'Know' Way

Last week, the Department of Labor’s Employee Benefits Security Administration (EBSA) released its much-anticipated proposal regarding participant fee disclosures (see "EBSA Finishes Regulatory Package with Participant Disclosure Proposal".

The industry’s response, by and large, has been positive (a notable exception: Congressman George Miller, author and sponsor of the 401(k) Fair Disclosure for Retirement Security Act of 2007—see “Miller Fee Bill Cruises through House Committee”), though one got a sense that there would be a LOT of comments forthcoming on the proposal, not the least of which was timing. After all, the DoL is soliciting comments through September 8 (so much for vacation), and says it plans to have the new rules in place by January 1.

My first thoughts on opening the proposal doubtless mirrored many of yours—“Holy cow, 103 pages!” And then, also perhaps like many of you, I set it aside for a time when my brain could handle 103 pages of proposed government regulation (I realize some of you are still waiting for that time). Now, as it turns out, something like two-thirds of the document is spent analyzing the costs/benefits of the proposal. In fact, most of it is spent outlining the costs and the assumptions associated with complying with the new proposals.

The Proposal(s)

Despite those initial concerns, the proposal itself seems relatively straightforward: It purports to require disclosure of certain plan- and investment-related information (including fees and expenses, of course) to participant-directed account participants. It identifies three categories of annual disclosures (to be furnished on or before their eligibility date, and at least annually thereafter), and further requires a quarterly disclosure of specific dollar amounts charged to the participant’s account for specified administrative expenses.

In the case of the latter, the DoL says the information should be “sufficiently specific to inform the participants or beneficiaries of the actual charge(s) to their accounts and enable them to distinguish the administrative services from other charges and services that may be assessed against their accounts.” On the other hand, the DoL’s proposal calls only for the charges to be shown in total, noting that it “does not believe that it is necessary, or particularly useful, for participants to have administrative charges broken out and listed on a service-by-service basis.” (For more details on the disclosures, see “EBSA Finishes Regulatory Package with Participant Disclosure Proposal”.)

The proposal’s import notwithstanding, the DoL tossed in some extra “nuggets” worth mentioning.

First, it took the “opportunity to reiterate its long held position that the relief afforded by section 404(c)….does not extend to a fiduciary’s duty to prudently select and monitor designated investment managers and designated investment alternatives under the plan,” and that a “fiduciary breach or an investment loss in connection with the plan’s selection of a designated investment alternative is not afforded relief under section 404(c) because it is not the result of a participant’s or beneficiary’s exercise of control”—a comment that struck me as a shot across the bow of federal courts that have, in a number of the recent revenue-sharing cases, been a bit “generous” in their application of 404(c)’s protections.

The DoL also tossed in its belief, “as an interpretive matter, that ERISA section 404(a)(1)(A) and (B) impose on fiduciaries of all participant-directed individual account plans a duty to furnish participants and beneficiaries information necessary to carry out their account management and investment responsibilities in an informed manner.” Now, in my experience, plan fiduciaries have long attempted to provide participants with a host of materials designed to help them make good investment choices—and doing so is perhaps just a practical application of common-sense principles. However, I found it interesting that the DoL slipped in to the proposal a duty to do so.

The DoL also said that the lack of fee disclosure means that participants may underestimate the impact that fees and expenses can have on their account balances—and thus may undervalue the importance of the disclosures. Further, that if employees undervalue disclosure, plan sponsors might “under provide” it—a position that the DoL found support for in the “wide dispersion of fees paid in 401(k) plans” (though it acknowledges that some of the variation could be explained by the varying amounts of assets in plans and their accompanying economies of scale, as well as the fact that some plans might offer “more, or more expensive, plan features”).

Finally, despite the obvious increase in reporting effort and costs, the DoL thinks that “small plans will benefit from the proposal, because it will clarify what information must be disclosed to plan participants.”

Potential Impacts

Personally, I think that most plan participants will, as they always have, choose investments based on net returns, not fees specifically. And, though the DoL references the importance of evaluating more than fees in its proposal, it also states unequivocally that it expects the disclosures will result in the payment of lower fees for many participants—assuming that participants will more consistently pick the lower-cost comparable investment alternatives under their plans. However, they also estimate that (only) about a quarter (29%) of plan participants are “likely to benefit from reduced search time and corresponding reduced costs” in reviewing this information. It’s possible that even that modest assessment is optimistic since, IMHO, the fee disclosures illustrated in the DoL’s model comparison chart) are no more (and perhaps in the DoL’s defense, no less) useful than those currently found in most mutual fund prospectuses.

A more likely consequence, IMHO, is the DoL’s notion that the requirements may lead plan fiduciaries to give additional scrutiny to fees, and “consequently to select less expensive comparable investment alternatives.” The fact of the matter is, plan sponsors have a duty to know what these fees are, and, IMHO, participants have a right to know how much they are paying.

- Nevin E. Adams, JD

Comments on the proposed regulation should be directed to the U.S. Department of Labor, Employee Benefits Security Administration, Room N-5655, 200 Constitution Ave. N.W., Washington, D.C. 20210, Attention: Participant Fee Disclosure Project; electronically to e-ORI@dol.gov or via www.regulations.gov.

A Sure Thing

By some accounts, I just spent the past week in “retirement”—driving around sightseeing, reading some good books, and yes—even sitting on a beach.

And I have to tell you—if that was retirement, I don’t know how I’m going to afford it.

Now, I realize that isn’t the stuff of most “real” retirements, though it is frequently the stuff of retirement planning brochures. My week was a family vacation, and it was spent doing the things that families do on vacations. And it served as a stark reminder that, whereas sitting on a beach doesn’t cost much, making arrangements to stay—and eat—in proximity to the aforementioned beach is a whole other financial consideration.

Having said that, there were plenty of older folks sunning themselves out there—and most had the equipment and tan lines that suggested they got to do this kind of thing more often than yours truly (in fact, an entire busload descended on our hotel at 6 a.m. one morning, making the kind and volume of noise generally associated with drunk teenagers).

Still, I couldn’t help thinking this week about the thousands of retired salaried workers at General Motors who got word that their health-care coverage was about to change (see “GM Puts the Brakes on Health Care VEBA”). Don’t get me wrong—as disruptive as the change will likely be for those GM retirees, they’re still better off than the vast majority of retirees. Oh, sure, they’ll have to arrange for their own health-care insurance, but they’ll get a $300 boost in their monthly pension to help deal with that at a time when many workers don’t have the benefit of employer-sponsored retiree health insurance, much less a program as generous at GM’s. And they’ll get access to “counseling” to help them adjust to the change. Indeed, when all is said and done, those retirees may very well find the elimination of the common stock dividend (another cost-saving measure by the automaker) a bigger disruption to their financial plans.

Disruptive Influences

“Disruptions” are the bane of a fixed income, of course. Just when you think you have it all balanced out, you have to spend (a lot) more for gasoline, pay a higher real estate tax bill, scrape up some money for a new prescription drug, deal with the financial consequences of an unexpected medical emergency. That this happens at the same time that your investment portfolio is taking a sustained “hit,” and that you are told the house you are living in is worth a lot less than it was (on paper, anyway) a year ago, all contributes to the sense of economic pessimism that garners so much press (and presidential candidate) attention in this election season. Things cost more than they did, and those on fixed incomes (and that includes a growing number of current workers who perhaps haven’t gotten a pay increase in a while) have to make adjustments—sometimes painful adjustments.

It’s been said that the only sure things are death and taxes—but the lesson for those of us still drawing a paycheck, IMHO, is the importance of preparing for that third “sure” thing: uncertainty.

- Nevin E. Adams, JD

Motivationally Speaking

As anyone who has (or has been) a teenager can attest, motivation is a tricky business. Once upon a time, it took little more than a smile or a “good girl” to motivate my children to do the right things (alongside the occasional threat to rely on corporal punishment). But as they have grown older, the “motivations” have become more “challenging” (and, unfortunately, frequently louder); not because they are not interested in doing the right things—it’s just that they have other priorities.

