The Benefits of the Doubt

Those who were wondering when—or perhaps if—the issues raised in those revenue-sharing lawsuits would ever actually be tried got a strong, affirmative response last week.

This time, the 8th U.S. Circuit Court of Appeals found triable issues of fact in a case involving Wal-Mart’s 401(k) plan (“8th Circuit Says Wal-Mart 401(k) Suit Requires Further Discussion”), sending the case back for another hearing by the trial court that had dismissed issues raised in the lawsuit, while also taking the time (at least in a footnote) to distinguish some of its findings from a similar case (Hecker v. Deere) that had failed to clear the bar in another circuit (see "The 'Burden' of Proof").

But, IMHO, what distinguishes the ruling in Braden v. Wal-Mart Stores Inc. from all the revenue-sharing cases that have been adjudicated thus far is that the 8th Circuit judges were willing to concede that the plaintiff had alleged facts that, at least on the surface, were sufficient to support a potential claim.

Now, in fairness, the court applied a fairly traditional standard of review in evaluating the motion to dismiss; to give the benefit of the doubt, if you will, to the perspective of the party who has not made a motion to dismiss the case without moving to trial—and it admonished the lower court for not doing so in plain language. In its ruling, the 8th Circuit not only said that the lower court “ignored reasonable inferences supported by the facts alleged,” it went on to criticize that court for not only drawing inferences in favor of the party (Wal-Mart) that had made the motion to dismiss, but for criticizing the plaintiff for “failing to plead facts tending to contradict those inferences.”

What's Different?

So, what did the court find compelling enough to give this case a fuller hearing? The “relatively limited” (10) menu of fund options “selected by Wal-Mart executives despite the ready availability of better options”—“better” in this case including the fact that they were retail rather than institutional class mutual fund shares (there are other, and IMHO weaker, allegations about performance relative to benchmarks and the use of actively managed funds, rather than index alternatives). And then, perhaps by way of “explaining” the use of these allegedly inferior options, plaintiff Braden notes that the Wal-Mart plan funds “made revenue sharing payments to the trustee, Merrill Lynch, and that these payments were not made in exchange for services rendered, but rather were a quid pro quo for inclusion in the Plan.”

Now, IMHO, the plaintiff’s case isn’t ironclad. Even in its ruling sending the case back for another shot, the 8th Circuit noted that “there may well be lawful reasons appellees chose the challenged investment options.” However, that court also pointed out it was not the plaintiff’s job to rule out those alternatives—nor was it, in the appellate court’s view, appropriate for the trial court to basically assume that because there might be alternative explanations, no further inquiry was warranted.

The Duty to Disclose

There is another interesting aspect to the case, IMHO—and it has to do with the duty to disclose revenue-sharing arrangements. While I believe all of the cases presented to date have claimed that such a duty exists—and that every court that has heard that argument to date has just as readily refuted it—the 8th Circuit had a different take. “In the context of this case, materiality turns on the effect information would have on a reasonable participant's decisions about how to allocate his or her investments among the options in the Plan,” the court noted.

The impact of that materiality was heightened by allegations that “those payments corrupted the fund selection process—that each fund was selected for inclusion in the Plan because it made payments to the trustee, and not because it was a prudent investment,” according to the court. And “[i]f true, this information could influence a reasonable participant in evaluating his or her options under the Plan,” the court said – even as it acknowledged that there is no per se duty to disclose these arrangements.

Finally, the 8th Circuit took the lower court to task for basically insisting that the plaintiff prove that the revenue-sharing payments were unreasonable before trial (a threshold that it notes would have been impossible, even if legitimate, since the arrangement between Wal-Mart and Merrill Lynch was confidential).

The 8th Circuit’s actions here don’t necessarily portend a shift in result for these cases, nor should it suggest that there is anything about this particular case that is markedly distinctive from similar cases brought in other jurisdictions. That said, to this point, the courts have, IMHO, been extraordinarily willing to give the employer/fiduciaries the benefit of the doubt in these revenue-sharing cases.

It will be interesting to see how the allegations hold up to a full adjudication of the facts.

—Nevin E. Adams, JD

"Thanks" Giving

Thanksgiving has been called a “uniquely American” holiday, and while that is perhaps something of an overstatement, it is unquestionably a special holiday, and one on which it seems a reflection on all we have to be thankful for is fitting.

Here's my list for 2009:

First off, I’m thankful that the financial markets have stepped back from the precipice we were surely standing at a year ago. I’m thankful that the investment markets have recovered from the worst of the losses of 2008, even if we still have a long way to go. I’m thankful that so many Americans seem to be concerned about the nation’s fiscal health—and hopeful that those concerns will resonate with those who make decisions that affect it.

I’m thankful that relatively few employers felt the need (or took the opportunity) to cut matching contributions this year—and even more thankful to see so many of those who did cut the match restore it.

I’m thankful that so many employers have remained committed to their defined benefit plans and—often despite media reporting to the contrary—continue to make serious, consistent efforts to meet funding requirements that are quite different than when most initially decided to offer these programs. I’m thankful that a core group of lawmakers in Washington continues to be attentive to the very real challenges imposed by those rules, and continue to be proactive in responding to rational relief measures during this difficult economic period.

I’m thankful that so many participants now seem to have a greater appreciation for the importance of prudent, diversified investing—and thankful, though it was a painful lesson for some, that the deep differences in philosophy that underlie target-date investments are being better communicated and understood. I’m thankful that so many participants took it upon themselves to increase their contribution levels during the downturn, and that so few dipped into those retirement plan accounts to tide them through the rough patches.

I’m thankful that plan sponsors will soon have access to more information about the expenses paid by their plans—and optimistic that it won’t be as bad as they fear. I’m thankful that we’re no longer talking about whether fees should be disclosed to participants, but are now trying to figure out how to do it.

I’m thankful for the intelligence, experience, and professionalism of the folks that regulate our industry—and who do so consistently, despite the occasional changes in “the guard.”

I’m thankful to be part of a growing company in an important industry at a critical time. I’m thankful to be able to, in some small way, make a difference on a daily basis.

And, of course, I’m thankful that so many good and capable advisers were available to participants during the worst of the downturn.

I'm thankful for the home I have found at PLANSPONSOR and then with PLANADVISER, and the warmth with which its loyal readers have embraced me, as well as the many who have "discovered" us during the past 10 years. I'm thankful for all of you who have supported—and I hope benefited from—our various conferences, designation program, and communications throughout the year. I’m thankful for the constant—and enthusiastic—support of our advertisers, even in a year that has been tough for so many.

But most of all, I’m once again thankful for the unconditional love and patience of my family, the camaraderie of dear friends and colleagues, the opportunity to write and share these thoughts—and for the ongoing support and appreciation of readers like you.

Thank YOU!

Nevin E. Adams, JD

IMHO: Tractor “Trailer”

About a week ago, Caterpillar agreed to a $16.5 million settlement of one of those allegedly excessive fee/revenue-sharing lawsuits.

It was the first of these suits—launched in September 2006—to come to some sort of “resolution” though, IMHO, it hardly qualifies as such (see “Caterpillar Ready to Ink $16.5M Fee Suit Settlement”).

