Getting 'Out' While the Getting's 'Good'

It’s been fun watching “Coach K” take another team to the Sweet 16 this year—hard to believe he’s been coaching for nearly half a century. 

I had the opportunity to see Mike Krzyzewski coach in person just once—and in the not-so-friendly confines of the claustrophobic Cameron Indoor Stadium (no, I was not rooting for Duke). And while he’s had better teams—and Duke’s not on my favorites list—I, for one, won’t be disappointed if he wound up an amazing career by winning it all… again (a sentiment made easier because the teams I was pulling for are no longer in contention).

And then there was Tom Brady—who may have had the shortest retirement in NFL history. Rumors notwithstanding, apparently Aaron Rodgers is still willing to keep playing. Presumably both are at least partially motivated by the possibility of hanging up their cleats with another championship ring on their hand—to get “out” at the top of your game. 

A Pew Research Center analysis of the most recent labor force data concludes that, as of the third quarter of 2021, just over half (50.3%) of U.S. adults 55 and older said they were out of the labor force due to retirement. That compares to 48.1% in the third quarter of 2019, before the onset of the pandemic. Looking through a more traditional retirement age focus, in the third quarter of 2021 two-thirds of those 65- to 74-year-olds were retired, compared with 64.0% in the same quarter of 2019.

Indeed, there’s a widely cited datapoint that 10,000 Boomers head into retirement every single day—an eye-dropping pace that is almost certainly higher these days. The Pew report notes that the leading edge of the Baby Boomer generation reached age 62 (the age at which workers can claim Social Security) in 2008. Between then and 2019, the retired population ages 55 and older grew by about 1 million retirees per year—but in the past two years, the ranks of retirees 55 and older have grown by… 3.5 million.

This is all a bit extraordinary. Back in the aftermath of the so-called “Great Recession,” retirement rates actually declined. By the third quarter of 2010, 48% of adults ages 55 and older[i] were retired, down from 50% in the same quarter of 2007, according to Pew. Of course, accompanying that downturn was a steep decline in the value of financial assets, not to mention home prices. Not surprisingly, that combination (and the rampant uncertainty of the times) apparently served to keep workers… working.

That’s not been the case in the aftermath of the pandemic; household wealth has been rising since the onset of the pandemic (thanks in no small part to the checks from the federal government), the markets have (certainly until recently) been robust, housing prices are rising (unfortunately, so are a lot of other things). Heck, even Social Security saw a nice bump (we’ll set aside the funding/sustainability concerns for another day).

Now there are doubtless many factors underlying these trends—surely the Boomers at least have been “conditioned” to think of the attainment of a certain age as time to cease, or wind down, full-time employment. Moreover, while it may be a phase rather than a permanent shift in sentiment, there’s no denying that many, perhaps most, workers are rethinking—work. 

 But one can’t help but note that the increases in financial wealth—and here some credit is surely due to the compounded impact of workplace benefit programs—employer contributions, and the savings that have benefited from the strong markets—that have provided the cushion, if not the wherewithal—to step out of the rat race—with the comfort and backing of their workplace retirement savings. 

And who wouldn’t want to get “out”… when the getting is “good.”

- Nevin E. Adams, JD

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[i] I’m not sure why 55 was chosen as a marker. In fairness, the notion that roughly half the population 55 and older was “retired” strikes me as extraordinary, in and of itself. While some amount of that is surely involuntary, I can’t help but think that I’m doing something “wrong”… ;-} 

Life-Changing Times

 It’s hard to believe that just two years ago many of us went into our places of work, packed up, and went home for what most thought would be a week, maybe two—and wound up being a lot more than that.

In March 2020, my wife and I had just returned from a funeral in the Boston area. While the worst of what we would come to learn about COVID was—well, yet to be learned—we knew that cautions were in order. So we drove, rather than flew to the event—which wound up being full of strangers (many of whom were in what would come to be acknowledged as “vulnerable” health categories). Throughout we were aware, conscious of a certain risk, but we were not overly cautious—about on the order of what you would do when you come into contact with someone who had a cold. 

In hindsight, what might have been a “super spreader” event didn’t turn out to be one—even though less than 48 hours later the governor of the Commonwealth was putting in place lockdowns and restrictions that would have precluded our trip. We’ve not regretted that trip for a moment over the past two years, though on more than one occasion since I’ve thought to myself just how remarkable that was. It could have been life-changing.   

In fact, the past two years have been life-changing in such different ways—many have lost loved ones, and, worse, been precluded from saying “good-bye”—others have had damage to their health, or the health of loved ones—many more have suffered financial hardship—and, incredibly, some have not only emerged relatively unscathed, but prospered, at least financially—spared travel and commuting expenses, and perhaps even courtesy of assistance funds from the federal government. Most of us can identify with more than one of those categories. 

That said, while COVID, or the response to COVID, has affected us all[i] in some ways—and continues to do so—the impact was… uneven. Some industries—ours included—pretty much packed up one night, went home—and continued to do what we do every day (with modest adjustments). Others—restaurants, hotels, airlines, law enforcement, fire departments—couldn’t. Some—notably schools—tried to pivot to remote learning overnight with what are/were necessary, but arguably unsatisfying results. And then there were some—and here one can’t help but acknowledge the bravery, commitment and sacrifice of health care and long-term care workers—who not only “couldn’t,” but were required to put their very lives at risk in the service of others. 

These actions, and the response to these actions, will almost certainly be life-changing—in ways we cannot now fully appreciate. 

Amidst labels like the “Great Resignation,” it’s been widely proclaimed that we’re never going back to “normal”—that work, at least the notion of a 5 day/week physical location—has been changed…forever. And certainly, for some workers and workplaces, that is true. Whether that will be for good or ill, whether “cultures” can (or should) still be nurtured on that basis remains to be seen. 

However, the COVID pandemic has also illuminated—in a unique way—the importance of workplace benefits: the financial buffer that retirement savings can (and do) provide in an emergency, the synergies between our financial and physical health, and an opportunity for these programs to be—to the extent they aren’t already—an integral component of an organization’s culture.

And if these programs are an integral component of your culture—what does it say about your organization? Is it “just enough” to get by? 

Or could it be… should it be… life-changing?

- Nevin E. Adams, JD

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[i] Indeed, I’ve walked away from this experience convinced of a couple of things: (1) most of the jobs that can’t be done from home are probably worth more than they’re paid; (2) many of us live further from the ones we love than we realize; and (3) many likely live further from work than we’d prefer. 

Is the Retirement System ‘Fragile’?

It’s not all about “the Benjamins,” but a recent analysis of the nation’s private retirement system certainly puts a lot of emphasis on the accumulation of aggregate assets in retirement plans.