Of course, teenagers are really just human beings (despite the occasional rumor to the contrary), and as such, they don’t always do the right thing, or do it as soon as a parent might prefer. So it also goes for adults—specifically, adults in the context of saving for retirement. Realizing that, we have long used certain subtle means of encouraging them to do the right things. We impose vesting schedules to encourage their continued employment, we offer “free money” in the form of company matches to spur their willingness to put some of their own money aside, we allow them to borrow against their savings so that they feel more comfortable about saving larger amounts than they might otherwise—heck, we even offer 401(k) plans to entice them to come to work for us in the first place.

In large part, those motivations have succeeded. Far more people participate in these programs than not, and the vast majority contribute to the exact level to obtain the full company match. More recently, a series of initiatives was first touted, and then legislatively sanctioned, to “motivate” those workers who, for a variety of reasons, had nonetheless been disinclined to take advantage of these programs: automatic enrollment to get them “in,” contribution acceleration to help them get to the right amount, and asset-allocation funds to help them get—and stay—optimally invested.

“Thinking” Caps?

Now, if these new tools work—and, by all accounts, they are working well—then, IMHO, it might well be time to give some new thought to our long-standing assumptions about participant motivation and plan design.

For example, why should the company contribution only go to workers who think they can afford to save? That, after all, is what a matching contribution does. And if you’re going to match contributions, why not do so with a smaller amount applied to a larger range of deferrals? Instead of 50 cents on the dollar up to 6% of pay (which leads participants to stop deferring at the 6% level), why not 25 cents on the dollar up to 12% of pay? Participants will likely save more—and employers might well save some money.

Why maintain these enormous menus of investment options that have to be selected, monitored, and explained—and which require participant involvement to rebalance—when it is so much easier to focus your due diligence efforts on a QDIA solution? And do you still need to offer loans to get workers to participate, when you no longer even require them to fill out an enrollment form?

I don’t mean to suggest that these changes won’t be viewed unfavorably by some. After all, if you used to get a 50% match for only deferring 6%, it’s hard to imagine a scenario in which a 25% match for the same deferral doesn’t look like a benefit reduction. And, as much bother as those bloated investment menus are, many participants like at least the illusion of broad choices—and may well feel a bit hemmed in by a QDIA. As for loans—well, you take that away, maybe more of those automatically deferred participants will actually expend the energy to opt out.

It’s hard to know just exactly how this new era of defined contribution plans—and plan participants—will respond to change. What we do know is that not considering the possibilities associated with these changes can mean that we overlook opportunities.

- Nevin E. Adams, JD

“Diss” Ingenuous

Over the past several years, it has become “fashionable” in some quarters to bash the workplace retirement savings plan; most frequently, the 401(k). Critics have long bemoaned “anemic” participation rates as a sign that the programs aren’t working, faulted what were perceived as inadequate savings rates as an indication that participants didn’t grasp the need, and pointed to less-than-optimal investment allocations as proof that those who did save were not capable of, or not interested in, making those decisions.

In fairness, much of that “criticism” has been of a constructive nature—from professionals who care about retirement savings adequacy, who believe strongly in the support of the employer-sponsored system, and who truly want to see people have the opportunity to do the right thing, and to do the right thing with that opportunity. However, those well-intentioned voices were sometimes employed in contexts that, over time, have hinted (and sometimes done so more overtly) that there were inherent problems with that system that were perhaps beyond remedy. And there are suggestions, from time to time, that the retirement savings crisis is overblown, a concoction of investment providers and advisers who simply want to ensure their own retirement security.

More recently—and more insidiously, IMHO—is a growing voice that 401(k)s are little more than tax dodges for the better-off. That they, like any tax-advantaged program, provide disproportionately higher value to those who actually pay taxes—those who, by definition in our current “progressive” income tax scheme, have higher incomes.

Alternative Courses

Those opposed to the current employer-sponsored system do have alternatives. One is to remove the tax benefits from the 401(k) altogether, either as a “fairness” move (e.g., since everyone doesn’t have a 401(k), no one should), or that put forth by those trying to establish some fiscal responsibility “cred,” is the need to save the federal government money by not deferring taxes on those contributions and/or earnings and by no longer giving employers tax benefits for their contributions on behalf of participants. Some want to replace the current workplace savings program with something else; generally, some grand government-mandated savings program (yes, in addition to Social Security which, let’s tell it like it is, is not a savings program), while those opposed to “Big Government” hold out the notion of a government-sanctioned/mandated payroll IRA, where each worker would have the “opportunity” to set up their own account anywhere they chose to do so.

At the heart of each of these initiatives—yes, even the seemingly innocuous proposal to mandate IRA payroll deductions—is the weakening or outright elimination of the employer-sponsored retirement system.

Those of us who work with these programs in the real world can anticipate where that would leave retirement security. Without the encouragement of an employer match, the convenience of signing up in the workplace, or the incentives of pre-tax deferrals, most would not save at all, or would certainly save at a more modest rate than they do at present. One could, of course, simply mandate savings—but it is hard to imagine that we would be willing to enforce the level of savings necessary to achieve reasonable retirements (short of forcing it into some kind of pooling system like Social Security, and some have recommended just that – see “IMHO: Conspiracy Theories”).

What all too often gets lost in our criticisms of the current system is just how often it works well. Perhaps only three-of-four eligible to participate in such programs choose to do so, but on an employer-by-employer basis, participation rates north of 90% are not impossible to find—and that’s before the adoption of mechanisms like automatic enrollment. Contribution acceleration programs have allowed workers to readily do what was once a cumbersome process. Target-date funds have, in incredibly short order, gained the favor of plan sponsors and participants alike—with as yet incalculable benefits for those retirement investments. Those, and a whole new generation of retirement income alternatives are coming to market—alternatives that, unlike the prior generation, will benefit from the scrutiny of plan fiduciaries trying to make sure that a lifetime of accumulation isn’t decimated in a single moment. These innovations have come to light, and to market, because of the employer-sponsored system. What kinds of innovations have been brought to those disciplined enough to set aside money in a retail IRA?

In the real world, a lucky few know how to save and invest properly; somewhat more have access to the counsel and advice of a trusted adviser. But for most of us, the workplace retirement program is our first and only “investment” account. It is the one place where even those with relatively small balances can have access to professional advice, alongside the opportunity to gain the purchasing power of a group. But they might not have any of that without the involvement of their employer, the funding of that company match, and the tax incentive from the government to do the right thing.

Those that would take all that away have lots of reasons for throwing out the support of the employer-sponsored program—but they would really, IMHO, be throwing the baby out with the bathwater.

- Nevin E. Adams, JD

==========

See “They’re Baaaack, Again!”

See also “IMHO: Vanishing Points?”

IMHO: “Wonder Land”

IMHO: “Crisis Management”

National Treasure

This coming Friday, the nation will, in large part, set aside its normal business for a three-day weekend filled with cookouts and fireworks displays, as we commemorate the birthday of our nation. Despite those “distractions,” some will think back on the courage of the nation’s founders and their vision in crafting a structure of government that remains a unique role model for the world—and well they should.


Still, students of history—and even aficionados of the musical 1776, readers of David McCullough’s John Adams, or its recent HBO miniseries adaptation—know that the decision to declare independence was no easy matter. Indeed, the political bartering involved in getting to a “unanimous Declaration of the thirteen united States of America” would have been all-too familiar to the legislators of today.

While we celebrate the Fourth of July as Independence Day, that is neither the day on which the Continental Congress passed the resolution (July 2), nor the day on which the declaration was signed by the members of that Congress (only President of Congress John Hancock and Charles Thomson, Secretary, signed it on the 4th (the former in a hand "large enough for King George to read without his spectacles"). Most delegates didn't sign it until August 2. One didn't sign until 1781. Three delegates never signed.

