning industry professionals who (continue to) share links to the uncritical coverage of this report.   

Interestingly enough, the dictionary defines “capitalize” as “to take the chance to gain advantage from.” 

Hmmmm….

- Nevin E. Adams, JD

 

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[i] As a stand-alone policy initiative, EBRI has projected that the present value of additional accumulations over 40 years resulting from “partial” auto portability (participant balances less than $5,000 adjusted for inflation) would be $1.50 trillion, and the value would be $1.99 trillion under “full” auto portability (all participant balances). Under partial auto portability, those currently age 25–34 are projected to have an additional $659 billion, increasing to $847 billion for full auto portability. But that picks up all potential rollovers, and they certainly aren’t “forgotten.”

[ii] Full disclosure—the author CONSCIOUSLY left behind every single one of his 401(k) accounts until recently. For account balances above $5,000 it was the easiest thing to do (e.g., “nothing”), for some of them it was a matter of appreciating the institutional pricing and/or options available there versus the new 401(k), and for at least one it was simply the aggravation involved in trying to get the funds from the old 401(k) mailed to me in a check. I’m happy to say that the process has improved somewhat over the years, though all three prior providers insisted on mailing me a hardcopy check (two, where Roth balances were involved). Oh, and I never “forgot” a single one.  

[iii] Don’t get me wrong; “leakage” is a real concern, and rollovers, for the most part, remain a tedious process for your average participant. Too many smaller (and perhaps some larger) balances do, in fact, get lost or overlooked, and “attribution” via escheatment or force outs does occur.

Does Your 401(k) Need ‘Guardrails?’

A new WSJ op-ed says that 401(k)s “too often lead employees to make financially harmful mistakes.”  And yes, advisors are (apparently) part of the problem.

The “problem”—at least according to the op-ed authors is that, left to their own devices participants are said to be inclined to overindulge in bad investment choices; choices they claim are the result of plan sponsors’ ignorance of how their workforce is actually using the options—an ignorance born of advisors failing to provide that information. Advisors, they comment, who “don’t have any financial incentive to provide such information, or to design plans in ways that would tend to reduce diversification mistakes to begin with.”

Now I can’t speak for every advisor, but I know plenty who are actually devoting a fair amount of time and energy to tracking—and sharing, certainly in the aggregate—the asset allocation decisions of the participants in the plan with the plan committee. Beyond that, no small number of participants are individually counseled in financial wellness sessions toward “better” decisions with their portfolios—and that completely ignores the large (and growing) reliance on professionally managed alternatives like target-date funds and managed accounts by participant-savers.

But these researchers—who turn out to be none other than Professor Ian Ayres[i] of Yale University and Professor Quinn Curtis, a colleague from the University of Virginia—want to put some guardrails on employee choice(s) to solve a problem they detected in a single large plan…back in 2016.

The current op-ed—“inspired” by (or perhaps attempting to inspire sales of) their just-published book “Retirement Guardrails” (which can be obtained for a mere $110 in hardcover, or $34 paperback)—calls out for criticism a retirement system they say allows workers to put portfolios at risk by failing to diversify their investments and choosing investment options with “relatively high fees that eat into their returns.” They “estimate” that about 10% of participants fall prey to one, or both, of those errors.

In fairness (and we’ll accept at face value their factual assertions) once upon a time the University of Virginia’s 403(b) plan had a lineup in excess of 200 fund choices (not an uncommon array in university 403(b) plans, as those who follow litigation in this area can attest)—among them (apparently) one that tracked gold futures. And, in 2016 (when the study was conducted, and at a time when gold, for a while, was arguably an intriguing opportunity—before it wasn’t), the professors claim that a third (35%) of the participants in that program held more than half their savings in that fund—including 11% who were betting their entire balance on, not red, but…gold.[ii]

As noted above, Ayres’ solution for all this is—“guardrails”—basically imposing limits[iii] on how much participants might be permitted to invest in certain funds—funds that, in the estimation of the plan fiduciary MIGHT be harmful in large “doses.” 