That said, the settlement’s terms were not just financial; it also included a series of changes in how Caterpillar agreed to administer the plan and monitor its investments. First off, during a two-year settlement period, Caterpillar agreed to "increase and enhance communication with employees about 401(k) investment options and associated fees,” as well as hiring an independent fiduciary (at least during that same two-year period)—and it has also apparently said that it would detail specific fees charged to participants. Caterpillar says it will avoid retail mutual funds as core investment options for the plans, and that the plan’s recordkeeping fees would be “limited,” specifically calculated on a flat or per-participant basis, rather than drawn from asset-based fees (which can go up—or down—with, IMHO, little correlation to the recordkeeping services associated with those asset values).

Caterpillar also committed to not allowing investment consultants to also serve as investment managers and to not receiving compensation from plan investments. Note that from 1992 to 2006 (actually up till about four months before the revenue-sharing suit was brought), the company offered plan investors a group of mutual funds that were advised by a wholly owned subsidiary (that subsidiary now sold off).

So, who are the winners—and losers—here?

Well, while it surely will be categorized as a “win” by those pursuing these suits, and it’s certainly not a loss for them, IMHO, it’s more accurately described as the other party saying “uncle.” In fairness, these suits haven’t fared too well in court—actually, they have had a hard time getting past the hearing stage (see "IMHO:The "Burden" of Proof"). That doesn’t mean they don’t cost the firms being sued time and money; as a mentor of mine once cautioned, “You can spend a lot of money in court being right.” Doubtless, Caterpillar, whatever it saw as the merits of pursuing its defense (admittedly, because for a long period of time, the firm’s money management unit oversaw some of the funds in question, it might have been more vulnerable to charges of excessive fees) eventually figured there were better ways to spend its time and money.

Presumably the Caterpillar participants will benefit as well—from whatever part of the monetary settlement doesn’t go to the lawyers, as well as from the changes in operation agreed to by Caterpillar. Some will no doubt argue that the terms agreed to by this employer will hereafter become something of a talisman for other firms to contemplate, if not adopt, in their own programs. And, talisman status notwithstanding, that wouldn’t necessarily be a bad thing.

However, for those of us on the outside, a settlement is something of a disappointment. Whatever the basis in fact of these lawsuits, they have now, IMHO, put in play legitimate issues of concern for plan sponsors, advisers, and providers—issues that extend well beyond the “starter set” of firms currently involved in this litigation. Issues that, admittedly, the courts have largely dismissed to date, but issues that one senses (if only because the Department of Labor seems not to fully concur with the judicial renderings to date) remain an unsettled area—and one therefore still ripe for litigation. Litigation that, ironically, might later point to plan changes adopted in the wake of these developments as some kind of “smoking gun” admission of impropriety.

So, while the decision to settle may well mark the end of uncertainty for one employer in such matters, it seems to me that it leaves the situation even more UNsettled for the rest of us.

—Nevin E. Adams, JD

The settlement announcement is online HERE

See also Case Sensitive, “Limit” Ed

"Worth" Whiles

I’m sure you’ve seen that commercial where a series of more-or-less everyday events and their price tags are presented, building to larger and more exotic events (and price tags) until they culminate with some extraordinary event—one that the announcer declares is “priceless.”

As an industry, we have long worried about the plight of the average retirement plan participant who doesn’t know much (if anything) about investing, who doesn’t have time to deal with issues about their retirement investments, and who, perhaps as a result, would really just prefer that someone else take care of it, though it’s not always clear how much they value that effort.

What gets less attention—but is just as real a phenomenon—is how many plan sponsors don’t know anything about investments, don’t have time to deal with issues about their retirement plan investments, and who, perhaps as a result, would also really just prefer that someone else take care of it. But how much will they pay for that?

Now, there’s a difference between choosing investments and selecting a trusted adviser to do so. However, as complicated as the former can be, there are certain touchstones that even an amateur can rely on, IMHO: developing a menu that encompasses a broad array of choices, that fill out a style box grid, that factor in performance results, and/or fund rankings. I’m not saying it’s “easy,” or should be entrusted to amateurs (particularly when issues of fiduciary liability are involved), but it’s certainly manageable.

Quantify Able?

Contrast that with the myriad challenges attendant to selecting an adviser—particularly when you consider that PLANSPONSOR’s surveys routinely show that plan sponsors choose an adviser primarily based on the quality of the advice they provide (primarily to committees, but a close second is the advice rendered to plan participants). One can’t help but wonder how that advice is quantified (certainly not in the same way that investment funds can be). Doubtless, that helps explain why so many advisers are hired not on what they know, but on WHO they know.

But for many plan fiduciaries, the obstacle to hiring a retirement plan adviser is financial, not intellectual. Particularly for a plan sponsor who has not previously employed those services—or, more ominously, in the case of one who has hired an adviser that didn’t hold up their end of the bargain—the additional costs of hiring an adviser can be problematic. The question that is frequently asked is, “Why should I hire you?” But, IMHO, the question that is really being asked is “Why should I pay you that much?”

There are ways, of course, to quantify the value of your services, ways that quantify not only what you are worth, but why your fees are what they are. In the most obvious case, you come in and demonstrate the ability to save a plan money. That’s clearly added value, and value that is readily measured (that, of course, only lasts a year, maybe two; after that, the baseline has been reset in terms of savings expectations).

Similarly, your ability to increase plan levels of participation, deferral, and investment diversification also adds value—but value that, IMHO, like the value of retaining qualified talent, is harder to quantify. Many advisers promote their services as a shield against litigation, or at least some kind of buffer against the financial impact of such an event, but in my experience, while most employers are glad to get/take the “warranty” (implied or explicit), they generally aren’t willing to pay very much extra for it.

Where else can you make a difference? You’ve no doubt seen surveys that show that, in the course of a year, most participants spend more time thinking about—and planning for—their vacation than about their retirement plan investments. Ask any plan sponsor client or prospect how much time they spend working on, or worrying about, their retirement plan, and you’ll probably find a similar imbalance. Of course, plan sponsors, like plan participants, know that they should be spending more time on such matters—and most will admit that, no matter how much time they are spending, they should be spending more.

So, how much time are they spending? How much more do they wish they were spending? How can your involvement reduce the time they spend and/or improve the quality of the attention they give their retirement program? You have the ability to share with them insights—from your other clients, from industry surveys that you gain from attending industry conferences; you can help them make better decisions quicker because your experience offers insights to which they wouldn’t otherwise have access.

So, save them money if you can, save them aggravation if you have to, but in this crazy, hectic period, if you can save them time—well, IMHO, that’s truly “priceless.”

—Nevin E. Adams, JD

See also “IMHO: ’Right’ Minded” at

IMHO: Change of “Hearth”

We made a provider change last week.

We really hadn’t been focused on making a change, though the subject had come up from time to time. In fact, considering how long we had been thinking about making a change without actually doing anything about it, the change itself felt almost accidental in its suddenness. So sudden, in fact, that, in hindsight, I found myself wondering if we were “hasty”—perhaps too hasty.