The signers—who stood to lose everything they possessed, including their lives—surely did so with trepidation. Indeed, Hancock reportedly said at the signing on August 2 that they must all stick together—to which Benjamin Franklin reportedly responded, "Yes, we must, indeed, all hang together, or most assuredly we shall all hang separately.” Of course, that declaration was neither the beginning nor the end. Hostilities with England had already been underway for more than a year, General Cornwallis' surrender at Yorktown was still more than five years off, and an official end to the hostilities would not come until 1783.

Invoking the Vision

Less than a hundred years later, armies were once again fighting over those principles—one side defending the same basic rights of property, and freedom to enjoy it, that their forefathers struggled to establish; the other, to extend those same rights to all Americans. In the middle of that Civil War that would threaten to rip the young country asunder—and on the Gettysburg battlefield where July 4, 1863, would forever mark the end of the bloodiest battle in American history—President Abraham Lincoln invoked the vision of the nation’s founders to launch his Gettysburg Address with the words; "Four score and seven years ago our fathers brought forth on this continent, a new nation, conceived in liberty, and dedicated to the proposition that all men are created equal."

The choices our nation faces today—on terrorism, the fighting in Iraq, health care, energy costs, the economy, and. yes, even retirement savings—seem relatively modest in scope when considered next to the daunting prospects our forefathers faced in 1776, IMHO. What they could not have had at that time—but what their vision has surely bequeathed to us—is a confidence in what we now consider American ideals, and the resilience of the American spirit.

Their sacrifices were made a long time ago—and the liberties they fought to win, and to preserve, are so interwoven into the normalcy of our day-to-day expectations that it is easy to forget just how precious they are, and how rare still in this world.

With all its faults, all its frailties, what we have here remains a special gift. A gift that young men and women are still sacrificing to extend to others today. A national treasure we should appreciate every day—even if we only celebrate it once a year.

- Nevin E. Adams, JD

'Swimming' Pool

Having just spent most of the past week in Chicago at our annual Plan Designs conference (bigger and better than ever, I might add!), my head is still swimming with new ideas, modifications of existing “assumptions,” and the occasional validation of the “tried and true.”

I’m dedicating this week’s IMHO to a rough summary of some notes I took during that time (in some cases, I have “refined” statements to be more declarative than they were presented to make a stronger point):

• A prudent process helps you win in court; a good result keeps you out of court in the first place.

• Lots of people have already decided who they are going to vote for in November.

• Automatic enrollment (still) isn’t for everyone.

• Some people who nod their head knowingly when you start talking about glide paths don’t have a clue what you are talking about.

• In an era where asset-allocation solutions dominate, you’re better off picking the best target-date fund(s)—and then finding a recordkeeper that can/will accommodate that selection.

• Target-date fund benchmarks are available—but they incorporate certain beliefs/assumptions on the part of the index maker (though that’s not exactly radical, IMHO. The S&P 500 also incorporates certain beliefs/assumptions in its composition).

• Nobody (except perhaps the lawyers who wrote them and the regulators that mandated them) is actually reading all these participant notices.

• We’re getting ready to know more about fees charged than some ever thought possible—then, we’re going to have to be taught what to do about what we (now) know.

• Lots of plan sponsors are “OK” with the fees they are paying—but they aren’t sure that they are “reasonable.”

• Retirement income is an “easy” sell, but still a tough “buy.”

• Mentioning that you’re thinking about beginning a provider search (even if you’re not) is an easy way to gain a quick fee/service concession.

• Tax breaks associated with tax-deferred savings and employer-sponsored health care add up to a lot of money—and some in Washington want to spend that money other ways.

• More people (still) seem to be worried about the 25 basis points being split between the recordkeeper/TPA and adviser than the 80 basis points being spent on investment management.

• There is an inherent mismatch when revenues are based on something (assets) that has very little correlation with costs (plan structure and participant count).

• Most plan sponsors still have a better chance of being struck by a meteor than being sued by a plan participant.


- Nevin E. Adams, JD

Time Enough?

My dad has been on my mind a lot of late—for no particular reason that I’ve been able to identify. The anniversary of his passing was several weeks ago—his birthday not until October. The approach of Father’s Day is the most obvious explanation—but the truth is, Father’s Day with my dad was never a particularly memorable occasion (Dad always liked his Sunday afternoon naps).

He was a man of few words (outside his pulpit, anyway) and, like many men of his time, wasn’t inclined toward big shows of emotion. Ultimately, he was with us longer than he expected to be—but a lot less time than I ever anticipated.

Perhaps because I’ve been in that frame of mind—perhaps because of his closeness with his father, and his books that shared that relationship with the rest of us—the news of Tim Russert’s untimely passing Friday really stuck with me this Father’s Day weekend.

People die tragically and prematurely every day, of course. However, most of them are unknown to us, and nearly all are unnamed to us. As for Russert—well, I didn’t know him, never met him—but he spent a lot of Sunday mornings in my living room. Politics aside, his was a face and a voice that I got to know. He was older than I, but not so much so that his passing would be expected. He was, by all accounts, a loving son, husband, and father—a man in the prime of his career. That he might have gone to work Friday just like any other day—to realize that on any given day, any one of us could go to work and simply not come home…well, it reminds us just how precious and sometimes tenuous life can be.

We know that, as ironic as it sounds, death is a part of life. Thoughtful individuals prepare for the possibility of death—through faith and, with luck, sound financial planning. Most don’t dwell on those realities, and that’s doubtless a good thing, IMHO.

In this business, we spend a lot of time worrying about the risks of outliving our retirement savings. Participants increasingly seem to rely on an assumption that they will work longer, or save more later, to make up for their current shortfalls.

However, Tim Russert’s passing should remind us all again that we don’t always have as much time as we might want.

- Nevin E. Adams, JD

A “Simple” Plan

More than a decade ago, my mom was getting her finances ready for retirement. A schoolteacher her whole life (except for that swathe of time when she set that aside to be at home with her brood during their formative years), there weren’t a lot of varied sources and complicated tax planning to worry about. The most significant component was the balance she had accumulated in her 403(b) plan.

Then, as now, I fancied that I had at least enough investment savvy to make reasonable investment decisions for myself–and I’ve never been shy about offering my sense of the markets to anyone willing to listen (and worth every penny they paid for that advice, I might add). But this was my mother’s money–and a significant component of what she would need to live on for the rest of her life. Frankly, I was nervous about making a decision that would wipe out her years of savings.

Fortunately, I had the presence of mind to recommend an asset-allocation fund. Nothing too fancy, certainly in hindsight–just your basic 60/40 mix split between the S&P 500 and Treasury bonds, in a very reasonably priced mix. It helped that Mom had been paying attention in those education meetings over the years: She understood the importance of diversification, the balance of stocks and bonds, and was willing to have a larger exposure to stocks than many in her age cohort might have preferred. And, from the standpoint of a well-intentioned but frequently preoccupied son, it was a relief knowing that someone who actually manages money for a living would be keeping an eye on things.

About six months later, during one of our periodic calls, Mom asked if it wasn’t time to put some of that money in another fund. I was puzzled, Had she been disappointed with the fund’s performance (this at a time when one might well have wished for a higher apportionment to equities)? No, she said she had no issues there. Was it a problem with the fund company itself, I asked? Was she worried about their financial stability? After all, it was a mutual fund, not a bank; so, was she worried that it didn’t really have anything like FDIC insurance? No, she said, there was no problem there, so long as she knew. Well then, I asked, why did she want to move some of it to another fund?

“Because,” she explained patiently,“isn’t it important to diversify my investments?”

Now, I thought I had done a brilliant job of explaining the asset-allocation fund premise–how that diversification was accomplished within the fund on an ongoing basis by people who spent their working hours paying attention to such things. But to her great credit, my mom–who had no real education in investing or the market other than what she got in the workplace–may not have known what to invest in, but she did know that you shouldn’t put all your eggs in one basket.

