A Penchant for Pensions?

  I’m not sure how old I was when I first saw “Night of the Living Dead”—but I have long been intrigued by stories of a zombie apocalypse—where mindless beings inexplicably rise from the dead, with no memory of their past, just a relentless (and apparently insatiable) hunger for…well, “us.”

That is perhaps an unfortunate comparison to last week’s hearing by the Senate Health, Education, Labor and Pensions (HELP) Committee, one ostensibly held to focus on how we were going to stave off the retirement “crisis” by…bringing “back”[i] defined benefit plans.[ii]

There were two fundamental premises underlying the hearing; first that there is, in fact, a retirement crisis, and second, that the restoration of defined benefit plan designs would remedy that situation.  

There remains in many circles (including last week’s hearing) a pervasive sense that the defined contribution system is inferior to the defined benefit approach—a sense that seems driven not by what the latter actually produced in terms of benefits, but in terms of what it promised. Even now, it seems that you have to remind folks that the “less than half” covered by a workplace retirement plan was true even in the “good old days” before the 401(k), at least within the private sector. And when it comes to defined benefit plans, it was significantly less than half.

And while you can (eventually) wrest an acknowledgement from those familiar with the data, almost no one EVER talks about how few of even those covered by those DB plans put in the time required to vest in their full pension (particularly prior to the Tax Reform Act of 1986, which accelerated vesting schedules). Those who demonize the 401(k) are never asked to speak to the “coverage gap” that was actually wider when defined benefit structures were “in vogue,” nor called for an accounting of the shortfall between the actual benefits delivered versus the “promise.” And yet, those 401(k) critics in last week’s hearing—with a straight face—held forth on how much better things would be…if only defined benefit plans would come back.

Don’t get me wrong—defined benefit plans continue to serve a valued societal purpose (not the least of which the income they provide my 93-year-old mother, though given the state’s finances, she remains concerned how long they will last), though they tend to work “better” in the public sector and among unionized workforces, where one’s profession and job tenure tend to be less volatile. That said, it’s not like there was some kind of cataclysmic event that wiped them out overnight in the private sector. Rather, their demise was one of a hundred painful “cuts”—all well-intentioned, of course. 

There were (and are) premiums to provide insurance backing for plans that “fail,” disclosures to try and avoid (unexpected) failures, demands for a full accounting of the potential financial obligations those plans represented for the organizations that sponsor them, and finally a demand that those financials be moved from footnotes to the corporate balance sheet itself. At any number of points along that continuum, one could well understand and appreciate why employers would choose to step away from that burden—and they did. 

Moreover, with few exceptions they were able to do so without opposition from employees—who typically didn’t (and largely still don’t) appreciate the cost or benefit of a promise that won’t come to fruition until years, if not decades, beyond the date they expect to be employed by the firm making that promise. And that ignores a criticism highlighted by several in the hearing—that these programs aren’t always well-managed or funded to provide those promised benefits.         

Yes, a fully funded, fully vested benefit that you’ve paid nothing for is certainly a good thing. Little wonder that a recent survey (by one of those firms represented at the hearing) suggested a massive public clamoring for the alleged panacea of these programs. And considering the plethora of headlines proclaiming the dire straits of today’s retirees, who can be faulted for clinging to a benevolent notion of a simpler time when someone else worried about such things?

All that said, there was little in the way of actual data at the hearing to suggest that a return of DB (certainly at the expense of the 401(k)) would actually resolve the issues. Mostly the witnesses focused on the alleged shortcomings of the current system (albeit with some sharp differences in conclusions, and a brief debate about the different results one gets from actual data versus surveys reliant on what people think in terms of establishing whether or not there is an actual crisis), alongside some optimism that SECURE and SECURE 2.0 had laid the groundwork for potential improvement in coverage, sufficiency and decumulation options. If there was a consensus, it might have been that we need to address the projected shortfalls in Social Security benefits—and, truly, if that isn’t, then we really will be looking at a crisis.

The thing that makes cinematic zombies so terrifying is that there are so many of them—and that they keep getting up and pursuing you no matter how much damage you inflict.[iii] That, and they manage to “convert” more with a simple bite. Let’s face it—a truly serious look at the retirement “crisis” would acknowledge that under traditional vesting definitions and job turnover rates in the private sector, defined benefit designs are, at best, a dubious solution. 

A penchant has been described as an irresistible attraction, as someone having a “penchant” for taking risks. 

A more practical one would be to look at a system that is already in place and working for those with access—and talk about ways to make THAT reality a reality for all.

- Nevin E. Adams, JD

 

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[i] In fairness, there are still defined benefit plans about, even in the private sector—though they are considerably fewer than they were a generation ago, and many are frozen or in termination status. 

[ii] The hearing was titled and you can still listen to a recording of it here, "Taking a Serious Look at the Retirement Crisis in America: What Can We Do to Expand Defined Benefit Pension Plans for Workers."

[iii] Well, except for the occasional well-placed headshot.

‘Positive’ Thinking: Why Small Businesses That Offer a 401(k) Do So

Last week we explored the reasons why small businesses DON’T offer a retirement plan to their workers. But there are quite different—and positive—reasons for choosing to do so.

The obstacles that keep most small businesses from offering a retirement plan to their workers are an assortment of factors, real and (somewhat) imagined. There ARE remedies for those concerns,[i] but mediation of those concerns doesn’t seem to be a factor in the motivations of small businesses that DO choose to offer a plan.