What’s more puzzling—and troubling—is that he seems to have bootstrapped (and to my eyes out of thin air) a fiduciary obligation[iv] to not only prudently review and monitor the services and investments offered by a plan, but to track, investigate and, yes, limit the asset allocations of participants among options that are deemed subject to misuse/abuse. Indeed, he basically makes a product liability argument that those who build these menus have an obligation to monitor and remedy their (potential) misuse just like that imposed on a product manufacturer who knowingly distributes a dangerous product. And, by the way—he not only lays this at the feet of the plan sponsor/fiduciary and their advisor—but also as a responsibility for the recordkeeper platform provider (the ultimate “manufacturer”) themselves.

Now, there’s a reason that Preparation H contains a warning that the product is not to be taken orally—and that electric hair dryers bear a label that cautions against using them in the tub (I’m less sure about the labels on pillows warning of dire consequences for their removal). People, being people, do, in fact, sometimes do dumb things, and we know that even with carefully crafted instruments like target-date funds, individuals can (and do) split their investments between those one-size-is-supposed-to-be-enough options.

It’s not so much that “saving participants from themselves” isn’t a laudable undertaking—but one can’t help but wonder just how intrusive and/or expert plan fiduciaries are expected to be in order to strike an appropriate “balance” in such things. Let’s face it—it’s hard enough to make sure that the options on the investment menu satisfy—and continue to satisfy—ERISA’s rigorous standards for prudence—under this solution fiduciaries would also be expected to track (and restrict) the how much?      

Well, the good news—at least for now—is that there wouldn’t appear to be any actual fiduciary obligation to do so. ERISA 404(c) provides both a structure and a means to provide participants with the opportunity for an informed choice, and—as noted above, current plan design trends suggest that there are solid, prudent options aplenty for those unable or willing to do so. 

That said, you never know when a federal district court judge somewhere (or a plaintiff’s attorney) might latch on to the idea. At which point, the statute notwithstanding, there’ll be no putting “guardrails” on the potential for litigation.

- Nevin E. Adams, JD

 

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[i] If those names seem familiar—there’s a reason. You may remember Professor Ayres from an incident several years back when he wrote to thousands of plan sponsors, alerting them that, based on his analysis of Form 5500 data that they were sponsoring a “potential high cost plan.” Not that he was just trying to be helpful in bringing this to their attention (Quinn Curtis was also working with him on that project)—he also told them that he planned to publish the results of his analysis, and to share those with, among others, The New York Times, and The Wall Street Journal—as well as via Twitter with a special hashtag identifying their company. And he did this on the stationary of Yale University.

[ii] There’s another disparity with the 401(k)s they are seeking to impose this solution on; unlike participants in the University of Virginia plan, most 401(k) participants don’t have access to a defined benefit pension plan.

[iii] The notion of such guardrails isn't really innovative, even within the context of retirement plans. Ayres acknowledges the (voluntary) application in situations involving company stock, and similar constraints have (voluntarily) been imposed on features such as a self-directed brokerage account, and among plans contemplating cryptocurrency as an option as well. The difference is that those adoptions were limited in scope and voluntary—unlike the type of guardrails Ayres touts. 

[iv] The book subheading says, “proactive fiduciaries,” but the text implies a deeper obligation, anchored on the authors’ assessment of court rulings.

 

A Glidepath of/for Life

I’ve been getting a lot of … comments … of late about my version of “retirement.”

I heard it both a couple of weeks back speaking at an event sponsored by The Standard—and again last week at the NAPA DC Fly-In Forum—that I was setting a poor example for retirement aspirations (all good-natured, and generally followed by a quick comment that they were glad to see me nonetheless).  So much for long walks on the beach or reading in a rocking chair, I suppose. But it’s my first “go” at retirement, after all—no practice rounds (even my vacations over the years have been a bit “busy”) beyond the “space” provided by COVID’s lockdowns.

That said, my days are definitely different now. And, though it’s perhaps not apparent from the content I (still) produce in any given week (blame the plaintiffs’ bar—if they’d quit suing, I’d have less to write about), I’m pleased to report that I’m (beginning) to ease into new daily patterns; (more) time on the treadmill, actually reading books that have nothing to do with retirement plans/ERISA (or even reality), planning trips, actually putting a bucket list to paper, and yes—even the occasional afternoon nap.  
       