Make no mistake—we had been happy enough with our current provider, certainly at first. In fact, we had been with them for a number of years and had, over time, expanded that relationship to include a fully bundled package of services. That made certain aspects simpler, of course—though we discovered pretty quickly that the “bundle” presented more seamlessly than it actually was delivered. Still, net/net, we were ahead of the game financially, and certainly no worse on the delivery side; we were just a bit disappointed in the disconnect between the sale and the service levels.

And all was fine for a while—or so it seemed. Looking back, there were signs of trouble that we could have seen—if we had been looking. There were unexpected charges on the invoices, and services that we were sure had been described as being part of the bundle that turned out not to be. There was the monitoring service that was supposed to be in place that we found out wasn’t—quite by accident, and months later. Over time we cut back on the services included, but the prices just kept going up. We were, quite simply, getting less and paying more, and getting less than we thought we were paying for. And it grated on us.

In hindsight, I wish we had been more vocal about our discontent. That we had called up and questioned those invoice charges. But, in the overall scheme of things, the charges weren’t large, just not what we expected. We figured that perhaps we had been the ones to misunderstand—and didn’t want to look “stupid” by calling to complain about a charge that some fine print in some document somewhere said was perfectly legitimate. Meaning always to go check that out sometime, the time to do so never materialized. Instead, we talked about how aggravating it was—and how we should do something about it…sometime.

Unfortunately, change is painful and time-consuming. The emotional and fiscal toll these changes took, while annoying, simply wasn’t enough to put change at the top of the to-do list. So, we talked about a change—and every so often asked friends and acquaintances about their experience(s). Of course, it was hard to find someone else who was in exactly the same situation—and a surprising number simply empathized with our plight, being stuck in much the same situation themselves. All of which conveyed—to us, anyway—a sense that, uncomfortable as we might be with the service package, we were probably about as well-positioned as we could be.

Then, one day, out of the blue, an opportunity presented itself. We weren’t looking for it, as I said earlier, but the months of frustration left us open to a casual message from an enterprising salesman—who not only knew his product, he clearly knew the problems that others like us had with the provider we were with. He did more than empathize with our situation. He did not pump me for information about what I was looking for, or what I didn’t like about my current situation. Rather, he was able to speak about the features/benefits that his firm offered…and, to my ears anyway, essentially ran through the list of concerns I had—but had not articulated—with our current situation. In fact, before our conversation was done, he had pointed out to me things that his firm offered as a matter of course that my current provider hadn’t even mentioned to me in all the years we had been associated—things I had assumed we couldn’t get, or couldn’t get without paying a lot more.

We made the change this past weekend—and while it’s early yet, I’m thrilled with the results.

Now, I realize I never gave my current provider the option of retaining my business. Moreover, I know that, had I simply made a call to tell them about the package/price we were getting from the new provider, they would have matched, if not bettered, the deal. Ironically, both points were made—and made somewhat obnoxiously, IMHO—when we called to tell our former provider about their change in status (ironically, by being a jerk about the whole thing, it only served to affirm our decision).

Ultimately, our former provider set themselves up by taking our business for granted, for (apparently) caring more about attracting new customers than in attending to our concerns, and for (apparently) assuming that “quiet” meant satisfied.

Are YOUR customers happy, content, and “quiet”? Or have they just quit complaining?

—Nevin E. Adams, JD

Editor’s Note: For the record, the provider change recounted above involves my cable company.

Conference 'Calls'

As I was listening to, and participating in, panels at our Future of Asset Allocated Funds conference in California this past week, I was struck again by how much things have changed in the past year.

For example, at this conference a year ago, when we broached the notion of marrying a risk-based approach with a target-date offering, the general feeling seemed to be that that would be tantamount to taking a perfectly good, clean, and simple concept—and ruining it. This year, the room was not only ready for the idea, there was widespread enthusiasm for it.

Similarly, a year ago, when we asked folks about the wisdom of putting a family of risk-based and date-based funds on the same retirement plan menu, well, the consensus would have been that you would be playing with fire in terms of confusing participants. This year, the notion not only seemed to be that it could be managed—but that it would be a real enhancement to the program.

A year ago, the importance of understanding and being able to benchmark the glide path of a target-fund family was front and center, and the “debate” was all about how much of that 2010 fund should be in stocks. This year, that allocation discussion had “evolved” - into a vigorous debate around whether those glide paths were—or should be—designed to take participants “to” or “through” the stated target date (see “IMHO: When You Assume…” ).

What Plan Sponsors Want

Considering what has transpired over the past 12 months, it’s hardly surprising, IMHO, that we’ve all got a somewhat different perspective. And, when PLANSPONSOR’s annual Defined Contribution Survey is published next month, you’ll see further evidence—strong majorities (among thousands of plan sponsors) expressing an interest in getting more detailed descriptions of glide path AND end date, a greater explanation of underlying funds and asset classes, and a clearer explanation of fund expenses.

You’ll also see a surprisingly robust minority continuing to express doubt that the target-date option available through their recordkeeper is the “most appropriate.” Despite that, I also found it interesting that very few (at least by show of hands) in last week’s audience were enthusiastic about the prospect of a government/regulator-imposed target-date “standard” for these vehicles.

One thing that wasn’t in evidence at our conference: a sense that plan sponsors were giving up on the asset-allocation solutions, or a sense that participants are any better equipped to deal with those investment decisions now than they have ever been. If anything, the events of the past several months seem to have engendered a sense that professionally managed investment solutions are more important than ever. Indeed, the clear sense of those in attendance was that, while some participants may have been surprised—perhaps shocked—at what the market’s slide did to the “target” investments of those nearing retirement, most were still better off in those “one-size-fits-most” vehicles than if they had been left to their own investment devices.

That said, there was a clear sense among those in attendance that participants needed more than just to be “dumped” in a solution, even if it was one “good enough’ to provide qualified default investment alternative (QDIA) protection.

There was, IMHO, a strong sense that there was benefit in an asset-allocated solution that took the individual into account, one that was willing to provide the participant-investor with the opportunity to understand what they were getting into, and to be able to make a conscientious choice about how, and when—and yes, perhaps even “if”—to get out.


- Nevin E. Adams, JD



See also “End” Points?

12 Things You need to Know about Target Date Funds

"Myth" Information

Recently, Time magazine ran a story called “Why It's Time to Retire the 401(k).” For the most part, the article was little more than a tired rehash of criticisms that continue to be trucked out with disappointing regularity by those who, IMHO, should, by now, know better.

Here’s my take on five “myths” that keep being told about the 401(k).

You can’t save enough to retire on in a 401k.

I’ll concede that when one looks at the “average” 401(k) balance today, it’s hard to imagine how anyone could live out the year, much less retirement, on that sum (1). Even if you look at the average balance of a near-retiree (rather than an average that includes the accounts of 25-year old savers), it’s hard to see how most could live for another 20 years on that balance.