Reasons ‘Able’

According to that recent survey by the Employee Benefit Research Institute (EBRI) and Greenwald Research, when the small business owners who offer retirement plans were asked the reasons that they do so, factors associated with attracting and retaining workers were the most prominent. Indeed, the vast majority—more than 9 in 10 of the small business owners[ii]—said that a reason they offer a plan is the positive effect on employee attitude and performance. 

According to the report, 90% said that a competitive advantage for the business in employee recruitment and retention is a reason for offering a plan. In fact, nearly a third (30%) said the positive effect of offering a plan is the MOST important reason, though nearly as many (25%) cited the competitive advantage as the most important reason.

Tax ‘Tacts’

Not that tax benefits and preferences weren’t factors; roughly two-thirds of the small business owners said that tax advantages for key executives and allowing the owner to save for retirement on a tax-deferred basis were (also) reasons for offering a plan, though only about 5% of the small business owners cited each of these as the most important reason.

The bottom line is there are any number of good, positive reasons—benefits for workers and business owners alike—for offering, and participating in, a workplace retirement plan. Unfortunately, there are also any number of reasons to put off doing so—not enough time, worries about the expense, confusion about the options, inertia, and that all-too-human inclination to put off big decisions for another day.

Then again, aren’t those the same reasons often put forth to justify not saving for retirement?

- Nevin E. Adams, JD

See also: 5 Reasons Why Your Small Business Should Offer a Retirement Plan | National Association of Plan Advisors (napa-net.org)

 

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[i] Notably the tax credits included in SECURE 2.0.

[ii] While those small business owners seem committed to the offering, the survey DID find some points of confusion with regard to the obligations associated with that undertaking. Turns out the one statement the survey asked about plan design requirements that was not true had the highest percentage of business owners agreeing with it; two-thirds (63%) of these owners thought that employer contributions were always automatically vested (in fairness, those who didn’t offer a plan were even more mistaken—and that WAS cited as a reason for not offering a plan).

Closing the 401(k) Coverage Gap: The ‘Better’ Business Bureau

 The solution to the coverage gap lies through small business—but only about a third have been approached in the past year about offering one, according to a new survey.

That’s not exactly a new revelation—any number of surveys and government data throughout the years indicates that the vast majority of large(r) employers already offer a workplace retirement plan.[i] The coverage “gap” so often held out as a sign of “failure” by the critics of the 401(k) lies almost exclusively among smaller employers. Which means that closing it will require a focus on small business—and understanding the “resistance.”  

At the outset, it’s worth acknowledging a certain truism about small plans (the kind small businesses set up)—they are sold, not bought. Consequently, it was disappointing to see that datapoint about just 31% of the businesses that do not currently offer a plan having been approached in the last 12 months about offering one.[ii] 

That survey finding was included in a recent report by the Employee Benefit Research Institute (EBRI), along with the Center for Retirement Research at Boston College and Greenwald Research. Asked why they weren’t offering a plan, the vast majority (74%) said that their business was either too new or too small. That said, among the highly cited reasons for not offering a plan, nearly as many (72%) said required company contributions are too expensive (yes, they mistakenly assumed company contributions were required[iii]), 70% said their revenue is too uncertain to commit to a plan, and 70% said it costs too much to set up and administer. In sum, most of the resistance came down to financial factors—and considering the failure rate of most small businesses, that’s hardly surprising.[iv]  

Indeed, asked about factors that would encourage them to establish a plan, the most cited reason (by 79%) was an increase in the business’s profits. But the next set of reasons most cited as likely to get small businesses to offer a plan were business tax credits for starting a plan (75%) and a plan with low administrative requirements and/or no employer contributions (74%).

Now, in that context, consider that among the small business owners not offering a plan, almost three-quarters (72%) said they were NOT aware[v] of tax credits up to $5,000 being available to cover the costs of starting a retirement plan—though 78% said the tax credits would make it at least somewhat more attractive to offer a plan[vi]—and more than a quarter (28%) said it would make it MUCH more attractive![vii]

The good news is, courtesy of the tax incentives in the SECURE 2.0 Act of 2022 (and the ability to shatter some myths about plan design), we have a message that could make a real difference in plan adoption—one that would be good for business—and your business—as well.

- Nevin E. Adams, JD

 

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[i] From 2010–2023, the fraction of establishments with less than 50 workers who offered a retirement plan ranged from 42%–52%. For establishments with 50–99 workers, 70%–79% offered a plan, and 78%–91% of establishments with 100 or more workers offered one. See Bureau Labor Statistics, “Employee Benefits in the United States, March 2023,” Historical Tables. https://www.bls.gov/ebs/publications/employee-benefits-in-the-united-sta....  

[ii] However, the small businesses with 50–100 employees were much more likely to have been approached, with 58% saying they had been. On the other hand, that’s roughly (only) half.

[iii] The researchers commented that it was interesting that “the one statement that was not true had the highest percentage of business owners agreeing with it, as 63% of these owners agreed that employer contributions were always automatically vested. In both cases, those offering a plan were more likely to agree with the statements than those that did not offer a plan. Thus, it appears that small business owners don’t understand the potential flexibility in offering an employment-based retirement plan, which is not unexpected, as larger employers typically have experts or access to experts on benefits that would not be available to smaller businesses.”

[iv] Somewhat surprisingly, the administration being too burdensome and the possibility of being out of compliance with government regulations or held liable for investment decisions made by employees—obstacles often targeted in legislation and regulatory safe harbors—were the LEAST likely to be cited as a reason for not offering a plan.