That wasn’t the last discussion I would have with Mom on the subject (though she let a respectable amount of time pass before she brought it up again). Not because she didn’t hear and understand my explanation, but because, IMHO, after a lifetime of having to make the investment decisions herself, she just couldn’t quite believe that the “right” thing to do was to invest it in a single mutual fund.

Things are even better for participants now, of course. Asset-allocation funds have long since incorporated sophisticated risk evaluations, and target-date funds make it easy for participants to make respectable decisions without even that “bother.” Those solutions have their imperfections, of course. But I wonder how much different the focus of participant-directed savings programs might be today if those kinds of solutions (1) had been available then.

- Nevin E. Adams, JD

(1) I realize that profit-sharing programs have long operated in a “balanced account” structure that didn’t require participant-direction (or, in most cases, participant funding). On the other hand, from the very beginning, accounts funded with employee contributions have sought to give participants the opportunity to decide how to invest their own money.

Magic 'Cull'

Participant education meetings have long touted the “magic” of compounding; that apparent miracle of finance whereby income earned on investments becomes part of an account balance, and earns more income that in turn adds to the account balance, which earns more income, and so on. The net result, of course, is that at the end of a savings career, you wind up with a lot more money than you ever thought possible.

The funny thing is, I’ve known about this magic for so long, I had almost forgotten how impressive the results could be. Or had, until Russell Investments published a short paper with a long title— “The 10/30/60 Rule: Where Do Defined Contribution (DC) Plan Benefits Come From? It’s Not Where You Think.” This paper wasn’t about compounding per se—if it had been, I doubt that I would have taken the time to read it. In fact, now that I’ve brought up the subject of compounding, you may have already gone on to other things—but stick around.

We all know that compounding is a good thing—something that works on our behalf even when we aren’t doing anything. Sort of like having a good metabolism that keeps your portfolio in fighting trim without requiring any physical exertion (I still remember those days fondly). As a consequence, we tend to take it for granted.

“Post” Script

However, the point of the Russell paper wasn’t the magic of compounding. It was a message about the importance of investment—particularly investment after retirement. How important? Well, important enough that a reasonably simplistic spreadsheet included in the paper showed that nearly 60% of one’s total retirement distribution can come from investment returns attained after retirement (age 65 in the example). How much comes from individual contributions? Well, in the Russell example, a relatively miniscule 10%, and the rest from pre-retirement earnings—about 30%.

Now, to get there, you have to embrace several assumptions—and the paper’s authors are clear on that point. They assumed a 7.8% annual rate of return and applied it consistently over the period in consideration (each year’s contributions were half-weighted). Granted, some might argue that 7.8% is a tad “optimistic,” certainly when one considers that return applied over a 64-year period without interruption (1). However, they also assume a 4.75% annual increase in the contribution. That assumption is doubtless expected to account both for wage increases and deferral growth—but still seems wildly optimistic in a 40-year savings “career.” However, if that is optimistic, then it only serves to accentuate the point of the Russell paper—that investment returns play a significant role in account accumulations (more on that in a minute). The paper’s authors also factor in distributions—again, in a consistent stream—that increase by 3% each year, designed to draw the account balance to $0.00 at age 90.

What that means for the baseline scenario presented is that, if you start by saving $1,000 when you are 25, by the time you get to 65 (under the assumptions noted above), you will have an account balance of nearly $470,000, of which only about $113,000 would have come from contributions. However, the real “magic” is that, by the time the sample participant exhausts his account at age 90 (2), he would have been able to withdraw more than $1.1 million. In other words, even after money starts being drawn from the account—and even after contributions are no longer made—those post-retirement years add nearly $700,000 to that account balance at retirement.

We all know that in the “real” world, nothing moves in a consistently positive direction. Investment returns are generally unpredictable, if not downright volatile; contributions (even “escalated” designs) tend to plateau at some point; and account balances are depleted, for a time anyway, by things like loans and withdrawals. However, the message—that your investments keep working for you even after you quit working—is timeless, and one well worth keeping in mind, IMHO, as we work toward a financially secure retirement.

- Nevin E. Adams, JD

(1)The paper’s authors examined a couple of different investment return scenarios—one where the annual return is 5% and another where it moved from 7.8% to 5% post-retirement. They did not, however, factor in any negative returns.

(2)The paper’s authors acknowledge that 90 is “slightly beyond the average life expectancy,” but explain its usage as a reflection of the need to “build in a margin against the uncertainty introduced by longevity into retirement planning.” However, if death is assumed to occur at age 85, rather than 90, the authors note that the 10/30/60 rule shifts to only 12/36/52.

Conspiracy Theorist

I spent some of my precious three-day weekend perusing Teresa Ghilarducci’s When I’m Sixty-Four, an intriguing title for a book about pensions–or, as the subtitle suggests, “The Plot against Pensions and the Plan to Save Them.”

To her credit, Ghilarducci, an economics professor at Notre Dame, actually offers a serious proposal to provide a more secure retirement income stream for Americans, certainly for lower-income individuals. It is unfortunate, IMHO, that she devotes but a single chapter of the 300-page book to exploring the “plan to save them,” leaving the bulk to “the plot.” A “plot” that includes the complicity and outright scheming of employers, advisers, providers, and even the federal government (well, at least the Bush Administration).

The plan? Well, she gets there by imposing a mandatory 5% FICA-like withholding (yes, in addition to the current one) into a “Guaranteed Retirement Account (GRA),” imposing mandatory annuitization of those benefits (no lump sums, and no ability to pass that “account” along to heirs, though she would allow you to accept a reduced benefit for the ability to include a beneficiary in an annuity stream), doing away with the current tax benefits associated with 401(k)s, and replacing that with a $600 refundable tax credit that would be indexed for inflation.

The “Plot”

As for the “plot,” in Ghilarducci’s view, employers offer defined contribution plans instead of traditional pension plans not because they are preferred by workers (in fact, she rather seems to doubt that) or because they are less impactful to the balance sheet (particularly these days), but simply because they are less expensive (there have, of course, been studies that refute that notion). She decries the 401(k)’s disproportionate benefit to upper-income workers–which apparently results from the reality that they are more likely to actually participate in such programs than are lower-income workers. The Pension Protection Act’s tightened reporting strictures on pensions were, in Ghilarducci’s view, at best an overreaction to a non-existent funding crisis and, at worst, an overt move by politicians who so desperately wanted to promote an individual account system over defined benefits that they effectively legislated it out of existence. Oh–and if you’ve been worried about Social Security funding, you can breath a bit easier. Apparently, the actuaries are notoriously pessimistic, according to Ghilarducci.

In Ghilarucci’s world, the current travails of the nation’s retirement system are not due to the lack of a coherent national policy, the aberration of a voluntary savings system inadvertently converted into THE retirement savings device, or the challenges that a pay-as-you-go Social Security design naturally experiences as it tries to pay for more people going than paying. Instead, it all seems to be the result of some form of Machiavellian plot–and one that, IMHO, is a perspective of someone who has perhaps not spent much time with plan sponsors who agonize over the very issues she seems to think they proactively set in motion.

She doesn’t seem to think that we need a different or additional system simply because the current approach isn’t working for everyone–rather, she seems to see the malicious and deliberate hand of employers in undermining the system (and, it seems, in championing the concept of working in retirement. “Working ‘retirees’ help manufacture healthy profits,” she says).

The Plan

Little wonder, then, that her solution relegates employers to the role of payroll withholder (she makes an allowance for employer-sponsored defined benefit plans that contribute 5% of payroll each year), while–like many who see government as a necessary part of the solution–advocating what amounts to higher taxes for all, willingly embraces a broad redistribution of wealth, and puts the management of said funds in the hands of the federal government.