The shift is, admittedly, subtle (my wife would tell you it’s still largely non-existent). But there’s a definite shift in focus from where I’m sitting (albeit not yet in a rocking chair).

To that end, I recently had the opportunity to listen in on a webcast featuring a good friend of mine, Jeanne Thompson, who is now mapping out her own version of “retirement.” Now, I’ve long appreciated Jeanne’s talents for data analysis (and, more significantly, her ability to convey the potential impact and import of that data in a way that “normal” people can grasp)—and on this particular webcast she crafted a perspective on life that mirrored the markets—with both bull and bear passages, but also life choices—as a series of asset allocation decisions. And, as with investing, how the different “markets” of one’s life/career can be influenced by, or sometimes run counter to prevailing forces.

As asset allocation traditionally differentiates between stocks, bonds and cash, Jeanne breaks life down into three major elements: sleep, life and work. Those are broad swathes of existence, to be sure, but when you are talking about something like work/life balance, it’s not a bad place to start from. And, as she graphed out her career experience on that webinar, it was easy to see how life events—promotion to a new position, marriage, the arrival of children, and the “emptying” of that nest were reflected in those allocations of time.

In life, as with the markets, there are external influences that force shifts in those allocations. And yet, we have—or should have—some sense of the allocation we believe to be desirable to meet our goals.  And, if we’re mindful of that compass, we know that adjustments are appropriate from time to time—and that if those adjustments are ignored—well, the results can be…unfortunate.

But, as with any asset allocation decision, it starts with knowing your goals, your time frame(s) to achieve them, an appreciation for the cognizance of the surrounding environment(s), and a commitment to rebalance over time, as appropriate.

And you don’t even have to wait till “retirement” to do so.

- Nevin E. Adams, JD

'Mission' Controls

 So, what did you want to be when you grew up?

Now, I realize that some of you are still growing up—but I’ve never met ANYONE who said “I wanted to work with retirement plans”—and that includes me. 

Indeed, what we aspire to become in our youth is complex—and often shaped by our experience(s) at the time. And while I am sure there was a period in my youth when I wanted to be a fireman, a cowboy, or maybe even a professional athlete (that one didn’t last long), my earliest memories are of wanting to be an astronaut—an aspiration that came to mind again last week on the anniversary of the Apollo 11 moon landing.

It was a magical time for our nation’s space program. There was a plan, three separate programs (Mercury, Gemini and Apollo) designed with specific mission objectives to help us get there, and a vision—as President John F. Kennedy said in May 1961—of “achieving the goal, before this decade is out, of landing a man on the Moon and returning him safely to the Earth.” There was also a sense of national urgency (the so-called “Space Race” with the Soviets), and, while throughout its life the program was remarkably bereft of injury, the tragedy of the February 1967[i] fire on Apollo 1 that took the lives of astronauts Gus Grissom, Ed White and Roger Chaffee reminded us of the stakes involved.

And then, after years of watching Americans enter space, circle the planet, exit their craft while circling the planet (at unimaginable speeds), and then leave Earth’s orbit to touch the lunar sky, came that one Sunday July evening in 1969. I can still remember the grainy black-and-white images of Neil Armstrong’s “one small step for man” flickering across the screen of my family’s small black-and-white television (replete with its aluminum foil-festooned “rabbit ears”)—the anniversary of which was just last week. It was, as Neil Armstrong is said to have intended to say, “a small step for a man…a giant leap for mankind.”

It doesn’t take much imagination to draw a correlation between the planning for a landing on the moon and a successful arrival in retirement (OK, so maybe it takes a little imagination). Both require a notion of what constitutes a successful “arrival,” an idea of the steps that will be required to get there, the tenacity and ingenuity to deal with the inevitable bumps along the way[ii] (remember the example of Apollo 13)—and the specificity of a date certain to give some structure to those plans.

That said, and as we ponder the accomplishments and planning that helped our nation put astronauts in space and on the moon—and that one day may take us further—it’s worth remembering that our “mission” is not only to get tomorrow’s retirees safely to retirement, to take those “small steps” along the way—but ultimately to position them and their finances to carry them safely through retirement… to a safe landing at their “tranquility base.”