[v] Awareness of these tax credits was different by the size of the business, as 50% of the small business owners with 50–100 employees were aware of the tax credits vs. less than 25% of the small business owners with fewer than 50 employees. Businesses with 10–19 employees were the most likely to say that the tax credits would make it at least somewhat more attractive to offer a plan.

[vi] Despite being lower ranked than the attraction and retention of workers, roughly two-thirds of the small business owners said that tax advantages for key executives and allowing the owner to save for retirement on a tax-deferred basis are reasons for offering a plan—though only about 5% of the small business owners cited each of these as the most important reason.

[vii] Half (51%) of small business owners offering a plan were not aware of the Saver’s credit/match—while 83% of those not offering a plan weren’t aware—though 69% of the small business owners said the Saver’s credit made offering a retirement plan at least somewhat more attractive. 

Love and Money

  How well do you (think you) know your significant other?

The passage of time—shared experiences and the process of getting to know each other reveals much—and yet I learned something new about my partner of some four decades just last week!

That brought to mind one of the favorite game shows of my youth was The Newlywed Game. The show featured four couples—all of which were to have been married less than two years. Each of the contestant couples were separated—then asked a series of questions designed to test these newlywed couples’ knowledge of each other, and in some cases their collective memories (and willingness to share publicly). Points were assigned based on answers that matched—but the most memorable, of course, were the missed matches—and the inevitable response of the spouse who was absolutely CERTAIN of the response of their partner.  

Now, a year of marriage is arguably not long enough to know EVERYTHING about your partner. But, and with Valentine’s Day looming, a couple of industry surveys remind us that, while money can’t “buy me love,” it can be a relationship “breaker.”

Indeed, a new survey by Empower asserts that spending habits (38%) and budgeting (33%) are the money topics most likely to lead to disagreements in relationships followed by financial priorities/goals (20%). Over a third of couples (37%) say money is a big relationship stress point, with Gen Zers feeling the most strain around financial issues (48%). Retirement planning/savings, while on the disagreements list, was pretty far down—cited by only 10%—though one assumes that is largely because of its relatively distant timing impact(s).

Fidelity Investments’ 2024 Couples and Money study notes that 45% of partners admit they argue about money at least occasionally—and more than 1 in 4 couples identify money as their greatest relationship challenge. Fidelity’s survey is interesting in that it—like that old Newlywed Game show—surveys couples individually before bringing their answers together to analyze and identify where couples are doing well with their communication and finances. Those couples give themselves high marks on that score—with nearly 9 in 10 claiming they communicate well or very well with their partner.

On that account, the Fidelity report notes that more than a third of couples miss the mark when it comes to how much income their significant other makes—and more than a quarter (27%) admit to being often frustrated by their partner’s money habits, but say they let it go for the sake of keeping the peace. More than half—but just over half (54%) cite as their top financial concern having enough money saved for retirement. Only about half (57%) work together on making decisions about retirement savings and other long-term goals.[i] The good news is more than half of respondents feel very good or excellent about their financial health and 27% of Boomers say building a financial plan together is their love language.   

Inevitably couples are comprised of individuals who have different interests and aptitudes—and money and finances, in particular, can be a sensitive subject. We’re often caught between a fear of being judged—or convinced that judgement is required in order to achieve financial order, but worried that expressing that concern will lead to arguments—or worse. It’s something to bear in mind this Valentine’s Day amidst all the candy, flowers and romantic dinners. 

One thing seems certain, however; just as healthy long-term relationships are built on trust and openness—so are their healthy finances.

- Nevin E. Adams, JD 

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[i] When it comes to having a vision for retirement, Fidelity found that couples are mostly aligned on how they want to be spending their time—with family, friends, traveling, and their hobbies—though about half (53%) of couples who have not yet retired express conflicting views on how much they need to have saved to retire.

Could Your 401(k)’s Fate Rest on the Winner of Super Bowl 58?

Will your 401(k) be chopped by the Chiefs—or find gold with the 49ers?

That’s what adherents of the so-called Super Bowl Indicator[1] would likely conclude, after all. It’s a “theory” that when a team from the old National Football League wins the Super Bowl, the S&P 500 will rise, and when a team from the old American Football League prevails, stock prices will fall.

It’s a “theory” that has been found to be correct nearly 80% of the time—for 41 of the 57 Super Bowls, in fact. Not that it hasn’t been tackled short of the goal line. 

Portfolio Prognostications

One needs to look back no further than last year’s victory by the (original AFL) Kansas City Chiefs that, according to the Indicator, should have predicted a portfolio predicament for the S&P 500—but wound up with a 25% gain for the year. Or the year before that when the victory by the Los Angeles Rams “should” have been a portent of good times, only to see the S&P 500 slump more than 19% for its biggest loss since 2008. 

And while the previous year’s victory by the NFC’s Tampa Bay Buccaneers bolstered the premise behind the “theory,” the year before that the win by these same Kansas City Chiefs—who have become something of a regular in the big contest—over the then-NFC champion San Francisco 49ers undermined its track record (or did your 401(k) miss that 18.4% rise in the S&P 500?). Or how about the year before THAT when the AFC’s New England Patriots (who once upon a time were the AFL’s Boston Patriots) bested the NFC champion Los Angeles Rams—but the S&P 500 was up more than 30% that year (2019).