Ghilarducci is remarkably sanguine, IMHO, about the funded status of Social Security and pension plans generally (though, as I have said in this column before, I think too much was made over the effects of the so-called “perfect storm”). She “solves” the apparent tax “inequities” of the voluntary savings system by imposing a new FICA-like withholding on everyone. However, 5% withholding alone wouldn’t be enough to do the trick––and that’s where the pooling comes in, and where, like Social Security today, if you die early, your “account” is simply assimilated into the broader pool. The financial risks attendant with the program’s guarantee? “Borne by the government, not by the worker,” she explains–as though the government has a funding system independent of those workers.

I think most Americans would find the Ghilarducci proposal problematic. People who can save for retirement today but don’t ostensibly have reasons (or excuses) that would be impeded by the 5% mandatory tax. Those who currently have and appreciate the tax benefits of their 401(k) would surely hate to see that disappear (one wonders what would eventually happen to those workplace retirement plans and/or company matches if such a universal system were in place). While Ghilarducci takes pains to distinguish the GRA from Social Security, those distinctions will be invisible to most workers, and with good reason. Moreover, once the federal government gets its hands on that money, it’s hard to imagine that Congress won’t find other ways to spend it (one need look no further than how the original purpose and withholding rates of Social Security have morphed to today’s design to appreciate the potential).

We do need solutions beyond what is available today, IMHO–and Ghilarducci’s proposal will, and should, certainly contribute to the discussion. However, I think that discussion would be better served with less emphasis on the alleged conspiracies—and more on the theories that will truly make a difference.

- Nevin E. Adams, JD

You can check out a paper that was a precursor to the book HERE

The Rest of the Story

Last week, AARP published a report on how economic worries are impacting Americans.

The report, aptly titled “The Economic Slowdown’s Impact on Middle-Aged and Older Americans", "revealed” what seems obvious to most—that a large majority of Americans think the economy is in trouble (even though most respondents’ personal lives seem largely unaffected) and that, as a result, some are making adjustments in lifestyle (things like vacations and eating out), saving, investing, and retirement plans.

In fact, the headlines—including ours—tended to focus on the fact that more than one out of four (27%) workers age 45-64 say they postponed plans to retire, and nearly as many reported they are prematurely taking money out of their 401(k)s and other investments (see “Delayed Retirement, Early Withdrawals Result from Economic Downturn”). Another interesting data point was that 27% said that recent stock market losses had led them to start putting less in their retirement accounts.

That anyone is cutting back on savings is disconcerting, of course, since, by and large, people seem not to be saving enough as it is. But, “buried” in the survey data was another interesting data point: Nearly as many—25%—said that because of losses (or despite them) in the stock market, they were actually putting MORE of their income in retirement accounts.

The real point in all of this, of course, may be that—while they are concerned about the economy (though even in this survey, most Americans haven’t been impacted directly)—most haven’t made any significant changes to their retirement preparation habits. According to the poll, 77% haven’t changed their minds about retirement timing; nearly half were saving exactly the same amount before the market turmoil as now. In fact, if you take that latter group, and add in the group that has stepped up their savings, the headline could—and perhaps should—have been “Americans Cut Back on Eating Out—But Still Saving.”

As noted above, that wasn’t the focus of the coverage—not even ours. Discerning motivations is a tricky business, particularly when those motivations are as varied as the individuals covering these surveys (or the editors looking over their shoulders). It is, perhaps, natural to assume that a slowing economy would inexorably lead to a reduction in savings—and, in fairness, those cutbacks were highlighted in the press release that accompanied the survey’s release. And, lest we forget, there was absolutely nothing misleading in acknowledging the reality that a significant minority had, in fact, cut back on their retirement savings.

There’s an old journalistic maxim that says “if it bleeds, it leads.” It’s the reason why the teaser for the nightly news is about murder, a horrific fire, or a natural disaster—and you can’t just blame that on the news producers. They may not be giving us what we “want” when they do so—but they are, in fact, giving us what we tune in to hear about. Crudely put, it’s the kind of thing that sells papers (or Web clicks).

Still, we owe it to ourselves—and those we support—to look for “the rest of the story.”

- Nevin E. Adams, JD

One More Thing To Do

Last week, the Connecticut legislature didn’t get around to voting on a bill that would have effectively set up a state-sponsored 401(k) plan for small businesses (see CT State 401(k) Plan Proposal Dies as Session Ends). Proponents—which included AARP—claimed that the legislation would save businesses with fewer than 100 workers a lot of money, basically by allowing them to pool their plan investments—a pool large enough to provide the negotiating power that small businesses generally lack on their own (workers would have individual accounts and be able to choose from various investment options, while employers could contribute a percentage or set up a program to which employees would contribute).

Opponents—which included the Connecticut Business and Industry Association (CBIA), the Connecticut Bankers Association, the Insurance Association of Connecticut, the American Society of Pension Professionals and Actuaries (ASPPA), the Council of Independent 401(k) Recordkeepers (CIKR), and the Small Business Council of America (SBCA)—refuted that cost-saving claim. Cost-effective alternatives exist already, they said, in the form of SIMPLE IRAs. Moreover, they were doubtful that the projected cost savings would actually occur under the new design. And, of course, they also were concerned about the “competition” resulting from such a program for their members.

In comments submitted on behalf of ASPPA, CIKR, and the SBCA, Michael Callahan, founder of Southington, Connecticut-based third-party administrator Pentec, Inc., said, “If an employer doesn’t want to set up a retirement plan, it is generally either because the employer is not educated about available options, or the employer does not want to commit to making contributions for employees each year.”

Now, one can hardly argue that small business owners are, as a rule, intimately familiar with their retirement plan options, and surely there are any number of them who are not comfortable committing to making contributions every year. But, IMHO, neither of those is a major impediment to adoption of these programs by small businesses.

Fees Matter

And, despite the assertions of those opposed to the Connecticut proposal, I do think fees are an important issue, though perhaps not a central concern. These days, it’s not unusual for even moderate-size plans to be able to pay no explicit fees, courtesy of revenue-sharing offsets. However, smaller programs—particularly start-ups—are confronted with different realities; frequently forced to embrace proprietary fund solutions, and fund solutions of higher-priced mutual fund share classes, in addition to explicit administrative charges. However, for the very most part (explicit fees are always a complication), these “extra” charges, while real, are drawn from the participant investment accounts, not the employer’s purse (business owners frequently overlook the fact that theirs is the largest balance—and thus the largest “contributor”).

There are other noteworthy impediments: A fear of getting sued by participants looms larger every day (even though the plaintiff’s bar seems focused on more lucrative targets), not to mention concerns about the time and energy associated with keeping up with these programs. Indeed, IMHO, one of the biggest impediments to small-business adoption of these programs was noted in Callahan’s comments arguing against the proposal. “The ERISA rules, and Internal Revenue Code non-discrimination requirements, are designed to protect rank and file workers. These rules are important—they are also complicated and time consuming.”

While it was cited as a reason to oppose the legislation, that admonition applies with even greater force when it comes to what is required of employers to administer these programs on an ongoing basis.

Those rules and restrictions are, of course, in place for good and valid reasons, and many were put in place to deal with specific, real-world abuses. But the fact remains that offering a qualified retirement plan benefit is neither simple, nor easy—and until it can be, we probably shouldn’t wonder why so many choose not to take on that responsibility.

That’s not to say the Connecticut legislation dealt with any of that, though I’m guessing that it might well have made it easier for small businesses to choose a program, and perhaps one that charged participant accounts less than they would pay outside that model (they may well have paid more in taxes, of course). We often fret about the shortcomings of a system where only three-quarters (or less) of those eligible to participate in a 401(k) do so, and we rightfully worry about the adequacy of the deferral rates of those who do save.

However, the sad fact is that only about half of working Americans today even have the option of participating in a workplace savings plan—and most of the job creation in this nation’s economy comes from small businesses. We need to be creative in order to help make it easier for small businesses to embrace these programs and give those they employ a chance to save for retirement.