The Morningstar report—“Retirement Plan Landscape Report, An In-Depth Look at the Trends and Forces Reshaping U.S. Retirement Plans”—is extraordinarily diverse and comprehensive[i] in its assessment—though while the report’s authors seemed to be striving for a balanced assessment, the overall sense was one of a leaky boat.

No Surprises 

There were some findings that seemed to surprise the authors that didn’t strike me as all that remarkable. Apparently (I hope you’re sitting down for this one) larger plans pay lower fees (expressed as basis points) than smaller plans. They are also more likely to invest in collective investment trusts (which tend to have lower fees, though that isn’t necessarily the case).

What I did find surprising was Morningstar’s assessment that those smaller plans pay, on average, “just” 88 basis points (compared to the 41 basis points estimated for larger plans)—indeed, I found both numbers pretty reassuring. On the other hand, “averages” can often obscure reality, and the authors also found that smaller plans also feature a much wider range of fees between plans—with roughly a third of those plans costing participants more than 100 basis points in total.

And make no mistake: Those higher fees are—literally—a “toll” on retirement. The Morningstar report says that two workers who save the same amount and invested the same way might well result in an individual who worked for a smaller employer (and who participated in a smaller plan) having 10% less in retirement savings. That’s a hefty price to pay—but then this is hardly the only area in life where larger purchasers are able to obtain a volume discount.

ESG ‘Risk’

There was also little surprise in the finding that “Plan sponsors appear to have shied away from considering environmental, social and governance (ESG) information and analysis, in part because of regulatory uncertainty.” Oddly, Morningstar’s analysis—here they leverage their own ratings system to ascertain funds that might be considered to be exposed to ESG “risk”[ii]—produces a number that, while well short of what Morningstar would apparently deem prudent,[iii] still notes that “as many as 48% of retirement plans with at least 100 participants already offer investment strategies that use ESG analysis to evaluate investments”—though that belies the results of most industry surveys (including PSCA’s 64th Annual Survey of 401(k) and Profit Sharing Plans). On the other hand, the report acknowledges that this includes funds with a “broad definition” of ESG—funds that presumably take those type factors into account without touting that as an explicit emphasis (and perhaps without the awareness and focus of plan fiduciaries). Regardless, and undoubtedly for the reasons cited by the report, there’s little question that plan sponsors outside of the public and non-profit sectors have indeed shied away from ESG. At least for the moment.

Assets Oriented

There was, however, some interesting new ground in the apparent “churn” in the system. The report states that more than 380,000 plans closed during the period from 2011 to 2020—a result it attributes largely to employers going out of business. While that is certain a point of vulnerability for those previously covered by those plans (not to mention the presumed loss of employment), the solution for that lies beyond the retirement system per se.

As we have noted consistently, the report expresses concerns about coverage and the access to workplace savings, but ultimately differentiates its focus from traditional retirement system analysis by focusing on the size and flow of the system, as measured by assets. Indeed, and as noted above, the report seems particularly obsessed on the subject of assets—not on an individual level, or on obtaining a measure of retirement income adequacy, but on the premise that more assets mean the ability for plans in the system to negotiate for lower fees (and, on a related note, to opt for investment types, notably CITs, that have lower expenses). But while the emphasis was intriguingly unique, it’s also the basis upon which these authors affix the “fragile” label to the system, as if “the system”—as measured by assets—must constantly grow in order to be considered healthy. 

Now, there were some jaw-dropping numbers behind this premise—the report claims that there have been outflows of more than $400 billion a year since 2015, at least as reported by plans in their annual filings. However, at a time when 10,000 Boomers are said to be heading off into retirement every day, one might well expect a lot of them to be taking their retirement savings with them. 

‘Out’ Flows?

The concerns expressed in Morningstar’s analysis seems to assume that much of the outflow is pre-retirement “leakage”—though they seem equally concerned about rollovers. Why? Well, once again they write that, “More assets in the defined-contribution system would help more sponsors gain the leverage to demand lower fees from asset managers and drive down costs for end investors.” While true enough, it seems an odd anchoring. 

Indeed, in commenting on their assumptions, the authors comment that while they believe their estimates are “conservative,” and that “any errors understate the massive detectable flow of money out of DC plans,” they also admit that it is “…clear from Internal Revenue Service data that most flows out of plans are for rollovers rather than cash-outs…,” though they concede you can’t draw a distinction there between cash-outs and rollovers with the Form 5500 data.

Indeed, while 30,000-foot assessments of the retirement savings landscape are not unique, in looking nearly exclusively at the total pool of assets in that system and its implications, Morningstar’s report makes no attempt to correlate those assets to the needs of the individuals covered by the system. 

‘Pool’ Rules?

That asset-focused prism leaves it to claim that the entire system “relies on a few thousand employers to cover most people saving for retirement,” as though that’s a unique vulnerability. But the defined contribution retirement system is not one gigantic pool that must satisfy all obligations. Sure, it would be great if more employers, specifically more small employers, saw fit to offer a plan—but the fact that they don’t doesn’t put “the system” at risk. 

But those who do have these programs, and take advantage of them, face no jeopardy as a result (although they may well wind up being taxed at higher rates in the future). The U.S. DC system doesn’t “rely” on new employers to offer plans to compensate for those that are no longer doing so—though arguably the coverage gap, and the lack of ready access that results, are an issue of general concern.

All in all, the report offers an interesting assessment of “the system”—more thoughtful and comprehensive than most, though the obsession with total assets seems a bit myopic, and as one might expect a lot of assumptions, perhaps of necessity in a report as broad as this.  

In sum, while its conclusions are perhaps a bit “fragile” upon which to build a firm assessment, there’s plenty there to warrant discussion—and action.  But is the system "Fragile" - only for those who aren't part of it.

- Nevin E. Adams, JD

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[i] While much of the report focuses on DC plans, the Morningstar researchers also intriguingly acknowledge that more than 33 million people are or will receive benefits from defined benefit plans as of 2019, and that DB plans accounted for more than 30% of distributions paid to participants in 2019 and they do not appear to have peaked. It even notes that approximately 8.8 million people who are no longer working are still entitled to future benefits and 11.7 million people who are still working will eventually receive benefits. Looks like those “dead” pension plans still have a lot of life in them! 

[ii] The percent of assets that are in the various categories of ESG risk assigned by the Morningstar® Sustainability Rating™ for funds, sometimes called the globe rating.

[iii] In fact, the report comments, “…sponsors have left the U.S. defined-contribution system in the aggregate tilted toward investments with more ESG risk—which is the degree to which companies fail to manage ESG risks, potentially imperiling their long-term economic value. Plan sponsors may wish to reexamine their investment choices using an ESG lens.” 