Or, looking the other way, the year before that a win by the NFC champion Philadelphia Eagles against the AFC champion Patriots turned out to be a loser, marketwise, with the S&P 500 down more than 6% (though for most of the year it was quite a different story). Ditto the year before, when the epic comeback by those same AFC champion Patriots against the then-NFC champion Atlanta Falcons failed to forestall a 2017 market surge.

Now, one might think that the real “spoiler” to this market “theory” is the New England Patriots (who not so long ago were perennial Super Bowl participants)—but the year before that, the AFC’s (and original AFL) Broncos’ 24-10 victory over the Carolina Panthers, who represented the NFC, also proved to be an “exception.”

Market Makings

Indeed, one might well wonder why, in view of that consistent string of “exceptions” that we’re still talking about this “theory”—but, as it turns out, that’s an unusual (albeit consistent) break in the streak that was sustained in 2015 following Super Bowl XLIX, when the AFC’s New England Patriots (yes, they show up a lot) bested the Seattle Seahawks 28-24 to earn their fourth Super Bowl title.

It also “worked” in 2014, when the Seahawks bumped off the legacy AFL Denver Broncos, and in 2013, when a dramatic fourth-quarter comeback rescued a victory by the Baltimore Ravens—who, though representing the AFC, are technically a legacy NFL team via their Cleveland Browns roots. This is where things start to get confusing, as the Ravens, who were the Browns moved to Baltimore in 1995 (though the NFL still views them as an expansion team) filling the hole left by the then-Baltimore Colts’ 1984 “dead of night” move to Indianapolis.

Admittedly, the fact that the markets fared well in 2013 was hardly a true test of the Super Bowl Theory since, as it turned out, both teams in Super Bowl XLVII—those Ravens and the San Francisco 49ers—were, technically, NFL legacy teams.

However, consider that in 2012 a team from the old NFL (the New York Giants) took on—and took down—one from the old AFL (the New England Patriots—yes, those New England Patriots… again). And, in fact, 2012 was a pretty good year for stocks.

Steel ‘Curtains’?

On the other hand, the year before that, the Pittsburgh Steelers (representing the American Football Conference) took on the National Football Conference’s Green Bay Packers—two teams that had some of the oldest, deepest and, yes, most “storied” NFL roots, with the Steelers formed in 1933 (as the Pittsburgh Pirates) and the Packers founded in 1919. According to the Super Bowl Theory, 2011 should have been a good year for stocks (because, regardless of who won, a legacy NFL team would prevail).

But, as some may recall, while the Dow gained ground for the year, the S&P 500 was, well, flat (dare we say “deflated”?).

And then there was the string of Super Bowls where the contests were all between legacy NFL teams (thus, no matter who won, the markets should have risen):

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

Sure enough, the markets were higher in each of those years.

As for 2008? Well, that was the year that the NFC’s New York Giants upended the hopes of the AFL-legacy Patriots (yes, those Patriots) for a perfect season, but it didn’t do any favors for the stock market. In fact, that was the last time that the Super Bowl Theory didn’t “work” (well, until last year, the year before last—oh, and the year before that—and the year before…).

Patriot Gains

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

Of course, Super Bowl Theory proponents would tell you that the 2002 win by the New England Patriots accurately foretold the continuation of the bear market into a third year (at the time, the first accurate result in five years). But the Patriots’ 2004 Super Bowl win against the Carolina Panthers (the one that probably nobody except Patriots fans and disappointed Panthers advocates remember because it was overshadowed by the infamous “wardrobe malfunction”) failed to anticipate a fall rally that helped push the S&P 500 to a near 9% gain that year, sacking the indicator for another loss (couldn’t resist).

Bronco ‘Busters’

Consider also that, despite victories by the AFL-legacy Denver Broncos in 1998 and 1999, the S&P 500 continued its winning ways, while victories by the NFL-legacy St. Louis (by way of Los Angeles) Rams (that have since returned to the City of Angels) and the Baltimore Ravens (those former “Browns”) did nothing to dispel the bear markets of 2000 and 2001, respectively.

In fact, the Super Bowl Theory “worked” 28 times between 1967 and 1997, then went 0-4 between 1998 and 2001, only to get back on track from 2002 on (though “purists” still dispute how to interpret Tampa Bay’s 2003 victory, since the Buccaneers spent their first NFL season in the AFC before moving to the NFC).

Indeed, the Buccaneers’ move to the NFC was part of a swap with the Seattle Seahawks, who did, in fact, enter the NFL as an NFC team in 1976 but shuttled quickly over to the AFC (where they remained through 2001) before returning to the NFC.[2] And, not having entered the league until 1976, regardless of when they began, can the Seahawks truly be considered a “legacy” NFL squad?

Bear in mind as well, that in 2006, when the Seahawks made their first Super Bowl appearance—and lost—the S&P 500 gained nearly 16%.

Some fun facts to share about the game:

The 2023 game drew between 113 million and 115.1 million viewers—making it the most-watched U.S. telecast of all time.

The 49ers are 5-2 in previous Super Bowl appearances. The Chiefs are 3-2. The two teams have met in the Super Bowl before—in 2020, when the Chiefs came from behind to beat the 49ers in Super Bowl LIV. Early odds have the 49ers a slight favorite, by about 2.5 points. 

This happens to be the first Super Bowl ever played in the state of Nevada (11 states have hosted—knew you’d want to know), and while everyone is saying Las Vegas, it’s actually (technically) taking place in Paradise, Nevada. 