It takes a lot of courage, time, and energy to start and run a small business, after all. What small business owners generally aren’t looking for - is one more thing to do.

- Nevin E. Adams, JD

Their Own Devices

There’s been a lot of talk about tax policy of late.

It’s an election year, after all—and while most of the rhetoric revolves around targeting only “the wealthiest Americans,” it’s hard to shake a sense that the impact will be less than precisely targeted.

There’s talk of raising the tax rate on capital gains and dividends, for example—as though only the rich invest in stocks and mutual funds. A prominent presidential candidate talks openly about the fairness of increasing the amount of income subject to FICA withholding, and while it certainly sounds “fair,” that could represent a pretty big tax increase for some decidedly unwealthy families (worse, unless the benefit calculations are adjusted—and it would certainly be most unfair to do so—the move won’t even help the Social Security deficit; we’ll just pay out more in benefits to the people from whom we have now taken more FICA).

Another prominent presidential candidate wants to sever the tie between employment and health insurance, and if he is successful, many in the working middle class who currently enjoy that workplace coverage could find some or all of that benefit taxed—and probably shouldn’t hold their breath waiting for a salary boost to compensate for the loss (even more could simply find themselves with the “opportunity” to shop for insurance on their own). Others have resurrected the notion of imposing a “windfall profits” tax on Big Oil—as though we don’t all know who will actually wind up paying for it (note to politicians: It’s been tried before…it didn’t work).

Complicate Ed

Unfortunately, our economic lives are going to get more complicated in the coming months. We’re not technically in a recession, but regardless of such technicalities, many feel—and are hunkering down—as though we are. Ultimately, of course, perception is reality in such matters—and none of the current U.S. presidential candidates has any real interest in convincing us otherwise.

What that means, of course, is that between now and the election, we’re going to have a lot to fret about. Concerns about the rising cost of—well, just about everything—and anxiety about how the markets (and our 401(k) accounts) respond to that uncertainty will almost certainly continue to be the order of the day. In the months ahead, it’s likely to be harder than ever to keep participants focused on, and committed to, their retirement savings. Frankly, even the well-intentioned coverage and focus on 401(k) plan fees (and not all of it qualifies as “well-intentioned”) serves to undermine participant confidence in these programs.

As a solution, the Democratic candidates are touting payroll deduction plans for retirement savings (Senator Clinton’s are voluntary, Senator Obama would make them opt-out for participants) with government matches of up to $1,000. These solutions, of course, relegate the employer to nothing more than a payroll agent in the transaction (Senator McCain has yet to address the issue).

Doubtless, the ease of payroll deduction will spur some takers (certainly Obama’s opt-out version), but one can’t help but wonder how well-served workers, left to their own devices, will be in the retail IRA market, certainly compared with the structure, guidance, and institutional pricing afforded most employer-sponsored plans. It is a shame, perhaps a tragedy, IMHO, that the candidates have yet to consider the opportunity to provide real incentives for employers to “suit up” as a fiduciary for these programs.

But if there is a tragedy greater than the fact that only about three in four eligible actually participate in a workplace retirement savings plan, IMHO, it is that roughly half of working Americans don’t even have the opportunity.

- Nevin E. Adams, JD

Overdue

I was discussing the subject of retirement the other day with a friend. We decided we weren’t sure when that would happen, we weren’t even positive that it would happen—and we really didn’t know what “it” would be like if and when it did happen. Finally—it had been a pretty hectic week, after all—I somewhat playfully suggested that the best definition of retirement would be the absence of time-critical deadlines. Ah, now that’s something to look forward to!

Retirement has its own pressures. But the “difficulty” that my friend and I had actually describing what we would “do” is a real problem in retirement planning. If you don’t know what you are saving for, after all, it’s difficult to be very effective in your planning. The things we are accustomed to saving for—a car, a house, the kids’ college tuition, a vacation trip—generally are not only things we can envision, they have a very specific price tag.

Now, I know you’re thinking that retirement—more precisely, living in retirement—also has a price tag, and anyone who has an interest in knowing what that is can turn to any number of readily available calculators capable of revealing that number. Unfortunately, those disembodied numbers don’t shed much light on defining what we’ll get for our money—and they tend to be so large that the normal reaction is, “Isn’t there a cheaper model?”

I’ve seen a lot of interesting—and very creative—attempts to help overcome these obstacles, and I’ve no doubt that they have done a good job helping many participants prepare for a better retirement (whatever that may be).

To me, however, the answer to what retirement savings is for starts with a budget. And no, not what you’ll need in retirement, but what you spend money on today. The simple reason is this: A participant who doesn’t do an annual budget—even if it’s on the back of an envelope—while he or she is working doesn’t have a chance, IMHO, of beginning to understand the concept of retirement planning, much less savings.

Once you have that list of what you spend money on today, you’re well on your way to explaining what you’ll spend money on in retirement. Oh sure, some things you’ll spend more on—and others less; there are things you don’t have to buy now that you will then, and some things, like the care and feeding of your children, that you at least hope have a time limit. But I think that annual budget list answers questions about retirement in a way that no beach-umbrella-embossed retirement savings brochure ever can.

Budgets, of course, are composed of two basic elements: income and expenses. And just as surely as the latter deals with the “what am I doing this for” motivation, I have found that filling in the gaps on the income side very effectively deals with the realities of needing to put enough money aside. Not that those answers are generally “easy,” of course, but all of a sudden, retirement savings is transformed from looking like “extra” money to live, to what it actually is—replacing income sources that will not continue after retirement.

Finally, having waited far too long to be willing to tell participants the truth, many now have, IMHO, gone too far the other way—insisting that we either tell participants the total amount they need to have saved at retirement, or at least some percentage representation of how close they are to attaining that total amount. Those numbers are too big to be meaningful, and the accompanying percentages generally too small to provide the encouragement participants need to stay with it.

Unfortunately, we have tended to continue to treat retirement savings as discretionary savings. Personally, I think we’d do a better job of paying that retirement bill if participants set an annual budget for retirement planning just like we have for the mortgage or the car payment. That would give them a shorter-term target that could still be part of the larger goal.

Too often, retirement savings is a function of what is left over after everything else is paid. And that means that, too often, particularly when things like health care and filling the tank cost more than we had planned, we not only don’t pay that “bill,” we don’t even see it as overdue.

- Nevin E. Adams, JD

The Sum of Its Parts

Last week, the House Committee on Education and Labor passed the 401(k) Fair Disclosure for Retirement Security Act (H.R. 3185). That it passed was no surprise (it did so along party lines, and it is, after all, a bill sponsored by the chairman of that committee, Congressman George Miller (D-California)).

The issue that seems to loom largest in the minds of those paying attention is the requirement that all service providers break down their charges into four specific categories: administrative fees, investment management fees, transaction fees, and other fees. This isn’t a big deal for many, perhaps most—and it’s a lot simpler than the first version of the bill. Still, a number of bundled providers are claiming that it will be a burden for them to determine what that breakdown is, that the process of discovering—and communicating—those figures will cost money, and, at some point, that it doesn’t make sense because those services aren’t available from them at an à la carte pricing.

A stronger case can perhaps be made that these disclosures will amount to naught; that participants won’t read or understand them—or have any frame of reference. Plan sponsors are concerned that the disclosure will simply generate more participant concern and/or confusion, and potentially provide some with an excuse to defer or forego participating in the plan, and I think there are merits in all these concerns. Still, it seems unlikely that the Miller bill will go anywhere, certainly not in the short-term (it’s an election year, after all)—and the Department of Labor is well into the process of setting out its own proposals on enhanced fee disclosures.

Adults Education

But I think—and I’ve said this before—that it’s time we started treating participants like adults. We need to tell them the truth about retirement expenses, we need to be blunt about the realities of their current savings patterns, and they need to understand that these services we work so hard to provide have a cost. And, IMHO, the advent and widespread embrace of “automatic” plan features makes that honesty more critical than ever.