That said, there’s a difference between saying you can’t save enough and you haven’t saved enough (2). Every situation is unique, but ultimately, a voluntary savings system “suffers” from the reality that it is voluntary. That isn’t the fault of the 401(k), however—a design that basically allows workers to defer taking (probably spending) and being taxed on pay today as they prudently set it aside for retirement. Of course, we all know the 401(k) was never designed to be the sole source of retirement income (even its critics acknowledge that). IMHO, those, like the authors of that recent Time article, who want to “retire” the 401(k) because it isn’t ready to carry a load it wasn’t designed to do are ignoring the critical role it is playing—and will play—in making a more financially secure retirement possible for millions. They might just as well fault the design of a car that fails to reach its destination because the driver refused to fill the tank.

It’s a tax dodge for executives.

One of the most pervasive arguments of 401(k) critics is that the plans are little more than a tax-sheltering scheme for the very highly paid, one into which only they can afford to contribute to the maximum amounts the IRS permits for the plan.

Now, it is true that higher-compensated individuals generally do have more disposable income, and thus they are significantly more likely to hit those caps. It is also true that those who are paying income taxes do benefit more from a system that provides for a deferral of those taxes, and those with higher incomes (who pay higher tax rates) benefit even more.

On the other hand, as tax dodges go, the 401(k) is a pretty inefficient way to go, IMHO. Those higher-paid deferrals are hemmed in by discrimination tests, limits on considered compensation, and a hard cap on the annual amount that can actually be deferred into these programs on a pre-tax basis, in addition to maximum annual additions. So, take a second; add up how much (little) can actually be deferred into these programs by those executives. Then, compare that to the base pay of folks who qualify as “highly compensated” (which, in many areas of the country, is all-too middle-income)—and think about what they’ll be trying to replace (at least in part) with the $16,500 (plus match and maybe another $5,500 if they’re old enough to qualify for catch-up).

And then, hope that they don’t do that same math, and figure that there are better ways to spend company resources than in keeping up with a 401(k).

Employers have pushed 401(k)s on workers in place of pensions.

First off, pensions were never as ubiquitous as described in some media accounts (something less than half of private sector workers were covered, even at the peak of their popularity), and even where pensions did exist, the service/vesting requirements (coupled with the tenure typical in most private industries) meant that many workers in the private sector never got as much from those programs as one might think/hope (see . Retirees With Pension Income and Characteristics of Their Former Job)—or, more accurately, as they might have if they had actually worked 30 years for the same company.

That’s not to say, or course, that some workers didn’t—nor does that mean that some of today’s retirees haven’t enjoyed a much more financially secure retirement because they had a pension (certainly in the public sector). But the data suggest that those situations are rarer than we’ve been led to believe by some of today’s wistful news coverage (the data also suggest that the median private-sector pensioner is getting less than $10,000/year from that pension).

Certainly, there have been financial reasons for employers to prefer the relative financial obligation certainty and control associated with a defined contribution approach compared with a defined benefit plan. Moreover, recent changes in accounting rules and regulatory requirements have largely served to discourage the perpetuation of DB plans in the private sector, and have done nothing to spawn the introduction of new programs.

That said, this is not just a corporate decision. I have spent more than a quarter century in this business watching private-sector workers (including myself) “walk away” from pensions. Why? Well, because people make employment decisions for many other compelling reasons. And frankly, even if you have a pension and get a statement that tells you how much that pension is worth, until you have accumulated a couple of decades worth of service (and most don’t), the present value of that benefit is—well, let’s just say it’s not an attention-grabber.

Could we do things to change that? Sure. In fact, I wish we would (unfortunately, we’ll need some help from Congress). But make no mistake: Employers have found it increasingly difficult to offer traditional pension benefits—and IMHO, many, perhaps most, of their workers seem to prefer the 401(k).

401(k)s have been used to shift retirement costs to workers.

In a world where we all once had employer-paid-for pensions that have now been replaced by 401(k)s, this might at least be one way to think about it (see above, however).

On the other hand, if you look at the longstanding pre-401(k) estimates on plan expenses, you’ll find that the general rule was 70% of the expenses were investment related, 20% were attributed to recordkeeping, and the remaining 10% went to things like trustee/custodian, legal, and other administrative matters. And at that point in time, employers frequently wrote a check for everything but the investment fees—which were then, as they are now, largely netted against earnings. These days, it’s not uncommon for the “investment” fees to be the only explicit expense of the 401(k), leading commentators and critics alike to bemoan the “shift” of 100% of the plan fees to participants.

But most defined contribution/401(k) plan participants have always paid 100% of the fund expenses, which, even 30 years ago, typically included administrative expenses, 12(b)-1 fees, and sub-TA expenses (and yes, trading expenses of the fund)—even when the employer was also paying separately for recordkeeping and those other expenses. What has changed is not how much participants are paying (or how they are paying it), but rather how much employers pay. Now, you can certainly argue that the system has worked to reduce employer expenses, but to my eye, participants are still paying what they always paid. It’s just that, these days, the fund company doesn’t keep it all.

401(k)s are dangerous.

The Time article did break some new “can you believe they said that” ground when the author said, “Saving more, another common prescription for fixing the 401(k), has its downside too. That's because of another unpleasant quirk of the 401(k), which was mentioned earlier: the older you are, the riskier a 401(k) gets.”

Huh? What possible correlation could age have with risk? The author “explains” it this way: “In what must seem like a cruel joke to many, the accounts proved the most dangerous for those closest to retirement. During the market downturn, the 401(k)s of 55-to-65-year-olds lost a quarter more than those of their 35-to-45-year-old colleagues. That's because in your early years, your 401(k)'s growth is driven mostly by contributions.”

No, that’s because, in your early years, your 401(k) mostly IS your contributions. Now, if you look at a recent study by the Employee Benefit Research Institute (EBRI) (see “The Impact of the Recent Financial Crisis on 401(k) Account Balances”), you will find some “support” for the author’s position. What you won’t find in the Time article, but will find in the same EBRI analysis, is the following comment: “At a 5 percent equity rate-of-return assumption, those with longest tenure with their current employer would need nearly two years at the median to recover, but approximately five years at the 90th percentile.” Now, that’s not tremendously good news if your retirement savings got caught in the downdraft of the worst market downturn in recent memory just as you were heading into retirement. But it also suggests that recovery is not only possible, it’s likely—specifically if you fill some of that gap by continued, and perhaps increased, savings. Consider also that much of the account “heights” from which we’re now recovering were a result of that same market exposure. What remains critical is that we approach retirement with an eye toward preservation of those gains. Not doing so is like setting your car’s cruise control—and then taking your hands off the steering wheel on a winding road.

Speed without direction is—always—dangerous.

Sort of like believing that myths are reality.

—Nevin E. Adams, JD


(1) those “average” 401(k) balances also don’t include the accumulated balances from other 401(k) plans that workers roll into IRAs.