The Chiefs have been designated the home team for the game—and will be wearing red. The team wearing white jerseys in the Super Bowl has won 16 of the last 19 Super Bowls, including the Chiefs in 2023 (though the last time Kansas City won before that they were wearing red).

Among other things (whether Taylor Swift will make it to the game on time), you can (even) bet on the color of the Gatorade that will be dumped on the winning team's coach.

All in all, and particularly in view of the exciting playoff games that have led up to it, it looks like it should be a good game.

And that—whether you are a proponent of the Super Bowl Theory or not—would be one in which regardless of which team wins, we all do!

- Nevin E. Adams, JD

 

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[1] An alternate theory linking the Super Bowl to stock market performance in reverse fashion postulates that Wall Street’s results can be used to predict the outcome of the game. According to this theory, if the Dow rises from the end of November until Super Bowl game day, the team whose full name appears later in the alphabet will win. Some people have too much time on their hands…

[2] Note: Seattle is the only team to have played in both the AFC and NFC Championship Games, having relocated from the AFC to the NFC during league realignment prior to the 2002 season. The Seahawks are the only NFL team to switch conferences twice in the post-merger era. The franchise began play in 1976 in the NFC West division but switched conferences with the Buccaneers after one season and joined the AFC West.

How to Craft a 401(k) Crisis

Last week an article in an industry publication led with the title “401(k) experiment has failed, fueled U.S. retirement crisis, labor economist says.”

In what I am sure generated a fair number of “clicks” that turned out to be the pronouncement of none other than Professor Teresa Ghilarducci, teeing up a new book[i]—one that she says aims to review the last 10 years of research by multiple entities on something she’s labeled the “liminal” period of life—that apparently intended to refer to an “intermediate” stage of life. According to the article, she is taking aim at certain assumptions that are made with regard to retirement investing/saving between the ages of 55 and 70. Bad assumptions, apparently.

Now, considering that Professor Ghilarducci has written an entire book on this particular subject, extrapolation from a short interview about it (particularly when someone else did the interview) is a hazardous undertaking. But in that article—based on the upcoming book—she asserts that “experts and professionals and policymakers” have got it wrong; in this case “wrong” appears to be thinking that when people get to be about 62 and realize they don’t have enough resources to do so—they’re simply counseled to work longer. She also takes issue with the advice promulgated by a number of experts (and advisors) that folks should postpone taking their Social Security benefits—something she says (in the article) that “does not speak to the lives of most Americans.”

On the latter point (and I hope you’re sitting down), I completely agree.[ii] The logic in that advice is based on a solid strategy designed to maximize Social Security benefits—but increasingly is “buddied” by financial professionals/experts with the approach of using what may be inadequate retirement savings to bridge living expenses between leaving the workforce for good and age 70. That said, and as the article acknowledges, the decision to leave the workforce for good often isn’t a choice, which not only shortens the accumulation opportunity, but extends, and thus undermines the ability to stretch those savings.  Particularly when that happens late in one’s career, there’s no question it creates problems, and surely for some, financially insurmountable ones.

While that apparently isn’t the focus of the book, those type misapplications do seem to be at least a contributing factor to the crisis Ghilarducci perceives. More than that, she apparently sees an overarching theme at work here. In the interview she says that some unnamed “experts and professionals and policymakers” have embraced this notion if you find yourself later in your career short of funds, you simply have to work longer—a presumption she claims is further undermined by the debt carried by those heading into retirement. THIS she says is undermining retirement security, though in the article she lays the fault for this (“much of the loss of their security”) on the loss of defined benefit plans, before proceeding to label the 401(k) an “experiment,” and a “failure”—labels she has applied to these programs…repeatedly. 

On this, as you might imagine, we disagree. Now, I’ve got no beef with the comfort of a federally insured and well-funded defined benefit plan, particularly those in the private sector that traditionally required no involvement with[iii] or investment by individual participants. Of course, even at the height of their popularity, fewer than a third of private sector workers were ever covered by those plans, and only about 1 in 8 of those ever met the service length criteria to fully vest in those benefits. As retirement coverage “experiments” go, those are surely shortcomings.

Indeed, when you consider the coverage gaps left by the defined benefit “system,” I don’t know where we’d be without the 401(k)—or, more precisely, I do—and it wouldn’t be a good place. 

Those of us who actually work with real people know that this so-called “broken” system works amazingly well—for those who have access to it—including, most especially, those at the lower end of the income scale.[iv] Academics routinely target the well-off in their criticisms, but ignore the needs of middle-income households for whom Social Security will almost certainly not be… enough. And they routinely completely discount and/or ignore the role that the current tax preferences play in fostering the formation and maintenance of these retirement plans. With all its admitted imperfections, thanks to this “failed experiment,” tens of millions of Americans now have trillions of dollars of retirement savings set aside…and they—and their employers—have done so voluntarily, deferring, not avoiding, tax obligations. 

No, as “experiments” go, it seems to me that the real failure is that not enough Americans have the opportunity to do so. And we’re working on that.

 - Nevin E. Adams, JD

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[i] Titled “Work, Retire, Repeat: the Uncertainty of Retirement in the New Economy.”

[ii] In the interests of full disclosure, the author considered, but did NOT defer taking his Social Security benefit until age 70. 

[iii] So little involvement, in fact, that surveys routinely still find ridiculously high number of individuals think they have one. 

[iv] I have never understood the notion that the “rich” are gaming the system with the maximum (in 2024) $23,000 annual 401(k) contribution (not including the $7,500 in catch-up contributions for those over age 50), often less due to the limits of non-discrimination testing.