In that spirit, and regardless of what we wind up with on the regulatory or legislative front—or when—I think it’s time we insist on the following:

• Every plan sponsor should receive—today—a detail of the fees paid by their plan—and, IMHO, the breakdown articulated in the Miller bill is a good framework. Bundled providers can surely provide estimates, if nothing else. You can’t fulfill your fiduciary duty to ensure that fees and services are reasonable if you don’t know what the fees for those services are.

• Every plan sponsor should receive some idea of the fees paid by participants in their plan. You don’t have to see the Miller bill as inevitable to know the day is coming when we’re going to HAVE to tell participants what they are paying in a more explicit way. Worst case—take the detail above and divide it by the number of participants; or take the total plan fees, divide it by the total plan market value, and multiply it by the individual account balances. You might be surprised how close that will get you (certainly if the fees are largely asset-based).

"Compare" Ability?

Now, assuming that their plan adviser has—or will take —a leadership role in attaining those two results, I think it’s time to give plan sponsors and, eventually, plan participants one more thing: something with which to compare that result.

Other, comparable 401(k) plans would be good—but why limit it? Why not compare it with the account fees, transaction charges, and retail share-class charges participants would pay if they truly did it on their own?

Many have been worried that participants would be put off by knowing how much these programs really cost—some in Congress clearly think participants are getting ripped off.

It may be naïve, but I still think most are getting a real bargain—they just don’t know how good they have it.

- Nevin E. Adams, JD

"Better" Pill?

I hate going to the doctor for a checkup.

Or the dentist, for that matter. I don’t even like to take my car in for “scheduled maintenance.”

Granted, for the most part, it’s no big deal—just a minor inconvenience of time, setting aside that gentle comment from the doctor about how I need to lose some weight, to get some more exercise. Or that somewhat incredulous tone from the dental hygienist as she says, “How long HAS it been since you flossed?”

Still, I hate going and will put it off just as long as humanly possible—not because the process itself is particularly painful or arduous, but because I am always nervous that there will come a time when they will find something that requires a more significant change in my lifestyle.

There is, of course, the chance that they might find something at a stage that allows for plenty of time for treatment—and I know that those regular checkups provide the best opportunity to head off something truly calamitous. I know this—rationally—but sometimes it just seems “better” not to know.

I’m sure that same kind of thinking holds sway in many participants’ minds when it comes to retirement savings projections.

"Lack" Luster?

Last week, the Employee Benefit Research Institute (EBRI) published its 18th annual Retirement Confidence Survey (RCS)—or, as I’m beginning to think of it, the annual lack of retirement confidence survey. Not surprisingly, the survey tracked the biggest one-year drop in confidence in its 18-year history (see “Retirement Confidence Plummets in EBRI Survey”)—to a level where less than one in five (18%) was “very confident” about having enough money for a secure retirement. What wasn’t so widely reported was that that 18% matched the levels in 1993, though it has fluctuated over the intervening years (retirees in 2008 were actually more confident than were 1993 retirees).

The RCS is based on phone interviews with participants and retirees, not an objective evaluation of their incomes and actual savings accounts, and it’s hard not to wonder how many are confident when they have no reason to be, IMHO. For, while only 18% were very confident, nearly half (43%) were somewhat confident, a number unchanged from last year’s RCS (see “Workers’ Confidence in Traditional Benefits Slip”). All told, then, well over half—in fact, nearly two-thirds—of respondents expressed some level of confidence in having enough money to live, and live comfortably, throughout their retirement years.

Unfortunately, there is little in the RCS data to suggest that this confidence is grounded in anything other than wide-eyed optimism, a willing suspension of disbelief, or good old-fashioned ignorance. About half of the workers surveyed by the RCS (among those that provided this information) said that the total value of their household’s savings and investments (excluding the value of their primary home and any defined benefit plans) is less than $25,000, and nearly a third plan to retire prior to reaching age 65. Nor do they seem to be expecting a lot of support from the government; most are not confident that Social Security will continue to provide the same level of benefits as it does today (37% are not at all confident of that result), and two-thirds are not confident about the level of support from Medicare.

Nor did the process of participating in the survey seem to do anything to heighten concerns. Although the survey’s authors thought that respondents would have less confidence in their retirement preparations at the end of the survey than at the start, that was not the case. Two-thirds gave identical responses—and the others were as likely to gain confidence as they were to lose it by completing the survey.

It’s one thing to feel confident about one’s retirement prospects, of course, and another altogether to feel that way with justification. Still, nearly half (47%) of this year’s RCS respondents said that they (or their spouse) had at least tried to do a retirement needs calculation, and that’s MUCH better than the 31% who had done so in 1994. That’s an important first step, and one of the few that, IMHO, ever lead to changes in savings behavior.

The challenge, of course, is getting those participants to take the time—and run the risk of knowing that they have to undergo a change in savings behavior to avert disaster…while there’s still time to do something about it.

- Nevin E. Adams, JD

Legends for Our Times

Ours is an industry of fairly recent invention–one that is, in many respects, only just beginning to emerge from the growth pangs of adolescence. Ours is an industry constantly and dramatically evolving–and one that all too often seems relentlessly driven to push us forward to the next challenge, through the next legislative overhaul, and onto the next wave of tumult in the markets, sometimes in the same six-month period. For plan sponsors, change is not only the order of the day, it is the day. That certainly has been true for the 15 years during which PLANSPONSOR has been published.

But if the pace is relentlessly forward, there are nonetheless those among us who have a vision that stands out from the crush of the day, who provide a better way for the rest of us, either through thoughts or deeds, to succeed in helping bring about a more secure future for those who depend on us.

As our 15th anniversary approached, we began thinking about those individuals--individuals who have made an impact on this business of retirement benefits. For clarity, we limited our focus to the past 15 years, though there are certainly individuals whose contributions predate that timeframe and whose impact is still felt today. We also limited our list to 15, though it could easily have been twice that size.

They are leaders, innovators, partners—some have challenged the status quo, others have laid the foundation for a new one, and still others have helped us all negotiate the period(s) in between. There are some familiar faces, as you might expect–many have appeared in our pages over the years, several were highlighted as “influencers” in our 10th anniversary issue, and a number have subsequently been honored with PLANSPONSOR’s Lifetime Achievement Award. There also are some with which you may not be familiar, though you are almost certainly aware of their contributions. We are pleased to be able to introduce them to you here. Admittedly, there may well be those on this list that some may challenge–or some not represented who have arguably made equally significant contributions.

This is, however, our list–15 who have, in our estimation, during the passage of the past decade and a half, made a lasting contribution to the nation’s retirement security.

There are those who make a difference in our lives– parents, spouses, mentors, friends–and then there are those who make a difference in all of our lives.

They are legends.

- Nevin E. Adams, JD

The legends are online HERE

The Letter of the Law

An early “win” for plan sponsors (perhaps more accurately, a win for a plan sponsor) was Hecker v. Deere & Co.

That’s the case where, last June, U.S. District Judge John Shabaz tossed “with prejudice and costs” allegations that the plan had incurred excessive fees and had violated its fiduciary obligations by not disclosing revenue-sharing relationships to participants (see “Fighting Words”). It was, many experts said at the time (including this writer), a correct decision, but bad law, with Shabaz too broadly (IMHO) applying the shield of ERISA 404c to excuse an entire series of fiduciary responsibilities not encompassed by that statute.

Not surprisingly, that decision has been appealed—and this time, the Department of Labor has offered its opinion as a “friend of the court” (see “DoL: ERISA Fiduciaries Could Have Disclosure Mandate Not Specified in Law”). And perhaps not surprisingly, the DoL also seems to think that Judge Shabaz missed the boat on a number of his conclusions.