The Big(ger) Picture

Our industry often seems to treat participants like children who can’t make big decisions—but a recent research paper suggests they might make better choices if we expanded their perspective.

The paper, intriguingly titled “Financial Wellness Meets Behavioral Economics,” highlights a behavioral tendency known as “narrow framing”—basically a tendency to focus on one complex choice, or one element of a complex choice, at a time.  Now, at first blush this seems rational, and perhaps even prudent—but the paper suggests that this kind of linear thinking means that people are inclined to overlook real-life disruptions like financial emergencies—which are not only uncertain with regard to amount or timing, but even in terms of whether they will occur at all. Little wonder, therefore,  that studies routinely find that workers say they are ill prepared to come up with the funds to cover some kind of short-term emergency outlay of $400.

This particular e paper—authored by none other than Shlomo Benartzi, Professor Emeritus, UCLA Anderson School of Management and Senior Academic Advisor at Voya Financial, which published the paper—explains that “when it comes to household financial planning, the ‘one future’ fallacy often leads people to focus on predictable and recurring expenses, such as rent and the monthly phone bill.” It cites research by Abigail Sussman and Adam Alter that finds that people struggle to budget for any kind of “exceptional expense,” whether it’s a summer vacation or a new television. Since these expenses are not recurring, and most household budgets are narrowly framed around regular monthly charges, people fail to consider them as part of their financial plan. So far, so good.

The paper’s ultimate premise seems to be that if people could see the full range of their financial needs, they could do a better job of allocating funds—that, among other things,  they’d make more rational health care decisions if they were presented a full integrated cost impact of a plan with premiums and deductibles (the author suggests most focus on the deductible). In short, the paper suggests that we (advisors and the retirement industry generally) need to do a better, holistic job of helping individuals see the full range of options and alternatives, work with them to choose the most optimal—and, of course, make it easy for them to act, rather than defer acting on those choices.

Or, said another way (as the paper does), “the ultimate goal is to develop a data-driven financial wellness platform that helps people better allocate their scarce dollars.”

Now I don’t doubt for a minute that people “overlook” budgeting for emergency expenses because they don’t view them as a specific reality (I also figure that many don’t because they feel they have other, better uses for that money, including perhaps “eating”). In that sense, creating a “slot” for emergencies alongside the budgetary savings/spending slot for “retirement,” rent, food, and transportation is logical in both acknowledging the potential need alongside those that tend to be seen as “must-pays.”   

I’m not altogether sure, however, that an unspecified emergency (and approximated cost) will warrant the appropriate attention—and more than a little concerned that if it did, it would do so at the expense of items that feel more “discretionary” (like retirement).[i] And while this may be old-world thinking, I’ve seen (and heard of) far too many situations where giving people not only lots of decisions to make, but forcing them to come up with “answers” for all of them might well produce a misallocation of resources—or in a worst-case scenario, forestall a decision of any kind whatsoever.   

So from an academic perspective, “narrow framing” might well be a “bad behavior” that precludes “rational” decision-making, though I tend to see it more as a coping strategy for folks struggling to make complex financial decisions spread across limited means. But then I’d also argue that sometimes you need to make choices that, while perhaps deemed financially rational, aren’t necessarily the ones you need to make in order to sleep at night.

Thoughts?

- Nevin E. Adams, JD

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[i] I am, however, convinced that the positioning of health care programs/options/expenses could do with some improvement.

A Savings Account

My decision as to whether or not to save in my workplace savings plan wasn’t long or complicated. 

Yes, I had to actually fill out a form, and yes, I actually had to figure out how to invest those savings (though in fairness, there were only four funds from which to choose, one of which was company stock). Yes, there was also a generous match, but when you’re young there are more enticing ways to spend your income than—well, not spending it. That said—and at age 22 I’d not always fully embraced my parents’ counsel—my mother didn’t hesitate to insist that I did so.  

My mother, now a retired school teacher, then (and still) reminds me with some regularity (and deserved pride) that she began having $50 taken out of her paycheck at work—though my father protested at the time they couldn’t afford to do so. Or at least he did until he saw that first quarterly statement—at which point he began looking into how he could start saving in his workplace savings plan. They started relatively late in their working lives—and yet she continues to draw from that 403(b) account (and my dad’s, which has outlived him) to this day.

Those memories have a special resonance for me this week—which happens to be America Saves Week—and while if you’re reading this, you likely save every day, many Americans don’t. While the overall theme/focus this year (it’s been a “thing” since 2007) is on “building financial resilience,” each day of this special week has a different focus: yesterday (Monday) was Save Automatically, today is Save for the Unexpected (and boy, hasn’t COVID reminded us anew and afresh of that need?), Wednesday—a particular favorite of mine—Save to Retire, while Save by Reducing Debt is on tap for Thursday and the week wraps up with a focus on Save as a Family.

Now, arguably every week could (or at least should) be America Saves Week—but this week’s special focus provides us all with an opportunity to share not only success stories, but practical insights on how to do what we’re told (often by ourselves) what can’t be done. 

You don’t have to have a workplace retirement savings plan in order to save, of course—but it helps. We regularly cite data that proves that even modest income workers—those earning between $30,000 and $50,000/year—are 12-15 times more likely to save via their workplace savings plan than left to do it on their own. It’s a combination of making it not only automatic, but easy! Particularly these days with automatic enrollment, diverse default investments like target-date funds and managed accounts, and the option of automatically increasing that rate of savings on a regular basis—easy, automatic and efficient. 

I’ve never been very comfortable lecturing others on the importance of saving—we all have unique circumstances and challenges to overcome, after all—and saving is, ultimately, a matter of personal responsibility and choice. But I need look no further than the example of my parents to see the impact that a savings discipline and, let’s face it, sacrifice, can make.

See, my dad thought they couldn’t afford to save, but the reality is—they couldn’t afford not to. 

- Nevin E. Adams, JD

9 Things You May Not Know About the Saver's Credit

 As I was pulling together tax information this weekend, I was reminded that, in addition to the benefits of pre-tax savings and deferred taxes on retirement savings, there’s another tax benefit—but one of which many aren’t aware. 

It’s called the Saver’s Credit—but only 43% of workers are aware of the credit, according to the 20th Annual Transamerica Retirement Survey of workers. It’s available to low- to moderate-income workers who are saving for retirement. For those who qualify, in addition to the customary benefits of workplace retirement savings, it could mean a $1,000 break on your taxes—twice that if you are married and file a joint return!

Now, there are some limitations[i]—both regard as to who is eligible, and the income levels to which it applies. But in a year when household income levels might be impacted by COVID—well, it’s worth revisiting the option even if it hasn’t been available in the past.  