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A 'Cure" Worse than the Disease?

Last week, a trio of academics rolled out a plan to “save” Social Security—by undermining the 401(k).

Their “plan” is diabolically simple, though not unique. They’d just take away the tax preferences that support and encourage employment-based retirement plans—and “give” that money to Social Security. 

It was admittedly an odd combination—Alicia Munnell, director and founder of the Center for Retirement Research at Boston College (which often has pretty negative things to say about the private retirement system[i]), and Andrew Biggs, a senior fellow at the American Enterprise Institute, who has traditionally been a voice of reason on such matters—pointing to actual tax filing data to refute claims of a retirement crisis. Then again, Biggs, a former principal deputy commissioner of the Social Security Administration, and now a Senior Fellow at the American Enterprise Institute, has recently been nominated by President Biden to serve on the Social Security Advisory Board.       

Now there’s no question Social Security needs help if it’s to provide the benefits promised generations of American workers into the future.      

Some Assumptions

That said, their underlying premise in crafting this “solution”[ii] is that the tax incentives of the current private retirement system do little, if anything, to encourage participation. This conclusion seems to be based on “an economist’s lifestyle model”—previous reports by the CRR—and (now old) data from a study of Danish workers in a system that bears little resemblance to our own in terms of baseline assumptions and workplace demographics to conclude that savings behaviors won’t be impacted. 

They also choose to ignore the enormous opt-out rates among the state-run IRA programs that are three to four times that of those in the private system—state-run IRA programs that, it bears noting, lack the tax incentives of the 401(k). Oh, and then certain assumptions (SO many assumptions) are applied to estimate the “cost” to the government of the tax deferrals. 

That—and they completely gloss over the reality that these preferences are a DEFERRAL, not a forbearance of tax liability—unlike the tax preferences that riddle the federal income tax code at present, and which represent an actual, permanent “loss” to the federal government in terms of tax revenues.  

And Some Presumptions

But the biggest assumption they make—and it’s a BIG one—is that the lack of tax incentives will have no impact on the decision of employers to offer these programs, or to contribute to them. This happens to be a common assumption among those who reside in, or commune with the Beltway environs, most of whom it appears have never actually spoken to an actual employer.

Let’s face it, on an individual level, the incentives for higher-income workers, though real, are relatively modest. But then, and at odds with the assumptions of this paper, the true behavior subsidized by the tax preferences isn’t those individual contributions, but the very creation and maintenance of these plans by employers—that would otherwise be disinclined to take on such burdens in the first place, much less support and incentivize participation with things like the employer match. Ignored as well are the non-discrimination testing mechanisms that bound in the contributions of higher paid relative to the so-called non-highly compensated[iii]—and encourage dynamics like the employer match.

Remember as well that actual data supports the notion that even modest income workers—those making between $30,000 and $50,000 a year—are somewhere between 12 and 15 times more likely to save for retirement if they have access to a plan at work versus doing so on their own. Sure, perhaps the wealthiest would save on their own regardless—but without the plan established by the employer, those in the lower income brackets almost certainly would not. 

Let’s be honest; the 401(k) is the only way we have ever gotten working Americans to save for retirement—and they, and the employers that underwrite those programs, have done so voluntarily. Those who have access to those programs are doing well. The only problem with the 401(k) is that not enough working Americans have access to one. 

Common sense dictates that you don’t fix something that’s broken by breaking something that’s working. And this “solution” would likely do just that.

- Nevin E. Adams, JD

 

[i] … and has a record of relying on questionable data to craft conclusions.

[ii] The Case for Using Subsidies for Retirement Plans to Fix Social Security

[iii] See "Upside" Potential

‘Nothing’ Doing About Social Security?

Despite long being called the “third rail” of American politics, Social Security—or more precisely its viability—has reemerged as an issue in the 2024 presidential campaign.

It came up most recently in a mini-GOP debate between former U.N. ambassador/South Carolina governor Nikki Haley and Florida governor Ron DeSantis. Haley reaffirmed her previous statements that changes would be required to shore up the financial viability of that system (and, arguably more critically, Medicare)—taking pains to emphasize that she wasn’t calling for changes that would impact current/close-to-retiring individuals. 

For his part DeSantis—to whom the question was initially posed—maintained that there was no need to raise the age for full retirement benefits (apparently due to COVID’s impact on life expectancy), as though that were the only potential remedy required[i] (he did express confidence that something would be worked out long-term). And both former President Trump and President Biden have locked in on a “no changes” stance—criticizing any notion of reform as doing a disservice to seniors.[ii]

What’s weird to me[iii] is that those who seem to blithely embrace the “no changes needed” mantra aren’t getting the follow-up question; “but if we don’t change anything, won’t benefits have to be cut?”

Look, I’m now on the collection side of that equation—having contributed to that system what the law said I (and my employer(s)) had to in order to receive a certain benefit decades in the future. The notion that I would have done that for more than four decades only to then have my “promised” benefits reduced does NOT appeal to me in the slightest. Particularly since, going back to the 1980s, my withholding taxes were increased, my full retirement age extended, and my ultimate benefits are now means-tested (a.k.a. “reduced”)—ostensibly to avert a current and future such crisis.