404(c) "Immunity"

First and foremost, the DoL stated that “the statutory safe harbor in section 404(c) does not immunize the Plans' fiduciaries to the extent they acted imprudently in offering investment options with excessive fees”—and also that “section 404(c) does not give fiduciaries a defense to liability for their own imprudence in the selection or monitoring of investment options available under the plan.” Further, that “[a]ll of the fiduciary provisions of ERISA remain applicable to both the initial designation of investment alternatives and investment managers and the ongoing determination that such alternatives and managers remain suitable and prudent investment alternatives for the plan.” None of those statements are particularly controversial, IMHO, though they may surprise some that have seen 404(c) as some kind of magic talisman to ward off all fiduciary evils.

In fact, in its amicus brief, the DoL noted that “[i]f, as alleged, the defendants violated their fiduciary duties by selecting investment options with excessive fees, section 404(c) provides no defense to their fiduciary misconduct,” and made no bones about where it stood on Judge Shabaz’ ruling: “The district court thus erred in holding that ERISA section 404(c) immunizes fiduciaries from liability for any resulting losses as the basis for dismissing plaintiffs' claim for excessive fees.”

However, the DoL also noted that fiduciaries are forbidden from “misleading plan participants about their plan”—and said that that duty, “in certain circumstances, require[s] fiduciaries to disclose information that participants need to know to exercise rights under the plan or protect their interests in the plan.”

And while the DoL did note that there might be an obligation to disclose information to participants beyond that outlined in the so-called “black letter of the law,” that did not equate to an absolute obligation to disclose everything, much less the particulars of revenue-sharing relationships. The DoL noted, “This is not to say, however, that the Secretary agrees with plaintiffs' more sweeping suggestions that the fiduciaries of participant-directed plans must always, or even usually, disclose revenue sharing arrangements as a matter of general fiduciary principles. Indeed, we are skeptical that, absent any misrepresentations, ERISA's duties of prudence and loyalty would have required disclosure to plan participants of revenue sharing among Fidelity affiliates.”

At this juncture, we still don’t know if the fees charged in this case (or the dozen or so that alleged similar transgressions against a variety of employers by the Schlichter, Bogard & Denton law firm) were unreasonable or not, or if the alleged breaches of fiduciary duty are founded on anything of substance.

What we do have, thanks at least in part to the DoL’s brief, is a clear restatement of what the law actually requires. And that’s a step toward better law, as well as a better decision.

- Nevin E. Adams, JD

The DoL brief is here.

Safety "Net"

Over the past several weeks, I’ve gotten a lot of calls from reporters across the country looking to understand more about what appears to be a recent uptick in the volume of loan and hardship withdrawals from 401(k) plans. By most accounts, those volumes are up—in some cases, perhaps, up by a factor of two—from a year ago.

The natural assumption is that some combination of the subprime crisis, the struggling investment markets, and/or just general economic stress is forcing participants to tap into their 401(k)s. Of course, pretty much year-in and year-out, somewhere between 10% and 12% of participants have loans outstanding (though a huge database maintained by the Employee Benefit Research Institute (EBRI) indicates that the percentage with loans outstanding has been in the high teens for a number of years, certainly among larger plans). Still, there is clearly movement afoot.

The question, of course, is what should be done about it? If savings rates and accumulated balances are already inadequate to ensure retirement security, it’s hard to imagine a scenario under which depleting them—even if only for a short time—doesn’t make a bad situation worse, IMHO.

Moreover, when people “borrow money from themselves,” as the 401(k) loan process is often characterized, they quickly find out that they are really borrowing money from the plan, collateralized by their balance. That not only means that the 401(k) loan must be repaid on a regular basis (the plan fiduciary has an obligation to oversee these just like any other asset of the plan)—it also means that, while the participant may have satisfied one obligation, they have just picked up another.

The Loan Benefit

There are, of course, reasons to take advantage of the loan benefit, for that is surely what it is. There’s the interest rate, of course—generally prime +1%. Interest that, even if it has to be funded by the participant, does at least eventually wind up in their own account, rather than some credit card company’s. Plan loans are usually relatively easy—and the ability to simply tap into money that you have set aside is certainly more appealing to one’s sense of self-reliance than prostrating oneself before some loan official.

This industry has long and consistently embraced the notion that loans were something of a necessary evil in these programs. After all, if we didn’t give participants a way to tap into those funds in an emergency, they’d be much less inclined to save—or so runs the common wisdom. Odds are, if you’ve had the opportunity to explain these loan features to reluctant savers, you’ve perhaps thrown in the notion that “you can get to the money in an emergency.”

All in all, most participants appear to have treated that option responsibly. Over the past 20 years, the number of participants with loans outstanding has remained relatively constant, and while there are certainly cases of individual abuse, the combination of plan limits, processing fees, and sheer inertia has evidently served to keep this genie in the bottle. There are, however, clear signs of a shift here—a shift likely to accelerate along with the uptick in mainstream media coverage of the issue.

This doesn’t have to be a bad thing, of course. And while there is reason for concern if this simply becomes just one more way of fueling (no pun intended) our nation’s apparently insatiable desire for “stuff,” there’s little point in having a retirement savings account if you and your family get thrown out of your home 20 years before then.

However, unsettling economic periods are not restricted to the here and now, and as important as the safety net afforded by these programs can be in the short-term, it is a net that must be repaired and restored at some point. It’s one thing to borrow from yourself, after all—and something else altogether when you simply rob Peter to pay Paul.

- Nevin E. Adams, JD

Marshal Law

When a co-worker forwarded to me an e-mail about Eliot Spitzer’s alleged tie with a prostitution ring last week, I thought it was a joke.

It was no joke, of course—though, in incredibly short order, it became something of a circus (one can only hope that with Spitzer’s resignation, we’ll be spared the tiresome details about the personal life of the prostitute(s) whose services he engaged).

Spitzer was touted as a crusader by some—but like the crusaders of old, his motives and actions surely weren’t always pure. And though he reportedly embraced the image of a sheriff, he more accurately brought to mind Henry Fonda’s gunslinger marshal Clay Blaisdell in “Warlock” who, hired to rid the town of terrorizing bandits, soon became an even more ominous threat to the peace and well-being of the citizenry.

Spitzer made a lot of enemies during his career—IMHO, not so much because of what he did, but how he chose to do it. He was, of course, challenging large and powerful interests, but he frequently seemed all too willing to resort to the equivalent of extortion to impose his will on the targets of his investigations.

He may or may not have had the interests of his New York constituency at heart—he may well have merely viewed it as part of a political calculus designed to take him to Albany, and perhaps beyond. However, for the very most part, he wrested acquiescence and money, not guilty verdicts, from his targets. And, mind you, much, if not most, of the financial benefits have wound up in the Empire State’s coffers, not the pockets of those actually injured.

Still, whatever lies ahead for Mr. Spitzer, he has unquestionably left his mark on this industry. Because of his efforts, a number of illegal—and many highly questionable—practices were brought to light, and a new, sharper focus was brought to bear on the fees paid by the investing public, including 401(k) plan participants. I can still remember reading—with much the same incredulity that accompanied the early reporting of Spitzer’s prostitution ties—the arrangements that fund complexes had made to facilitate late trading, the pre-communication about trading movements with hedge funds, and the written agreements that violated both the spirit and letter of these same funds’ commitment to shareholders (see “IMHO: Wrong-Headed”). And let’s not forget that certain other regulatory bodies, given the opportunity to step in, did not (see “IMHO: Between the Devil and the Deep Blue Sea”).

Ultimately, of course, what got most of those firms in trouble was the hypocrisy of saying they did one thing while they did something else altogether. That, and a certain hubris about the application of the law. These are maladies often visited upon those grown too rich and too powerful.

It’s more than mildly ironic that they now appear to have contributed to the downfall of a man who also grew rich - and perhaps too powerful - at the expense of others.

- Nevin E. Adams, JD