(2) there remains a heated debate about just how much people need to save in order to retire – see “Scare Tactics”

12 Things You Should Know About Asset-Allocation Funds

Asset-allocation fund solutions have, to put it mildly, exploded on the retirement plan scene—aided in no small measure by the sanction of the Department of Labor’s final regulations regarding qualified default investment alternatives (QDIA). However, the recent market turmoil has drawn a fresh, heightened scrutiny to the philosophy and structure of these popular defined contribution choices and, certainly for plan sponsors, reminded us all that there are differences—significant differences, in fact—in how these vehicles are constructed, how they are managed, and even the philosophies underpinning those designs.

Now, the “right” answer for your program will, in many respects, be unique to your program. On the other hand, there are certain basic questions that plan sponsors should know the answers to in choosing an asset-allocation solution.

Getting Started

1. Are we talking about lifestyle or lifecycle funds?

The terms are used interchangeably all too often. However, funds that structure their allocation based on an individual’s risk tolerance (risk-based) are generally called lifestyle funds. Those that base that allocation on a specific future date (date-based) are referred to as lifecycle funds or, more broadly, target-date funds. While the latter was more prominently cited in the DoL QDIA regulations, a properly structured risk-based fund could work as well—and has seemed to enjoy a much greater receptivity in the marketplace even before those regulations (see #2 below for at least part of the reason). Some plans have both on their plan menu, but that can complicate plan communications. On the other hand, IMHO, risk is going to loom larger on people’s minds going forward.

2. Is a risk tolerance questionnaire part of the process?

In my experience, no matter how short and “approachable” the process of ascertaining a participant’s tolerance for risk, it is never going to be something that is comfortable for most. Still, if you are employing a risk-based solution, you have to have something to base that tolerance on—and you should make sure how comfortable you are with that process/document. Additionally, today there are several risk-based target-date offerings that combine both approaches. I’ve tended to be skeptical about these—IMHO, many still focus more on the risks of losing money than the risks of not having enough money to live on--but, short of imposing some kind of generic sense of tolerance, you have to have some means of assessing comfort with risk if you are going to employ a risk-based alternative.

3. What kinds of history/benchmarks are available?

Just a couple of years ago, there were no benchmarks to speak of in this space (other than those constructed by the firms managing those funds, and those were often composites). Of course, just a couple of years ago, there were not enough funds in this space with enough history to make for a meaningful evaluation. However, time has provided the history many funds were lacking (granted, many would just as soon not have that fourth quarter 2008 result included)—and a new generation of benchmarks and indexes has emerged along with the explosion in these funds. But take note: The benchmarks today are as varied in their underlying philosophy and construction as are the funds themselves. IMHO, you need to first know what you believe about the approach, glide paths, and/or asset allocation before you pick the benchmark.

Fund Construction

4. Are the funds composed of proprietary offerings, or are they “open architecture”?

The “debate” over the relative advantages of open architecture versus proprietary offerings has long been part of retirement plan administration choices, and it is part of the target-date decision as well. Those advocating the benefits of open architecture generally tout the ability to pick “best of breed” investment solutions (while readily being able to dump those that fall short), backed by the notion that no one firm can possibly be that best choice across every asset class. Those pushing proprietary choices take issue with that latter point, while pointing to the benefits of their intimate knowledge of their own product set—not to mention the relative cost efficiencies of a proprietary product. There is no right answer, but the determination should be part of your evaluation.

5. What IS an appropriate asset allocation?

This is the million-dollar question for target-date funds these days. At a high level, this is no more complicated than deciding what is the right mix of stocks and bonds, international and domestic, alternative investments and/or cash for investors at every stage of their investing life—or than picking the firm(s) that you trust to know what that right mix is.

6. How much of what is on your glide path?

The “glide path” sounds like a complicated concept, but it is actually nothing more than how the shifts in asset allocation take place over time. It is the path that these investments take your money on throughout your investing life. Still, for some funds—particularly newer, smaller funds—the asset-allocation strategies outlined in the fund prospectus or fact sheet may still be “aspirational,” may not yet incorporate all the specific strategies that the fund manager has in mind for that time in the future when the funds achieve a certain critical mass. You need to know what the targets are—and know if those targets are part of the current strategy.

Fees

7. Do the funds have a fee “wrapper” in addition to the underlying fund charges?

Particularly when a provider incorporates other funds in their offerings, they frequently charge some kind of fee for their expertise in putting together those other funds. This is a fee generally applied as some kind of basis-point charge in addition to the other, regular fees charged by the underlying funds. You will want to know what this charge is, if any, and consider it as part of the total cost of your selection. This fee is generally smaller (sometimes there is no extra charge) for proprietary-only offerings.

8. What are the fees charged by the funds?

Beyond the aforementioned “wrapper” fee, these funds will have all the same kinds of fees typically associated with retirement plan investments. Bear in mind that some of the fund allocations may include some relatively exotic asset classes—and those may carry higher expenses than you are accustomed to seeing. Additionally, you may find some retail share class funds included, even in institutional share class offerings. The bottom line: Keep an eye on the bottom line.

Plan Design

9. Does it fit your investment policy statement?

Most (though not all) retirement plans have an investment policy statement—that essential blueprint for monitoring and managing the investments you make available on your plan menu, set alongside the objectives you have established for your program. However, the blueprint you set out for your plan investments before you introduced an asset-allocation solution may not take their unique contributions—or considerations—into account.

10. How many “life” options are available on the recordkeeper’s platform?
For many plan sponsors and advisers today, there is a harsh reality at the end of the due diligence rainbow—a limited number of asset-allocation options available on your recordkeeper’s platform. In fact, it was not that many years ago that most plan sponsors could only pick from a single option. Limited choices may seem to make the decision easier, but these offerings are not identical, and you and your plan will be better served if you are able to evaluate and choose from a variety of options.

11. They can be misused.

No matter how hard we try to make these types of solutions “idiot proof”—well, let’s just say that you should take nothing for granted. Odds are that automatically enrolled participants defaulted into a QDIA will not fall prey to such mistakes. But, after years of being counseled that they should not “put all their eggs in one basket,” well-meaning participants have been known to try and split their investments across more than one asset-allocation solution. Fortunately, many recordkeepers today can apply system edits to prevent (or at least warn about) such missteps—and advisers also can certainly play a role in this education.

12. Should everyone who retires in 2020 (or 2010, or 2030, etc.) have the same asset allocation?

The simple answer to that question is, probably not. On the other hand, as an alternative that can broadly and efficiently address perhaps the most daunting participant savings obstacle, it is hard to think of a better solution. That is not to say, however, that this solution cannot, with the engagement and involvement of plan fiduciaries, be made even better.

—Nevin E. Adams, JD
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A SunAmerica Opinion

I am admittedly something of a pension (and regulatory) geek, but when the SunAmerica Opinion was published (December 2001), it was clear that something big had just happened.

Not only did the Labor Department sanction an arrangement that, for the first time, allowed an investment management firm to offer advice on its own funds and be paid for that advice—even if that advice impacted the compensation received—it made the effort to make that decision public; IMHO, signaling to the industry that the model sanctioned in the Advisory Opinion ) could serve as a blueprint for other investment firms (and advisers) to follow in those footsteps. Indeed, it was issued not as a prohibited transaction exemption in a specific situation (though that was what had been requested), but as an advisory opinion on the program’s structure.