But if the math that we’re presented with is accurate, there’s no way we can maintain the “status quo” on benefits without some change(s)—presumably to those who, like I was in 1983, are several decades away from collecting benefits. In fact, the Social Security Board of Trustees has projected that the looming 2037 “shortfall” means that changes equivalent to an immediate reduction in benefits of about 13%, or an immediate increase in the combined payroll tax rate from 12.4% to 14.4%—or some combination of these changes—would be “sufficient to allow full payment of the scheduled benefits for the next 75 years.”  

Without a doubt, Social Security is most certainly the biggest retirement assumption—by individuals, retirement planners and legislators alike. At a time when we’re working to broaden coverage, to expand the impact of automatic plan design features, and the reach of state-run IRA programs, we know that as valuable, even essential, as those steps might be in broadening and deepening the success of the private retirement system—they won’t be “enough” if we don’t shore up the baseline foundation upon which the nation’s retirement security is currently predicated. Those who oppose “reform” without acknowledging the need for change may find that a popular point of view—but it’s really just whistling past the proverbial graveyard.    

That said, and whatever the presidential aspirants espouse, it will be up to Congress to remedy the situation. That’s not a recipe for hope, mind you—but it is a reality check. 

While Social Security reform may not be at the top of your list of candidate considerations, I’d argue it should be on that list—for those you support, those you love—and you.

- Nevin E. Adams, JD

 

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[i] Outside the debate hall he has previously supported making those benefits tax free—essentially eliminating the “means-testing” provisions currently in place that tax benefits above certain income levels.

[ii] Vivek Ramaswamy (while still a candidate) basically says no cuts for seniors—and even hints at a reduction in current levels of “means” testing—but ultimately positions that as a boon for the economy, which will help put Social Security on a firmer financial setting, and then at least partially privatize Social Security.  

[iii] What’s also weird to me is that it’s hard to find anybody who seems to think the problem won’t get fixed at some point—though the definitions of “fixed” vary—and nobody is willing to hazard a guess on who’s going to step up, much less when or how.

Is It (Finally) Finally Time?

Two headlines on NAPA Net caught my eye this past weekend—provocative “what if” type questions.

I’m talking about “Will Retirement Income Solutions Finally Break Through in 2024?” and “Will Managed Accounts (Finally) Take Hold as QDIAs?” Both, of course, included the word “finally” in the title(s)—no doubt because the underlying premise has been touted in previous years, but (mostly) come to naught.  And yet even now, both were basically based on predictions of organizations/individuals that have—as my friend John Sullivan put it—“a dog in the fight.”

More specifically, the former finds heightened plan sponsor interest expressed (in an annuity-friendly trade survey)—and provisions in the original SECURE Act. And the latter finds a similar level of interest by plan sponsors in trading out target-date funds as QDIAs for managed accounts—on a premise that fees in the latter will decline and that recordkeepers will be able—and plan participants willing—to incorporate more personalization in their models.[i]      

Not that having a vested interest in the outcome precludes one from accurately assessing future trends—though it seems prudent to accept those particular forecasts with a grain of salt. Indeed, one might argue that the current disappointment in adoption—and take-up rates—of these programs is, at least to some degree inspired by what often seems the unbridled optimism of firms/organizations on those prospects reported as a fait accompli!

Don’t get me wrong; there’s little argument that both developments could represent a significant enhancement in the retirement prospects of 401(k) savers—if properly designed, priced and implemented. 

All of which leaves the industry at large proclaiming the need for these “evolutions”—and yet scratching our collective heads wondering why the take-up rates are so…disappointing. Now, you can’t really be surprised that product advocates are inclined to see a bright future for their wares—indeed, predicting an "expansion" of interest seems like a no-brainer (particularly if one demurs on a specific definition as to how much). But let’s be honest; plan sponsors will NOT be sued for not offering retirement income—there is, quite simply, no legal obligation to do so. On the other hand, managed accounts that aren’t truly personalized will—and have—been sued for costs that exceed allegedly comparable target-date fund options.     

Indeed, where things often fall apart lies in the reality department in those details—or in skepticism about the realities of those details. Retirement income as a concept is a laudable goal of retirement plans—but concerns remain about the efficacy of the solution, not to mention its cost and portability.  Ditto managed accounts which, in any number of situations, appear to be little more than an expensive target-date fund—so much so that advisor-respondents to the 2023 NAPA Summit Insider characterized them as a negative game changer. 

That said, and to the premise of the articles cited above, this is not the first time that those bright futures have been predicted.[ii] There are, of course, any number of reasons/rationalizations for those past disappointments—but I’m not sure this time will actually be any different (feel free to push back in the comments section). More's the pity because I think your average participant could surely use help on these fronts.

Let’s face it; TDFs were "easy" (arguably easier than they should be)—and they solved a here-and-now problem. Retirement income remains "hard"—and (eventually) solves a problem for workers, but not plan sponsors. Quite the opposite—as it creates difficulty for the plan sponsor in the here-and-now. There's progress on that front, for sure—but likely not (yet) enough to matter. 

As for managed accounts—it seems to me their prospects rely on two developments: (1) plan sponsor willingness to replace their TDF QDIAs with managed accounts (and that’s by no means certain, despite Wilshire’s enthusiasm); or (2) the realization of the personalization promise of those options. At that latter point, it would seem to speak not only to the expressed need of participants, but to the ability for plan fiduciaries to provide more than the “blunt instrument” of a target-date fund. What remains to be seen is if plan fiduciaries will be willing to trade en masse the “comfort” of the pack’s TDF adoption for the variability of truly individualized portfolio management in a default option?     