Here are some things you (not to mention your plan sponsor clients, or participants) may not know about the Saver’s Credit:

1. It’s not technically the Saver’s Credit.

The official name for the Saver’s Credit is actually “the Retirement Savings Contributions Credit.” At least that’s what the IRS calls it.

2. It’s a credit, not a deduction.

A deduction lowers your tax bill by reducing the income subject to tax. However, a credit actually reduces the amount of tax you owe. Then again, if you don’t owe any federal income tax, the credit won’t do you any good, because it isn’t refundable. Additionally, it can’t be carried forward to the next year. Nor can you get a tax refund based only on the amount of the Saver’s Credit.

3. A wide variety of retirement savings contributions qualify.

Eligible contributions include those made to a traditional or Roth IRA or to a 401(k), 403(b), governmental 457(b), SARSEP or SIMPLE plan; voluntary after-tax employee contributions made to a qualified retirement plan (including the federal Thrift Savings Plan) or a 403(b) plan; contributions to a 501(c)(18)(D) plan; or contributions made to an ABLE account for which the individual is the designated beneficiary (beginning in 2018).

4. However, rollover contributions do NOT qualify.

5. Withdrawals can reduce the credit

The amount of eligible contributions may be reduced by any recent distributions received from a retirement plan or IRA, or from an ABLE account.

6. There are two deadlines for eligible contributions.

To qualify for the Saver’s Credit, contributions must be made to a 401(k), 403(b), 457 plan or the federal government’s Thrift Savings Plan by the end of the calendar year. However, retirement savers have until the tax filing deadline of April 18, 2022 to make a contribution to an IRA and have it count as a 2021 contribution.

7. It’s not (yet) “EZ” to claim the credit.

The Saver’s Credit is (still) not available via the 1040 EZ Form (though there have been legislative attempts to remedy that situation).

8. You can take a quiz to see if you qualify.

The IRS now offers an online quiz to easily determine if you qualify for the credit at https://www.irs.gov/help/ita/do-i-qualify-for-the-retirement-savings-contributions-credit.

9. You have to file to get it.

You only get the credit if you file for it. It’s not too late to save and get “credit” for doing so—make sure the participants you work with, and plan sponsors you work for—are aware.

- Nevin E. Adams, JD

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[i] There have been legislative attempts in recent months to broaden utilization of the Saver’s Credit, both by lifting the current income eligibility levels, and by making the credit “refundable.” To date, however, those efforts have not been successful. 

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Your Retirement Might Have a Stake in the Super Bowl’s Outcome…

 Will your 401(k) be bitten by the Bengals—or rally with the Rams?

That’s what adherents of the so-called Super Bowl Indicator[i] 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 55 Super Bowls, in fact. And sure enough, last year’s win by the NFC’s Tampa Bay Buccaneers provided support for that notion, as the S&P 500 gained ground.  

Not that it hasn’t had its shortcomings. One need look back no further than the previous year’s win by the AFC’s (and original AFL) Kansas City Chiefs over the then-NFC Champion San Francisco 49ers to refute the applicability (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 (who, of course, are making another run at it this year)—when the S&P 500 was up more than 30% in 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—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

You 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—the Ravens and the San Francisco 49ers—were NFL legacy teams.

However, consider that in 2012 a team from the old NFL (the New York Giants) took on—and took down—one from the old AFL (the New England Patriots—yes, those New England Patriots… 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 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.[ii] And, not having entered the league until 1976, regardless of when they began, can the Seahawks truly be considered a “legacy” NFL squad? 

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

As for Sunday’s contest, it’s said to be a contest of underdogs—with oddsmakers thinking this was “supposed” to be a contest between the 49ers and the Titans (though the Rams were an early season favorite, and thus arguably after a bit of a stumble have redeemed themselves). In fact, this is the first time in Super Bowl history that both teams entered the playoffs as (only) No. 4 seeds.

The Bengals have appeared in three Super Bowls (counting this one), having lost the other two—in 1981 and 1988—both to the 49ers (and both by a single score). The Rams, on the other hand, are making their fifth Super Bowl appearance, and their second in the last four years. Their last appearance: in 2018 against the Patriots, in what turned out to be the lowest scoring Super Bowl of all time (13-3). 

Rams coach Sean McVay, who is just 36, is not only looking for his first Super Bowl win, but if he gets it, he’ll be the youngest head coach to ever hoist the Lombardi Trophy (Steelers coach Mike Tomlin currently holds that distinction for winning Super Bowl XLIII at age 36). On the other hand, Bengals coach Zac Taylor is (just) 38—marking the youngest pair of Super Bowl head coaches in the game’s history. 

A final point of potential interest: the Bengals (the designated home team, representing the AFC, even though the game is literally being played on the Rams’ home field) has announced that they will be wearing black jerseys and white pants with orange highlights and matching socks—in tribute to their first Super Bowl appearance (though they lost that game, of course). The Rams will be donning their retro white jersey, yellow sleeves and royal blue socks. That might matter because, dating back to 2005 with the Patriots in Super Bowl XXXIX, the team wearing white jerseys has won 14 of 17 times.[iii]

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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[i] 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.

[ii] 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.

[iii] Only the Packers in 2010, Eagles in 2017 and Chiefs in 2020 went against this trend.

The Real Retirement Fraud

 A new paper rehashes (and embraces) some old beliefs, blatantly ignores the full impact of workplace savings, disregards the reality that deferrals are temporary—and kills a lot of trees in the process.  

The diatribe’s author, perhaps because he’s affiliated with a law school, perhaps because the paper (provocatively titled “The Great American Retirement Fraud”) is so long (82 pages), managed to get what amounts to a long-winded pontification published by the Social Science Research Network[i]—a network that normally publishes research. 

There’s little new here, and painfully little substance—though he does affix a label—“the Retirement Reform Project”—to the “conspiracy” he crafts between employers, investment management firms, advisors and those that support their interests. At the crux of this imagined conspiracy is none other than Rob Portman and Ben Cardin. Yes, that Portman and Cardin!
 

Reform ‘School’?

Indeed, he claims this “Retirement Reform Project” was birthed in 1996 by then-Congressmen Rob Portman and Ben Cardin as a cynical means to a political end. “By sponsoring what proved to be popular legislation, Portman and Cardin made themselves prominent and influential,” he writes. Indeed, “Retirement policy was still an uninspiring and unpromising legislative backwater when Portman and Cardin began their reform efforts, but the two men needed a policy portfolio to distinguish themselves,” he claims. 