- Nevin E. Adams, JD

 

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[i] Of course, the January 1986 explosion of the Space Shuttle Challenger reminded us anew and afresh of those dangers.

[ii] Students of history know that one of the contingency plans for the Apollo 11 mission was a presidential statement if those astronauts had crashed (they got pretty low on fuel before landing), or if they hadn’t been able to return to Earth (some engineer actually forgot to put a handle on the outside of the lunar module door—and if they hadn’t noticed that and left the door open while they were on the surface, they might not have been able to get back inside the LEM). Fortunately, those contingencies are now simply interesting historical anecdotes. Still, it’s worth recalling that the ultimate mission was not only to get men to the moon, but to return them safely home.

Social Security COLA ‘Click Bait’

Over the past couple of years, one of the most-clicked posts on NAPA-Net has been on a topic that is a bit of a head-scratcher.

I’m speaking, of course, of the (now-incessantly tracked), monthly projections of the (potential) cost of living adjustment (COLA) for Social Security. It started back when inflation emerged as a real consumer concern—and it was spurred by the efforts of a group called the Senior Citizens League in publishing—EVERY MONTH—a projected cost of living adjustment (COLA) for Social Security.[i] And our coverage of those projections has been, and continues to be, one of the most clicked-on stories[ii] (ditto other publications, apparently).  

Like many, perhaps most, of you, I was initially intrigued by the reporting. Let’s face it, after a couple of decades of relative economic slumber, inflation has reared its ugly head in a way that reminds some of us of the days of our youth when inflation was an actual scary economic reality, rather than an obscure concept. And, at a time when the soaring cost of—well, everything—has (re)garnered our attentions, the notion that those impacts for older workers might be muted by a positive adjustment in their monthly benefit (not to mention those prospective increases in contribution and benefit limits of qualified plans) was encouraging.

But every single month?        

Not that Social Security has always had a COLA. In fact, Congress enacted the COLA provision as part of the 1972 Social Security Amendments, and automatic annual COLAs didn’t begin until 1975. Prior to that, benefits were increased only when Congress enacted special legislation. As for its calculation, Social Security’s COLA is based on the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of the last year a COLA was determined to the third quarter of the current year. If there is no increase—and, believe it or not, that’s been the case in recent memory—there can be no COLA. That said, you can imagine that there tends to be something of a hue-and-cry from Social Security beneficiaries in those rare situations (most recently in 2016,[iii] though the increase in 2017 was just 0.3%). 

Of course, inflation measures often seem to be as much art as science—varying largely on what you spend your money on—and seniors do tend to spend money differently. In fact, one of the criticisms of the current formula is that it considers the purchases that current workers make, rather than retirees.[iv]  Another factor is the timing of the formula, which considers the period from September of one year to the next—while the government reports tend to reference the change from the PRIOR month, or in some cases from the same month a year earlier. 

That said, those on what are commonly referred to as “fixed incomes”[v] are understandably interested (and anxious) about potential increases (or lack thereof) in those finances. Let’s face it—retirement is not a profession that warrants merit increases, after all, nor are there typically opportunities for “promotion.” Purely from an SEO perspective, one can understand and appreciate the internet search engines cranking up to try and get a peek at what’s coming up in terms of potential benefit increases (and, to be sure, we do get significant traffic for those posts outside of our newsletter distribution). Still, and while those projections are based on the realities of the official inflation numbers reported by the federal government, they are merely point-in-time guestimates when it comes to knowing what the actual COLA number will be.

Not that I don’t “get” and appreciate the significance of the ACTUAL Social Security COLA—its impact on retirement projections, not to mention realities, is significant. That said, relentlessly tracking the POTENTIAL COLA based on interim monthly readings of inflation a year out from the actual establishment of the COLA have always struck me as a bit… obsessive. But clicks drive coverage these days and for the foreseeable future, and therefore, as long as you (all) keep clicking, we’ll keep covering…

Still, it should serve as a reminder to us all that planning for retirement should look beyond the income we happen to be drawing when we leave the workforce. After all, if the income we have at retirement isn’t enough to adjust to the costs of living in retirement—it might well cost us an “adjustment” in how, or how well, we live through retirement.