What It Will Take

Despite what may seem pessimism on those prospects, I think the key to shifting the needle of adoption against those impediments will require that plan sponsors who HAVE made those adoption decisions be willing to talk about it. Consider IBM’s recent announcement regarding trading off its matching 401(k) contribution for an employer cash balance contribution. While it’s an innovative shift, it’s not likely to be widely adopted—and yet for weeks after that one plan sponsor announcement, the industry was all a buzz for the possibilities…of a return to defined benefit plan designs. 

So, if you are—or have—a plan sponsor client that has embraced, adopted (and hopefully implemented) a vibrant, highly personalized managed account solution—or a retirement income option for participants on the menu—we want, no need, to hear from you. We need to know that it’s more than just a good idea; we (all) need confirmation that it’s practical, efficient and appreciated. 

Failing that, we’re likely to continue to wonder if it’s (finally) finally time…again.

  - Nevin E. Adams, JD

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[i] The trends report here also envisions an uptick in interest in retirement income options.

[ii] It might help to set (more) realistic expectations. Rather than these periodic surveys/reports which “transform” mere expressions of interest into presumptive action, we need to acknowledge (as most of us do, at least in person) that these are complicated decisions—and decisions that are being made in the midst of a highly litigious environment.

(Not-So) ‘Common’ — Wisdom

There is a “common wisdom” in our business that suggests that all plan sponsors are, more or less, alike; that large plans are the inevitable early adopters of trends that, sooner or later, trickle down to plans of all sizes.

Consequently, those who make their living trying to discern trends and patterns frequently focus on the behaviors in evidence at larger programs—figuring that, in three years or so, those same characteristics will emerge across the spectrum.

There’s some logic to that perspective—and at least anecdotal evidence to support it. Human beings—including plan fiduciaries—frequently draw comfort and solace from the experience of others, and smaller programs can hardly be faulted for adopting plan designs and approaches that have been “vetted” by programs with more copious resources.

Sure enough, there are areas in which larger programs once dominated—but over time those variances have disappeared. For example, according to the Plan Sponsor Council of America’s 66^th Annual Survey of Profit-Sharing and 401(k) plans, there is now essentially no difference in the availability of Roth options (more than 90% across the board do), and no longer any difference in permitting catch-up contributions (also about 90% for both the largest and smallest plans)—and just about the same percentage of workers took advantage of this feature. Nearly all plans of all sizes accept rollovers from other plans—while just under half of plans of all sizes encourage roll-ins. And while it’s hardly common, in-plan annuity options are to be found at about 1 in 10 plans, regardless of size.

That said, I have always found it dangerously simplistic to assume that small plans will, inevitably, follow along eventually in the footsteps of their larger cousins.

‘Less’ Likely

On the other hand, consider that—and this has long been the case—that the smallest employers (those with less than 50 employees) were significantly less likely to offer automatic enrollment than the largest programs—those with 5,000 or more workers (28.9% versus 71.8%), according to the Plan Sponsor Council of America’s 66^th Annual Survey of Profit-Sharing and 401(k) plans.[i] 

There’s also a big gap in opening the door to participation; more than three-quarters (77.9%) of those larger employers now offer immediate eligibility, versus just 30.4% of smaller employers, and 37% of those with 50-199 workers. Indeed, the most common for smaller employers remains a year. Similarly, to receive matching contributions, two-thirds (62.2%) of the largest plans allow them immediately, while just 28% of smaller employers do—and 45.7% overall. Therein lies some of the danger in relying solely on the aggregate responses in discerning trends—like averages in any assessment, they can obscure considerable variances in the underlying responses.

Note that the largest plans were also significantly more likely (93.1%) to report having an investment policy statement (IPS) than were the smallest plans (though more than two-thirds of those did). There’s some irony to be found in the reality that while just over a third of the smallest employers have 26 or more fund options available on the menu, only half as many (17.1%) of the largest have that many (roughly a third have 11-15). Smaller plans were also notably less likely to review those options; only half did so on a quarterly basis, compared to 81% of the largest programs.

Advisor Attributes

There were also differences in advisor compensation; the vast majority (81.1%) of the largest programs are using a fixed fee, while only about a quarter of the smallest are (60% of those are using a percentage of assets basis). Robo-advisors were much more typical (28%) at the largest plans than the smaller programs (7.8%). The smallest plans were notably more reliant on advisors[ii] for retirement committee plan education (75.9%), while the largest plans were more likely to lean on an ERISA attorney (68%) than an advisor (37%). 

The largest plans were notably more likely (6.4%) to be considering a change to provider or advisor in 2024 than the smallest (2.7%). On the other hand, 6% seemed to be a pretty solid response across the board.

Having worked for huge firms—and considerably smaller ones—I can tell you that, when people come together in groups, they are not as different as you might think (or hope, as the case may be). That said, resources and priorities differ and often diverge. Those who target specific niches—be they industry, geographic or plan size—are well advised to be alert to the potential divergence from the “common wisdom” of industry trends.

After all, we may all be alike—but that doesn’t mean we’re all the same.[iii]

- Nevin E. Adams, JD 

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[i] Though that’s likely at least partially attributable to the preponderance of safe-harbor plan designs—73.5% of smaller employers were safe harbor plans, compared with 36.7% of larger employers.

[ii] This actually was the case for all plan sizes other than 5.000+, with somewhere between three-quarters and two-thirds of responding employers noting that the advisor provided that education.

[iii] Of course, to see those plan size breakdowns, you need the full report—details on how to obtain it can be found at https://www.psca.org/research/401k/66thAR