He argues that public policy on pensions was originally designed to basically limit the set-asides for corporate execs and to protect workers—but that along the way that policy lost its way.[ii] He bemoans the tax revenues the federal government “loses” to its support of retirement plan formation and support as not needed to encourage the saving of higher-income individuals, and ill-suited to providing adequate savings for those at the lower end of the income scale (deep into the paper he grudgingly concedes that it might be serving the intended needs of those in the middle).

Incentives ‘Eyed’?

However, he—like others before him who focus  myopically on the individual tax preferences—wrongly presume that the sole motivation arising from the tax incentives is the personal individual account of the higher-income. Let’s face it, the incentives for higher-income workers, though real, are relatively modest. The true behavior subsidized by the tax preferences isn’t those 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. 

Remember as well that 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 probably would not.

He acknowledges, but quickly discounts, the potential impact of things like top-heavy testing and non-discrimination testing in limiting the gap between highly compensated worker/owners and others. However, there’s actual data from the nonpartisan Employee Benefit Research Institute (EBRI) that shows that while higher-income individuals have higher account balances, those balances are in rough proportion to their incomes (see https://www.napa-net.org/news-info/daily-news/%E2%80%98upside%E2%80%99-potential).

Deferrals Aren’t Forever

Another tired and readily disproved assertion treats the tax preference for these programs as equivalent to money the federal government expends on initiatives like “renewable energy, building low-income housing, donating to charitable organizations, pursuing research and development”—but, and unlike those initiatives, he completely ignores the reality that retirement plan preferences are a deferral, not a forbearance of tax obligations—not just of the contributions but on the accumulated income as well (which he labels the “core tax subsidy for private retirement savings”). Which, not to put too fine a point on it, will be taxed at ordinary income rates, rather than the capital gains rate that would likely apply if the wealthier individuals that he alleges would save on their own did so.

He even takes issue with the restrictions on access to retirement monies in the form of penalties and taxes—seeing those as some kind of absurd green “handcuff” to keep the assets (and fees) in the hands of the financial services industry. Catch-up contributions? “The point was never anything other than to increase the contribution limits for higher-income earners.” Ditto the extension of the required minimum distribution.  

Towards the end of the rant, data finally emerges—data from the National Institute on Retirement Security (NIRS) regarding retirement readiness, and the Federal Reserve’s Survey of Consumer Finances (SCF) regarding retirement account balances. Now, the SCF winds up being widely cited (including by the NIRS), but is not without shortcomings, as we’ve noted previously. The SCF relies upon self-reported numbers, and not by the same people over time, but by different groups of people (at different points in time). The NIRS analysis builds on that shaky foundation by incorporating some assumptions about defined benefit assets and extrapolating target retirement savings needs based on a set of age-based income multipliers—income multipliers, it should be noted, that have no apparent connection with actual income, or with actual spending needs in retirement—and this is the touchstone on which this author anchors his conclusion about retirement readiness? 

Having spent so much ink dissing the current system, one might think that somewhere in 82 pages of rant, he’d find room to suggest an alternative. But you’d be wrong. 

There is, however, a conclusion, and there he opines that, “Genuine reform would curtail retirement-savings subsidies for higher-income earners, who do not need those subsidies as incentives for retirement savings. Genuine reform would convert tax deductions, tax exclusions, and non-refundable tax credits for lower-income earners into direct, government-funded enhancements of retirement security—preferably through Social Security but otherwise through private retirement accounts. And genuine reform would leave the status quo in place for middle-income earners, who respond as expected to the marginal incentives of retirement-savings subsidies and who likely would not save in the absence of those subsidies.”  

Oh—and apparently he intends to show this “better path” in “future work.” I can hardly wait.

Let’s be honest; the 401(k) is the only way we have ever gotten working Americans to save for retirement. 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.  

At one point during the paper he states that, “The object of this paper is to identify this nonsense for what it is.” 

And if by “this nonsense” he means the paper itself, in this observer’s opinion, he has succeeded.

- Nevin E. Adams, JD

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[i] Which touts itself as a repository for preprints devoted to the rapid dissemination of scholarly research in the social sciences, humanities, life sciences, health sciences and more.

[ii] “I argue that the primary objective of the legislators who have promoted the retirement-reform project over the past twenty-five years has been to advance the interests of employers and the financial-services industry. Employers bear many of the costs imposed by federal regulation of retirement plans, and they have repeatedly pushed for deregulation. The financial-services industry collects investment-management, investment-advisory, and other fees from retirement-plan and IRA assets. Its interests therefore align closely with the interests of higher-income earners, and it has repeatedly pushed for increases in the contribution and benefit limits and for relaxation of the rule requiring distributions during retirement. Before the retirement-reform project, the objectives of Congress were to protect employees from abusive practices by employers and financial-services companies and to contain the cost of retirement-savings subsidies. Under the retirement-reform project, the objective of Congress has been to give employers and the financial-services industry more or less whatever they ask for.”

Match vs. Defaults

Which is more powerful—a generous match, or a high savings rate default? 

As it turns out, Christmas Eve brought us a new white paper with the fairly innocuous title, “The Impact of Employer Defaults and Match Rates on Retirement Saving.” Indeed, there have been plenty of surveys (and tons of data) that speak to this issue (many of which are cited as references in the paper)—but underneath that bland title the authors take on an intriguing question, specifically how, and how differently, the deployment of specific plan design features—the employer match, or default enrollment—impact retirement savings.

With regard to the former, there’s been plenty of real data to buttress the notion that the employer match acts as a virtual target for retirement savings—with employee contributions clustering around those like moths to a flame, regardless of the savings needs or income wherewithal of the participant. Similarly, we’ve long—but even more so since the advent of the Pension Protection Act of 2006– seen the dynamic impact that default savings rates—making individuals “opt out” rather than sign up—for retirement savings routinely produce participation rates north of 90%. 

Now, these plan designs have long been seen by employers (and those who support them) as positive forces to encourage workers to avail themselves of these critical benefits. On the other hand (and somewhat cynically), both can be seen as devices to produce retirement deferral rates sufficiently high to permit retirement plans to pass the muster of the various nondiscrimination tests to which they are subjected. And let’s face it, both carry costs for the employer(s) sponsoring the program. Indeed, if there is a shortcoming to these mechanisms at all it is that employees have seemed to assume they represent an answer to the “how much should I save” question, rather than simply being a function of how much the employer chooses to spend on benefits.

‘Better’ Idea?

As it turns out, the researchers (David Blanchett of PGIM DC Solutions, Michael Finke of the American College of Financial Services & Empower’s Zhikun Liu) have an answer to the question as to which is “better”—well “better” meaning the plan design that results in the highest employee savings rates, highest acceptance of the default investment, and lowest disparities in savings rates by income—that would be the one that uses a high default rate and a lower employee match.