Sure enough, in the months that followed, it seemed as though just about every large DC provider put together some kind of program that, like the SunAmerica model, applied some kind of independent asset-allocation computer modeling to their DC platform investment offerings. In no time at all, millions of participants1 who had been looking for a bit of substantive guidance on how to invest their 401(k) balances had an answer—and, it should be noted, generally at a price that they found attractive (it was often included at no additional cost). In fact, after the SunAmerica opinion took hold, it always seemed to me that the urgency around finding a way to provide “advice” to participants was greatly diminished.

That wasn’t the end of the issue, of course—even when then-Assistant Secretary of Labor Ann Combs published the SunAmerica opinion for the world to see, she noted the Labor Department’s continued support for advice legislation long-championed by Congressman John Boehner (R-Ohio), legislation that, in large part, found its way into the (still) controversial fiduciary adviser provisions of the Pension Protection Act (PPA) (see “DoL Lowers Another Advice Barrier”).

Still, I was surprised when Assistant Secretary of Labor Phyllis Borzi invoked the name of the SunAmerica Opinion at a recent conference; particularly when she said she had heard reports that firms had been inappropriately taking advantage of its provisions (see “EBSA Sets Out Carrot, Stick Agenda”). Now, Secretary Borzi didn’t elaborate on any specific firms, but considering that the original opinion contained a number of specific conditions, it is entirely possible that, eight years later, one or more firms have managed to “gloss over” some key elements either in designing or in explaining their program(s). It is even possible, of course, that some have flagrantly disregarded those provisions. Those situations should be dealt with promptly and, IMHO, visibly.

I was also struck by the repeated invocation of the SunAmerica opinion last week in a hearing by the House Ways and Means Committee (see “House Lawmakers Hear DB Funding, Advice Bill Pleas”). Most of the witnesses expressed concerns that legislation recently proposed—the 401(k) Fair Disclosure and Pension Security Act of 2009 (HR 2989)—would, in its attempt to eliminate the fiduciary adviser provisions of the Pension Protection Act (PPA), also, at least effectively, and perhaps unintentionally, lead to the elimination of many advice programs in place prior to the PPA’s passage, including those predicated on the SunAmerica structure. I say “effectively” because the proposed law would basically impose the stricter PPA computer model auditing requirements on any computer-modeled advice—and the concern is that the cost and complexity of doing so will lead firms to disband those programs and/or employers to cease offering them.

It is not clear to me at this point that that was the intent of the proposed legislation, though it may well be the result. No one is in favor of conflicted advice (though we may disagree on what falls within that definition)—but, however complicated we may try to make it, most participants (and plan sponsors) don’t care whether you call it “advice” or “education.”

They just want some help.

—Nevin E. Adams, JD

(1) The Profit Sharing/401(k) Council of America reports that 20 million participants are offered advice through Sun America arrangements.

You can check out the full testimony from the House Ways and Means hearing HERE

When You Assume…

Somewhere in the course of your professional life, you have no doubt heard (or used) the expression about what happens when you assume(1).

Well, over the past couple of weeks, I’ve heard a lot of discussion around target-date funds, most recently at the PLANADVISER National Conference (PANC). Without question, plan sponsors and participants—and perhaps not a few retirement plan advisers—were caught off-guard by the varied designs and resulting experiences of these popular investment offerings in recent months (2).

That many participants assumed these offerings were a no-maintenance solution to their retirement security is understandable, IMHO, certainly in view of how they were promoted by their manufacturers, sanctioned (from a design standpoint, anyway) by regulators, and positioned on retirement plan menus. But let’s face it, what happened in the markets last fall happened pretty much everywhere and to everyone (at least everyone who was invested in the markets).

And, while there’s no way to truly quantify this, my sense is that some of those 2010 participants who were, unfortunately, caught in that market maelstrom were nonetheless well-served in the months ahead of that downturn, and perhaps since, by having their savings invested in a truly diversified portfolio.

There remains, however, the “smoking gun” issue—what DID participant-investors “know,” and when did they know it? Or, perhaps more precisely, when SHOULD they have known it? That and, were they really given the information they needed to know it?

“To” Versus “Through”

The “to” versus “through” retirement debate—the notion of whether the target date is an end point for target-date investment or merely a point along the investing continuum—remains unresolved in target-date circles. Frankly, I have heard arguments (some better than others) on both sides, and, personally, I see no reason that informed and educated investors shouldn’t be able to make their own determination as to the approach that best suits their situation.

What troubles me—aside from the reality that offerings so different in composition, design, and intent have names that are disquietingly similar—is that the assumptions underlying the glide path are so often unarticulated.

I’m not talking about the relative mix of exotic asset classes, or the soundness of the balance of equities and fixed-income investments at the date of retirement (or decumulation), though both are impacted. No, I’m talking about the implicit assumptions these various strategies employ to develop those glide paths that purport to deliver on the promise (or premise) of adequate retirement income. Assumptions regarding the age at which investors will truly begin drawing down those savings and at what rate, and—most significantly—assumptions about the accumulation from which they will be working.

See, to me, if you’re promoting an approach that assumes that you will have a certain amount saved, you need to tell people what that amount is. Alternatively, if you are backing an approach that assumes a retirement saver won’t have what is “needed,” but hopes to shore up some of that shortfall, it seems to me that you should be upfront about that as well. IMHO, for all the focus on asset allocation as the be-all-and-end-all of the target-date debate, it’s the assumptions that underpin—or undermine—those decisions that are at the heart of the matter.

Ultimately, whether you are a plan fiduciary or a participant-investor, it seems to me that you can’t—and shouldn’t—make a target-date fund decision until you fully understand what is being assumed—and until you have matched those assumptions with the reality of your particular situation.

Because, as we all know, when you assume….

—Nevin E. Adams, JD

(1) Hard as it is for me to imagine that you haven’t heard this, the expression is “When you assume, you make an a.ss out of u AND me”.

(2) It is certainly worth noting that PLANSPONSOR/PLANADVISER is hosting a conference devoted to the subject of asset-allocated fund solutions next month. See HERE

Under New Management

Sitting in the audience at the ASPPA/DoL Speaks conference last week, I was reminded just how disruptive it can be to have a new boss.

The conference, which, IMHO, remains unique in both the quantity and quality of access to Labor Department exports, featured many panelists it has been my pleasure to meet and get to know over the past several years. However we practitioners may struggle from time to time with the regulations and interpretations these folks put together, you don’t have to spend much time with any of them to appreciate just how smart, hard-working, and dedicated they are.

Still, I can only imagine what it must have been like to have pressed (as they were surely pressed) to wrap up as much of the pending backlog of regulations in 2008. How it must have felt to see that last package—including the final regulations on investment advice—get all the way to the regulatory finish line, only to have it halted dead in its tracks (see White House Executive Order Snares Fee Disclosure, Advice Regs). And then, over a period of weeks/months, have that work rejiggered, perhaps significantly, “simply” because an election, based on factors that had nothing to do with these issues, brought in new leadership (see EBSA Sets Out Carrot, Stick Agenda).

Starting Over?