- Nevin E. Adams, JD

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[i] According to their website, they are a nonpartisan seniors group, and have been since 1992, though it wasn’t until the COLA adjustment reports that they crept onto my radar. And perhaps that, as much as anything else, explains the monthly COLA reports.

[ii] And by including “Social Security” in the title of this post, I’m shamelessly trolling for some additional SEO visibility, of course.

[iii] You can find a table of the COLA at https://www.ssa.gov/cola/

[iv] For more details, check out http://assets.aarp.org/rgcenter/ppi/econ-sec/fs160.pdf or https://www.aarp.org/retirement/social-security/info-2020/colas-history.html.

[v] And it’s not just retirees. Disabled workers and their dependents account for 19% of total benefits paid, according to the Social Security Administration (see http://www.socialsecurity.gov/pressoffice/basicfact.htm).

 

Are Millennials’ Retirements ‘Doomed?’

Millennials have had a rough week of it, at least in the financial press.

First there was a report that they had established asset allocations that mirrored that of their grandparents (the respondents apparently never heard of a target-date fund). Then a separate survey that indicated they (70% of them, anyway) were ashamed to ask their parents for financial advice (we’ll set aside for a minute whether that would have been a good source), and then the pièce de résistance was a report that painted a pretty bleak retirement picture for a generation that “entered the workforce around the Great Recession, which began in late 2007, and experienced a difficult economy early in their careers. Now, they are confronting pandemic-related setbacks while trying to manage work-life balance.” 

Indeed, the only bright note for this group—identified as those born between 1981 and 1996 - was a report that said the retirement savings gap between genders in that demographic was a mere 23% (which, at $29,218 versus $23,715, doesn’t mean it’s adequate, but then we’re only talking about averages). 

Now, as a mid-range Boomer—who happens to be the parent of three Millennials—I can attest to the complexities of this generation of individuals, now said to be the majority of today’s workforce (I can also attest to the reality that they all hate the label “Millennials”). 

Of course, they’re not the “kids” such labeling tends to call to mind—the eldest are in the 40’s, after all.  But that’s the age when life’s biggest financial struggles come home to roost; college debt, home ownership, marriage, kids (and the prospects of THEIR college expenses), and—increasingly—the burdens of caring for their Boomer parents. In that sense, their experiences are comparable to the challenges their parents faced, though perhaps a tad later in life.

There are, of course, the economic and technological realities of their generation. At similar ages, odds are their parents were barely aware of the Internet, and “innovations” like smartphones, email and social media were not even glimmers of possibility beyond science fiction. Those influences are both empowering and debilitating, inflating expectations and fueling a certain peer pressure on a scale their parents couldn’t appreciate. 

That said, and despite the recent spate of negative press (giving Boomers a break[i]), I’m pretty sure that:

Millennials are saving for retirement—likely earlier, and at higher rates than you did when you were their age.

Sure, some of that is plan design—automatic enrollment was a rarity when their parents were coming into the workplace, and employers are increasingly coupling that design with contribution acceleration.  Moreover, immediate eligibility is increasingly popular (Vanguard’s 2023 How America Saves says 80% of plans now offer that, while the Plan Sponsor Council of America’s 65^th Annual Survey of 401(k) and Profit-Sharing Plans puts it at just over half). And yes, that can matter a lot if job turnover is high—but it’s an urban myth[ii] that Millennials turnover more often than Boomers did at their age.

IF they have access to a plan at work, anyway.

Millennials are likely better invested for their retirement than you are—“then” and now.

Okay, as with saving for retirement, surely some of this is plan design—notably the default investment in target-date funds (TDFs) or some other qualified default investment alternative (QDIA)—and their more recent hire date. While data shows that TDF use varies with participant age and tenure, reports pretty consistently indicate that younger participants are more likely to hold TDFs than older participants (not so much due to their age, but due to their greater likelihood of being a new participant defaulted into the TDF. That doesn’t mean they are more involved/engaged/astute about those investments—but they’re likely more diversified, with portfolios regularly rebalanced (despite the conclusions of that survey above). 