 More specifically, based on a review of the activities of approximately 157,000 participants[i] who recently enrolled in an employer-matched 401(k) plan, they conclude that “a higher default rate has the largest impact on employee savings rates.”

Not only that, they caution that “plans with low default rates (say 3% or 4%) that match a high percentage of employee earnings induce higher-income participants to actively move away from the low default savings rate, resulting in a wider savings gap between higher- and lower-income employees.” On the other hand, setting a high default means that “fewer move away from the default savings rate resulting in higher and more equal savings rates among employees.” 

Other Considerations

There are some other considerations. They note that low default rates and high match rates also result in significantly fewer employees remaining in the default investment, and that while “raising the default savings level should increase savings rates for new participants, it won’t necessarily help existing participants.” As a consequence, the researchers comment that “plan sponsors may also consider different kinds of reenrollment or plan-reset options to utilize the positive impact of default savings rate increase. Additionally, plan sponsors should also consider including provisions for automatic savings rate increases to further boost participant savings levels”—because the one thing we know about most retirement savers is that—like Newton’s 1st Law of Motion—an object at rest remains at rest. And that’s what happens to most participants defaulted at a specific saving rate and in a specific investment—they stay there.

They also note that a high match appears to motivate workers to make an active decision to save more only when placed in a low initial default rate. Moreover, they found that a higher match motivates higher-income workers to save more, but only motivates lower-income workers who are defaulted (at the aforementioned 3% or 4% savings rate). They found that, when defaulted at a higher savings rate, the match rate only motivates high earners to increase their savings rate.

All in all, the match seems to matter to those who are more actively involved with the decision to join the plan—and those who are defaulted into the plan, in general, don’t seem to be those. There’s also a sense that more highly compensated individuals are more aware of, and active in, maximizing the match—though that may create nondiscrimination testing issues since less highly compensated workers seem to be more inclined to simply stay with the default rate.

Ultimately, of course, what matters is the default rate and the terms of the match; and with any luck at all, it’s not either or, but both!

- Nevin E. Adams, JD

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[i] Not that it matters, but the paper specifically cites “the second largest recordkeeper for retirement plans in the United States, which services over 12.8 million DC plan participants across approximately 67,000 retirement plans as of the third quarter of 2021”—Empower.

The ‘Best’ of 2021

I’ve been writing a weekly column (and then some) for more than two decades now. Some are easier to write (and read)—and some hold up better (and longer) than others. These are some of my (and perhaps your) favorites from 2021.

Let me know what you think in the comments below… particularly if I have missed one of your favorites… 

What’s So Special About College Debt?

Student loan debt—or more precisely, the forgiveness of some part of it—has dominated the headlines of late—but it’s been on the minds of retirement plan sponsors for a while now. The question is—why? https://www.napa-net.org/news-info/daily-news/whats-so-special-about-college-debt

Bundled Versus Unbundled: 5 Myths

While there are some amazing bundled solutions, ERISA’s admonition to act solely in the interests of plan participants (and beneficiaries), alongside the requirement that those be reasonable in terms of cost and value, call for a careful and considered evaluation. In that vein, there are some “myths” that seem to be prevalent regarding those choices, perceptions that persist even today. https://www.napa-net.org/news-info/daily-news/bundled-versus-unbundled-5-myths

Is COVID-19 a Retirement Story?

A recent paper was titled “COVID 19 Is Not a Retirement Story.” A week later, an article on Forbes.com said: “COVID-19 Is Most Certainly a Retirement Story.” So, which is it? https://www.napa-net.org/news-info/daily-news/covid-19-retirement-story

‘The 37-Year-Olds Are Afraid of the 23-Year-Olds Who Work for Them’

Yes, having lived through the not-so-subtle eye-rolling of younger co-workers (and the more recent dismissive “OK, Boomer” commentary), I couldn’t help but find some small modicum of comfort in the notion that that generation was, essentially, being hoisted on its own generational “petard.” https://www.napa-net.org/news-info/daily-news/37-year-olds-are-afraid-23-year-olds-who-work-them

Attention Getters

I was recently taken to task for a column about retirement savings regrets. https://www.napa-net.org/news-info/daily-news/attention-getters

5 Plan Committee Missteps

There is frequently a difference between doing what the law requires and doing everything that you could do as a plan fiduciary. That said, there are things that plan fiduciaries must do—and things that, while not required, can keep the plan, and plan fiduciaries out of trouble. https://www.napa-net.org/news-info/daily-news/5-plan-committee-missteps

Three ‘Scary’ Things That Give Plan Sponsors Chills

Halloween is the time of year when one’s thoughts turn to trick-or-treat, ghosts and goblins, and things that go bump in the night—and, for plan sponsors, and those who support them, a good time to think about the things that give us pause—that cause a chill to run down our spine… https://www.napa-net.org/news-info/daily-news/three-scary-things-give-plan-sponsors-chills

Things You Don’t Learn in School

Life has many lessons to teach us, some more painful than others—and some we’d just as soon be spared. But the graduates of 2021—well, they’ve been through a lot, arguably more than most—but with any luck at all, the days and years ahead will be brighter. Regardless, if you have a graduate—or if you are a graduate, here are some insights I’ve picked up along the way… https://www.napa-net.org/news-info/daily-news/things-you-dont-learn-school

Thanks again for all your shares, likes, support and comments along the way—wishing you all the best in 2022!

- Nevin E. Adams, JD

Naughty or Nice?

“You better watch out, you better not cry, you better not pout…”

Those are, of course, the opening lyrics to that holiday classic, “Santa Claus is Coming to Town.” And while the tune is jaunty enough, the message—that there’s some kind of elfin “eye in the sky” keeping tabs on us has always struck me as just a little bit… creepy.

That said, once upon a time, as Christmas neared, it was not uncommon for my wife and I to caution our occasionally misbehaving brood that they had best be attentive to how their (not uncommon) misbehaviors might be viewed by the big guy at the North Pole.

In support of that notion, a few years back—well, now it’s quite a few years back—when my kids still believed in the (SPOILER ALERT) reality of Santa Claus, we discovered an ingenious website[i] that purported to offer a real-time assessment of their “naughty or nice” status.

Indeed, no amount of parental threats or admonishments—in fact, nothing we ever said or did—ever managed to have the impact of that website—if not on their behaviors (they were kids, after all), then certainly on the their level of concern about the consequences. 

In fact, in one of his final years as a “believer,” my son (who, it must be acknowledged, had been particularly “naughty” that year) was on the verge of tears, panic-stricken– following a particularly worrisome “reading[ii]”—concerned not so much that he’d misbehaved, and certainly not that he’d disappointed his parents with his misbehaviors—but that as a result, he'd find nothing under our Christmas tree but the lumps of coal[iii] he so surely “deserved.”