Let’s face it, even in the private sector, managers and CEOs fall out of favor all the time and new ones are brought in, along with their new ideas (and sometimes their old friends). Advisers have seen plenty of that over these past 12 tumultuous months.

But for our industry, a few things seem obvious among those “new” priorities: a continued, and probably more insistent, emphasis on transparency in fees and revenue sharing; the rebuilding of walls between advice and compensation flows that could vary based on that counsel; and greater clarity in the targeting and positioning of target-date funds. But, frankly, while we may now achieve those aims in different ways, IMHO, it is at least arguable that we were already on those paths, or would have been shortly.

Looking Ahead

That said, there is a palpable sense that the new leadership will be less employer-friendly than its predecessors, though that need not mean unfriendly. They may be less willing to accept the rationalizations of those who protest that it is too hard, or too expensive, to provide meaningful information to plan fiduciaries; and, though it’s early yet, they seem more inclined to shield, rather than simply inform, participants. Time will tell.

Change, of course, is not only inevitable, it is frequently for the good. It is nearly always, however, “disruptive” as we shift and resift priorities and focus, certainly in the short-term. However, IMHO, if there’s a more disruptive force than change in our lives, it’s uncertainty.

And, for better or worse, I’m betting that this new Administration won’t leave us guessing for long.

—Nevin E. Adams, JD

Domino Theories

If you want to get a quick sense of just how fast time flies, consider that it was only a year ago this week that Lehman Brothers filed for bankruptcy—the same day that Bank of America announced its plans to acquire Merrill Lynch, and a day on which, not surprisingly, the Dow Jones Industrial Average closed down just over 500 points. That, in turn, was just a day before the Fed authorized an $85 billion loan to AIG—and that on the same day that the net asset value of shares in the Reserve Primary Money Fund “broke the buck.” This was made all the more surreal because it was going on while we—and several hundred advisers—were in the middle of our PLANADVISER National Conference.

Let’s face it—no matter how busy or hectic your week has been, I’m betting it’s been a walk in the park compared to those times.

The funny thing is, looking back (and armed with the prism of 20/20 hindsight), there were lots of signs of the trouble that eventually cascaded like a set of dominos, resetting not only the structures of the financial services industry, but disrupting the businesses and lives of thousands (if not tens of thousands) of advisers, not to mention the retirement plans of millions of workers worldwide.

The question that many of us have been asking ourselves (or perhaps been asked by our clients) these past 12 months is—why didn’t we do something about it?

Now, doubtless, some of you did. And those of you who didn’t can hardly—IMHO—be faulted for not fully appreciating the breadth, and severity, of the financial crisis we “suddenly” found ourselves confronted with. Still, having lived through a number of other “bubbles” during the course of my career, “afterwards” I’m always wondering why so many wait so long—generally too long—to get out of the way.

“Way” Laid?

Greed explains some of it: As human beings, we may later disparage the motives of those that, with leverage and avarice, press markets to unsustainable heights (from which they inevitably fall)—though we are frequently willing to go along for the ride. Some may be explained by human proclivity to stay with the pack, even when it seems destined for trouble, and some surely by nothing more than an inability to recognize the portents that precede the coming fall. When it comes to retirement plan participants, mere inertia surely accounts for most, though some are doubtless waylaid by bad, or inattentive, counsel.

There is, of course, a behavioral finance theory called “prospect theory,” that claims that human beings value gains and losses differently; that we are more afraid of loss than optimistic about gain. An extension of that theory, the “disposition effect,” claims to explain our tendency to hold on to losing investments too long: to avoid acknowledging our investing mistakes by actually selling them. It is, IMHO, an attribute rationalized every time someone says that the losses in our portfolios are “unrealized.” Unfortunately for investors planning for their retirement, unrealized and unreal are NOT the same thing.(1)

We all know that markets move up AND down, of course, and we must do the things we do without the benefit of a crystal clear view of what lies just over the horizon. That said, as we approach the anniversary of the 2008 tumult, it seems a good time to ask: Are you looking out for trouble—as well as opportunity?

—Nevin E. Adams, JD

(1) That said, the markets have, in recent months, recovered a lot of ground. The S&P 500 index is up more than 50%—if one looks back only to its March 2009 lows. On the other hand, that index is still down a third from its 2007 peak, still 20% lower than it was a year ago. Recovery takes a long time.

'Looking' Class

Next week PLANSPONSOR and PLANADVISER will open nominations for our Retirement Plan Adviser of the Year awards.

Each year we receive a number of inquiries from advisers about the awards, and many of these fall into a category I tend to think of as “exploratory”—feelers as to what we are looking for.

Well, at its core, what we hope to acknowledge—and, thus, what we are looking for—hasn’t changed at all: advisers who make a difference by enhancing the nation’s retirement security, through their support of plan sponsor and plan participant information, support, and education. And, since its inception, we’ve focused on advisers who do so through quantifiable measures: increased participation, higher deferral rates, better plan and participant asset allocation, and delivering expanded service and/or better expense management.

A Different World

Of course, the world has undergone much change since we first launched those awards, and advisers now have an expanded array of tools at their disposal to make those results a reality—legislatively sanctioned automatic enrollment, contribution-acceleration designs, qualified default investment alternatives, and a broadly greater emphasis on transparency and disclosure of fees. These steps have been good for our industry, great for participant retirement security and, IMHO, have served to raise the bar for our award at the same time.

So, what will we be looking for this year? Well, last month I wrote a column outlining advice I have given to plan sponsors over the year about choosing an adviser. Of those seven areas (see “IMHO: ‘Right’ Minded”), several fall into what I would consider to be a personality match between plan sponsor and adviser—important to a productive working relationship, but not within the scope of our award.

Standards Setting

On the other hand, there are areas—critical areas—that absolutely apply. Now, I’m only one judge (albeit, IMHO, an influential one) on the panel, but advisers I am looking for:

Have established measures and benchmarks for plan success. Those benchmarks should include the measures noted above: participation, deferral rates, asset allocation. If you can’t tell me what your targets are and how your client base stands in relation to those targets, IMHO, you’re using the “wrong” benchmarks. I’m also interested in advisers who not only use those as a matter of course in running their business, but who develop them in partnership with their plan sponsor clients—and who regularly and routinely communicate results to their plan sponsor clients.

Fully and freely disclose their compensation. I’m frankly a lot less concerned with how you get paid than that your plan sponsor clients know what they are paying for your services.

Work at staying current on trends, regulations, and product offerings. The best advisers read, attend conferences and/or informational webcasts, have attained (and maintained) applicable designations, and commit to a regular course of continuing education during the course of the year. This business is constantly changing; if you’re not constantly learning, you—and your clients—are being left behind.

Encourage and inspire their clients. Client referrals have always been a key element in our award, and as the overall quantitative standards rise, the significance of the qualitative element afforded by client references (and award nominations) will almost certainly increase. How often do you talk with your clients? How often do you visit? How—and how often—do you communicate with them regarding regulatory and legislative changes? You know what you’re trying to do for your clients—do they?