BTW, that’s something that plan fiduciaries might want to keep in mind the next time the concept of reenrollment comes up.

Millennials are thinking about retirement. Probably more than you were at their age.

Millennials have never known a time without a 401(k), nor have they lived during a period when a personal responsibility for saving hasn’t been part and parcel of the education around their benefits package. They’ve been worried about Social Security’s sustainability from the time of their first paycheck (what they probably don’t appreciate is that their parents also worried, and arguably—in the early 1980s—with better reason).

While they certainly have options their parents didn’t, they also have their own set of challenges—some unique, but many unique only in that they are young(er). They have tools and innovative plan design, apps and the aptitude to use them, and in many cases access to professional guidance.

They may not know how much they need to save for retirement (nor do their parents, apparently), they may not yet feel that they can afford to save for retirement, they may not even know how to save for retirement—but you can bet they know they need to.

And, in more cases than one might expect from recent reports, with access to workplace retirement plans, the help of good plan design, and professional retirement planning advice, likely already doing so.         

- Nevin E. Adams, JD 

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[i] And, once again, nobody seems to care about Gen X… who also hates that label!

[ii] The data show that median job tenure in the private sector in the United States has hovered around five years for the past several decades, according to the nonpartisan Employee Benefit Research Institute (EBRI). 

 

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Independence 'Gaze'

A week from today the nation will celebrate Independence Day—though of course independence didn’t actually occur on July 4.

Let’s face it, the Declaration of Independence[i] was little more than that—a declaration. One that had yet to be backed by anything beyond the artfully crafted and narrow consensus of a handful of delegates appointed by a wide variety of means and mechanisms, with correspondingly disparate levels of responsibility and accountability for their alignment with the principles outlined in that document. 

As practically meaningless as that declaration might have been, we commemorate and celebrate those actions because, eventually, events transpired that made those aspirations a reality. But it came only after years of hard-fought fighting, and while we don’t often talk about this, it ultimately divided the nation between those who wanted to be free from what they viewed as tyranny—and those who viewed those actions and aspirations as nothing less than treason.

That said, the deliberations that produced that declaration are in many ways emblematic for how groups—including retirement plan committees—move forward—though it’s important to keep these things in mind:

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 (not to mention putting their own lives and fortunes at risk).

Indeed, 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 fear that advocating change suggests an admission that there was something “wrong” before, it seems fair to say that plan fiduciaries 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 problems, and a reluctance to adopt potentially disruptive (and, admittedly, sometimes expensive) plan features like automatic enrollment, deferral acceleration, or more recently—retirement income.

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.

Consensus can be hard to achieve.

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 they should be aligned around a singular purpose—decisions made with the exclusive purpose of the best interests of plan participants and beneficiaries.

It’s important to put it in writing.

Before the delegates at the Second Continental Congress were united in purpose, there was a sense by those favoring independence that putting those thoughts in writing would help crystalize, as well as formalize, that proposition. And while the Declaration of Independence technically had no legal effect, putting that declaration—and the sentiments expressed—in writing gave it a force and influence far beyond its original purpose. It also provided a focus for the debate and discussion of those delegates—and an opportunity to tweak and shape those thoughts to be in alignment with the whole group.

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 not only in validating the results, but also the thought process behind those deliberations (not to mention that there WAS a 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 (re)assessing those decisions at the appropriate time(s) in the future and making adjustments as warranted—properly documented, of course.

You can delegate authority—but not responsibility.

When it came to drafting the declaration itself, there was an acknowledgement that some delegates were better writers than others. But while the primary responsibility for the draft fell to Thomas Jefferson, he was teamed with several other key individuals to help assure that the draft took into account the sensibilities of the entire delegation—and even then, when presented there were additional edits.

Ultimately, however, the responsibility for the declaration fell to all the delegates. 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.”

It’s 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 not only permitted, but expected, to do.

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, rather than the history books.

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 ultimately produced the Declaration of Independence we’ll commemorate next week.

Yes, Independence Day is a great opportunity to reflect and recall 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

 

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