Making a List?

Every year about this time we read survey after survey recounting the “bad” savings behaviors of American workers. And, despite the regularity of these findings, must of those responding to the ubiquitous surveys about their (lack of) retirement confidence and their (lack of) preparations don’t offer much, if anything, in the way of rational responses to those shortcomings (even) though they (apparently) see a connection between their retirement needs and their savings (mis)behaviors. 

Now, arguably in this (yet another) pandemic-driven year, and now with inflation fears looming ever larger, those pressures have been magnified—but this is not a new concern. Indeed, the reality has long been that a significant number will, when asked to assess their retirement confidence, generally acknowledge that there are things they could—and know they should have—done differently. Retirees routinely bemoan and regret their lack of attention to such things. Sadly, if there’s anything as predictable as the end of year regrets, it’s the perennial list of new year’s resolutions to (finally) do something about it. 

So if they know they’ve been “naughty”—why don’t they do something about it? 

Well, some certainly can’t—or can’t for a time—but most who respond to these surveys seem to fall in another category. It’s not that they actually believe in a retirement version of St. Nick, though that’s essentially how they seem to (mis)behave. They carry on as though, somehow, these “naughty” savings behaviors throughout the year(s) notwithstanding, they'll be able to pull the wool over the eyes of that myopic, portly old gentleman in a red snowsuit—that at their retirement date, despite their lack of attentiveness during the year(s), that benevolent elf will descend their chimneys with a bag full of cold, hard cash from the North Pole. Or that sufficient time (or market gain) remains to remedy their “wrongs.”

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

A World of Possibilities

Now, the volume of presents under our Christmas tree never really had anything to do with our kids’ behavior. As parents, we nurtured their belief in Santa Claus as long as we thought we could (without subjecting them to the ridicule of their classmates), not because we truly expected it to modify their behavior (though we hoped, from time to time), but because we believed that children should have a chance to believe, if only for a little while, in those kinds of possibilities.

We all live in a world of possibilities, of course. But as adults we realize—or should—that those possibilities are frequently bounded in by the reality of our behaviors, as well as our circumstances. And while this is a season of giving, of coming together, of sharing with others, it is also a time of year when we should all be making a list and checking it twice—taking note, and making changes to what is “naughty and nice” about our personal behaviors—including our savings behaviors. To “be good,” not for “goodness” sake, but for what we all hope is the “goodness” of financial “freedom” in our lives.

Yes, Virginia,[iv] as it turns out, there is a retirement savings Santa Claus—but he looks a lot like you, assisted by “helpers” like your workplace retirement plan, your employer’s matching contributions—and your trusted retirement plan advisors and providers.

Happy Holidays!

- Nevin E. Adams, JD

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[i] And it’s still online at http://www.claus.com/naughtyornice/index.php.htm.

[ii] And yes, though this was before smartphones, there was a tendency to constantly check in. That said, there do appear to be a number of apps online now that purport to fulfill a similar function. 

[iii] For those unfamiliar with that reference: https://abc7chicago.com/st-nicholas-day-saint-lumps-of-coal/4846172/

[iv] In case you’re curious as to that reference… https://www.newseum.org/exhibits/online/yes-virginia-there-is-a-santa-claus/

Bundled Versus Unbundled: 5 Myths

 As human beings, we’re often motivated to seek simpler solutions to life’s challenges. But sometimes “simpler”… isn’t. 

While there are some amazing bundled solutions, ERISA’s admonition to act solely in the interests of plan participants (and beneficiaries), alongside the requirement that those be reasonable in terms of cost and value, call for a careful and considered evaluation. 

In that vein, there are some “myths” that seem to be prevalent regarding those choices, perceptions that persist even today. Here are some points to consider:

An unbundled approach is more expensive.

The reality is, it can be—depending on the point of comparison. If all other things are “equal,” then certainly engaging another level of service and compliance oversight can bring with it additional costs. Then again, engaging the services of a third-party administrator[i] (TPA)—at least the right TPA—is hardly an “all other things equal” comparison. Their involvement and engagement may well streamline the time involved in reconciling data and contribution flows, could provide insights on plan design that could save money and enhance benefits, positions them to coordinate communications on plan audits—and, significantly, likely forestalls the need for plan corrections, fees and fines. 

It might appear to cost more on the front-end—but it could more than pay for itself in other ways.

With bundled solutions, there is a single point of contact.

With most bundled solutions, it’s probably more accurate to say that there is a single starting point of contact. No matter how gifted, talented and powerful the designated point of contact for a given plan is, there are inevitably silos of information and resolution. For example, legal questions are routinely passed along to other departments, payroll reconciliations in another—those resources are not only in another department, they may often be in another state—or time zone. 

That doesn’t mean there’s no value in that single designated contact—but it’s rarely a “one-stop” shop. 

Using a third party complicates communications.

Without question, adding a TPA to the plan’s “phone tree” does add another point of contact when it comes to communications regarding plan compliance or administration. On the other hand, the right TPA can actually centralize and even streamline critical communications between the plan sponsor and recordkeeper, or with payroll. It might look like another point of contact—but it could actually simplify and consolidate the number of calls that have to be made—and, more importantly, could reduce the need for calls to correct the misunderstandings inevitable in telephone “tag.”

TPAs are best suited for smaller plans.

Smaller plans—where plan designs frequently take into account specific objectives of the business owner (including complications of things like top-heavy testing)—are certainly a good fit for the expertise of a TPA. That said, issues with payroll, compensation definitions, eligibility evaluation and vesting determination are issues with which plans of every size and shape must deal—not to mention the correction process with the DOL and IRS when things don’t happen as they are supposed to. A good TPA can mitigate the former, and smooth the way with the latter, should the need arise. 

All TPAs are the same.

All of the responses above are conditional—on engaging the “right” TPA, or a good TPA. But TPAs, like bundled providers (and advisors), are comprised of individuals of varying levels of skill, talent, experience and commitment. It’s important to find the one(s) that fit your needs—and those of your plan sponsor clients. 

Things—administration, compliance, and yes, correction—have grown significantly more complicated over the years and today TPAs not only keep up with participant accounts, they can be an invaluable resource to plan sponsors—and advisors—on issues like regulatory compliance and plan design.  

That makes it hard to obtain an apples-to-apples comparison. Indeed, the fact that each record keeper has a different process for… just about everything, makes it easy for things to fall by the wayside if you don’t have a clear assignment of responsibilities with every party involved.

Those looking for a good place to start that assessment can find it in this year’s NAPA-Net Black Book listing of TPAs—or among the membership of our sister association, the American Society of Pension Professionals and Actuaries (ASPPA). 

Because sometimes the best way to keep things “together” is to break them apart…  

See also “What’s in a Name?” and Resource ‘Full’?

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[i] It’s worth noting that your recordkeeper is a TPA.

An Insiders' Perspectve(s)

There’s nothing like the NAPA 401(k) Summit—particularly being at the NAPA 401(k) Summit after the many months and a worldwide pandemic that kept us all apart. 

Each year for the past four years we’ve taken advantage of that gathering (including in 2020 when we gathered “virtually”) to reach out[i] to the nation’s top retirement plan advisors to glean their perspective on a wide range of issues relating to their practice—and practices. 

This year’s Summit Insider was no exception—as we “consulted” with more than 500 retirement plan advisors and home office staff on a range of issues—the criteria in selecting—and rejecting—key business relationships, the things that are over-hyped—and the things that no one is talking about—but that everyone, at least in the eyes of these “Insiders,” should be. We also got some insights on retirement income, important features in choosing target-date funds, rollovers and outcomes. 

We’ve included a number of verbatim comments on what these “Insiders” wish that plan sponsors knew, or knew better. Sometimes those words are harsh, sometimes reassuring—but we asked advisors for their insights, and they were generous in doing so. I only wish we had room to share them all.

Key Findings

Among the key findings:

• Glidepath philosophy topped the criteria on selecting target-date funds, slightly outpacing 5-year performance.
• More than half of the advisors surveyed focus on measuring outcomes at the plan level during every plan review.
• Nearly two-thirds deliver financial wellness as a component of their current service offerings—another 17% do so through an external partner.
• ESG remains the most “overhyped” trend in the industry, outpacing robo-advice and MEPs/PEPs by a significant margin.
• Portability was deemed the most influential/compelling factor to respondents’ plan sponsor clients in considering a retirement income solution. It was also the most cited factor influencing advisor considerations.
• Client support and market intel were tied as the most-valued support from the DC wholesaler partners.
• Service was—still—the dominant criteria in selecting a TPA partner.  
• Rollovers, the SECURE Act’s expansion of a retirement income safe harbor, including lifetime income disclosures on participant statements, managed accounts, and e-delivery were all rated as “positive game changers.” However, a third rated managed accounts as “much ado about not much.”
• Legislation to allow student loan repayment matching was cited as a positive gain changer by 7 in 10, and legislation to expand emergency savings accounts drew “positive game changer” support of 60%. 
• The Labor Department’s fiduciary (re)proposal? A plurality (43%) said it was “too soon to say.” Which, as we’re still waiting for it, seems reasonable (if not obvious). 
• Recordkeeper consolidation was viewed as a negative game changer by nearly half (46%), though a quarter (23%) saw it as a positive.

As for what they wished plan sponsors knew more about, the list included “their roles and responsibilities,” the role(s) of other parties servicing the plan, fees, plan design, plan operations—oh, and “our roles,” of course. The verbatim quotes here are, as you might imagine, “priceless.”

A special thanks to the hundreds of retirement plan advisors who took the time to provide such thoughtful responses—and to the sponsors of this fourth edition of the Summit Insider. Which NAPA members can find in your mail—or online at https://www.napa-net.org/industry-intel/summit-insider.

- Nevin E. Adams, JD

The 4% "Solution?"

A recent white paper has garnered a lot of discussion by casting “shade” on a traditional premise about retirement plan withdrawals.

The premise—a so-called “rule of thumb[i]”—isn’t all that old, actually; it dates back only to 1994, when financial planner William Bengen[ii] claimed that over every rolling 30-year time horizon since 1926, retirees holding a portfolio that consisted 50% of stocks and 50% of fixed-income securities could have safely withdrawn an annual amount equal to 4% of their original assets, adjusted for inflation without… running out of money. 

That said, even though it was predicated on a number of assumptions that might not be true in the real world—a 30-year withdrawal period, a 50/50 portfolio mix of stocks and bonds, assumptions about inflation—oh, and a schedule of withdrawals unaltered by life’s changing circumstances (not to mention a 90% probability of success)—a recent Morningstar paper challenged its conclusions in view of “current conditions.”

The controversy, if it warrants that name, was that Morningstar said that 4% might no longer be “feasible”—that there might be a better number—more specifically that the “confluence of low starting yields on bonds and equity valuations that are high relative to historical norms, retirees are unlikely to receive returns that match those of the past”—and thus, “using forward-looking estimates for investment performance and inflation,” the Morningstar authors said that the standard rule of thumb should be lowered to 3.3% from 4%. 

Said another way, your retirement savings likely won’t last as long as you might have thought they would, and with surging inflation in the headlines, that conclusion certainly engendered a lot of media attention.

Now, in fairness, the paper states at the outset that they are not recommending a withdrawal rate of 3.3%, which they characterize as “conservative.” How so? Well, they note that it is based on four factors: 

1. a time horizon that exceeds most retirees’ expected life spans; 
2. it fully adjusts all withdrawals for the effect of inflation; 
3. it does not react to changes in the investment markets; and 
4. it’s based on a “high projected success rate”—90%.

Moreover—and significantly, despite the ensuing headlines of other publications—they explain that “by adjusting one or more of those levers, current retirees can safely withdraw a significantly higher amount that the 3.3% initial projection might suggest.”

Now, there’s been plenty of evidence—both empirical and anecdotal—that retirement “spends” aren’t nice, even streams. Life’s circumstances change, of course—and our health care, and health care costs, are notoriously variable. There’s a sense that the pace of spending earlier in retirement is more like that anticipated in most retirement education brochures—travelling and such—but that pace slows down as we do. 

In fact, I remember my one and only conversation with my father about retirement income. He had already decided to quit working, and had gathered his assorted papers regarding his savings, insurance, etc. for me to review. Determined to “dazzle” Dad with my years of accumulated financial acumen, I proceeded to outline an impressive array of options that offered different degrees of security and opportunities for growth, the pros and cons of annuities, and how best to integrate it all with his Social Security.

And yet, when I was all done, he looked over all the materials I had spread out before him, then turned to me and said—“So how much will I have to live on each month?”

At its core, once you stipulate certain assumptions about the length of retirement, portfolio mix/returns, and inflation, a guideline like the 4% “rule” is really just a mathematical exercise. A 4% “rule” may be simplistic, but it’s also simple—and when it comes to getting your arms around complex financial concepts and distant future events, there’s something to be said for that. 

But looking for a 4% ”solution” is arguably looking to solve the wrong problem.  

- Nevin E. Adams, JD

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[i] And the origins of that phrase are likely different from what you’ve been told—see https://www.phrases.org.uk/meanings/rule-of-thumb.html.

[ii] Who, interestingly enough, opined earlier this year that it might now be a 4.5% rule…