Are willing to accept fiduciary status with the plans they serve. This is an area our judges have debated vigorously over the years. I’ll admit some great advisers have been barred from accepting fiduciary status by forces they don’t control. I’m not (yet) saying you have to be willing to accept fiduciary status in order to get my vote, but it’s a factor—and, IMHO, an increasingly important one.


We launched our Retirement Plan Adviser of the Year award in 2005 to acknowledge "the contributions of the nation's best financial advisers in helping make retirement security a reality for workers across the nation." It has always been our goal to bring to light the very best practices of the nation’s very best advisers (and adviser teams), and in so doing, to help set—by their example—new standards for excellence in dealing with workplace retirement plans.

That’s what we’re looking for—and looking forward to acknowledging—this year as well.

—Nevin E. Adams, JD

P.S. Information about the nomination form/process will be published in the September 8 issue of PLANADVISERdash.

“To Do” List—Part 2

Being a plan fiduciary is a tough job—and one that, it’s probably fair to say—is underappreciated, if not undercompensated. In my experience, most who find themselves in that role (see “IMHO: Duty Call”) do an admirable job of living up to the spirit, if not the letter, of their responsibilities.

Nonetheless, there are plenty of areas in which we could do a better job. In this week’s column, we’ll touch on the rest of my “10 things you’re probably doing wrong” list:


6. Thinking your plan qualifies for 404(c) protection—and misunderstanding what that means.

Any number of studies suggest that many, perhaps most, plan sponsors think their plan meets the standards of ERISA 404(c ), a provision that ostensibly shields them from being sued for participant investment decisions, so long as certain conditions are met.

On the other hand, industry experts are nearly uniform in their assessment that very few, perhaps no, plans meet those standards (though the courts have been somewhat more liberal in their application). So, even if you think your plan does comply—check. And even if your plan does comply, understand that, while 404(c)’s shield may offer some protection against an individual participant suit, it offers no insulation against a participant suit predicated on an inappropriate investment option. Remember, too, that the DoL thinks you’re responsible for every participant investment decision except those behind 404(c)’s “shield.”

7. Depositing contributions on a timely basis.

The legal requirement for when contributions must be deposited to the plan is perhaps one of most widely misunderstood elements of plan administration. Unfortunately, a delay in contribution deposits is also one of the most common flags that an employer is in financial trouble—and that the Labor Department is likely to investigate.

Note that the law requires that participant contributions be deposited in the plan as soon as it is reasonably possible to segregate them from the company’s assets, but no later than the 15th business day of the month following the payday. If employers can reasonably make the deposits sooner, they need to do so. Many have read the worst case situation (the 15th business day of the month following) to be the legal requirement. It is not.

8. (Not) monitoring providers on a regular basis.

In some sense, we all “monitor” the performance of plan providers all the time. Is the Web site available when people try to access it? Do checks and statements arrive on time? Are the balances displayed accurate? The reality is that, for most of us, no news is seen as “good” news. After all, if the answer to any of those questions was “no,” we’d not only know about it, we’d be complaining about it (after fending off our own set of complaining phone calls). Odds are that you have a very full-time job dealing with the things that are “broken”—why go looking for trouble?

However, relationships with providers are like any other relationship—we all slip into “ruts” of complacency—and the best way to keep that new customer “honeymoon” feeling alive is to do something as simple as ask your current provider for a regular service review. At least once a year—no matter how well things are going—you should determine if your plan has access to the new services that have come online since you converted; that you are getting the advantages of the most current thinking about costs and fees; and how your plan’s participation, deferral, and asset diversification stack up. And every three to five years (sooner if there are problems, of course), you should go through a formal request for information (RFI) or request for proposal (RFP) process—on your own, or with the help of an adviser (who doubtless has more experience with such things).

Remember also that the DoL says that, “Among other duties, fiduciaries have a responsibility to ensure that the services provided to their plan are necessary and that the cost of those services is reasonable.”

9. Not following the terms of the plan document.

Plan documents are, after all, legal documents and can skirt the fringes of readability. Retirement plans develop certain patterns or routines—the way things are handled—that may not, over time, remain consistent with the terms of the plan. Particularly if you are using a plan document prepared by a provider (or, worse, an ex-provider) that may well accommodate that provider’s approach, but may not match (or may not have kept up with) how you actually administer the plan. It is a good idea to do a document/process “audit” every couple of years; don’t assume that “the way we’ve always done things” is supported by the legal document governing your plan.

10. Not realizing who is a fiduciary—and what that means.

The first thing to understand is who a plan fiduciary is, and to understand that the “test” isn’t what you call yourself (or, in some cases, what you avoid calling yourself), but your ability to control and influence plan assets. A fiduciary is any person or entity named in the plan document (e.g., the plan sponsor and trustee); any person or entity that has discretionary authority over the management of a retirement plan or its assets (all individuals exercising discretion in the administration of the plan, all members of a plan’s administrative committee—if it has such a committee—and those who select committee officials); and any person or entity that offers investment advice with respect to plan assets, for a fee.

Remember too, that the authority to appoint a fiduciary makes you a fiduciary—and that hiring a “co-fiduciary” does not make you an “ex” fiduciary.

If you are a fiduciary, and you feel that you lack the expertise to make those decisions, you will of course want—and, in fact, are expected—to hire someone with that professional knowledge to carry out the investment and other functions.

Finally, remember that, IMHO, you’re more likely to get sued for not doing something you should be doing than for doing something you shouldn’t be doing.


—Nevin E. Adams, JD

You can find more information on fulfilling your fiduciary responsibilities at the Employee Benefits Security Administration’s (EBSA) Web site HERE

"To Do" List

10 Things You’re (Probably) Doing Wrong—or Not Doing Right—as a Plan Fiduciary

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

Nonetheless, there are plenty of areas in which we could do a better job, and the purpose of this column—and the one will follow it next week—is to focus on those issues that come up regularly in my discussions with plan sponsors, advisers, and industry experts.

A couple of disclaimers up front: first, if you’re taking the time to read this, odds are you are probably doing a better-than-average job as a plan fiduciary. Second, you may well be able to identify things that are not on this list. This is a list compiled based on three decades of experience working with retirement plans; numerous conversations with providers, plan sponsors, regulators and advisers; as well as a review of documented compliance shortfalls.

Note also, however, that there is frequently a difference between doing all that the law requires and doing everything that you could do. This listing is a combination of the things that you must do and things that you do not have to do—but that, if done, would keep you and your plan(s) in good stead. I hope you find this list informative, and that you draw insight and comfort from its contents, as well as a reminder of the awesome responsibilities you have as a plan fiduciary.

1. Not having a plan/plan investment committee

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

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

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

2. Not HAVING committee meetings

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

3. Not keeping minutes of committee meetings

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

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

4. Not having an investment policy statement

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

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

5. Not removing “bad” funds from your plan menu.

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

Next week – the rest of the list…

- Nevin E. Adams, JD

Duty 'Calls'

When it comes to qualified retirement plans, there are three kinds of people: people who are fiduciaries and know it, people who aren’t fiduciaries and know it, and people who are fiduciaries and don’t know it.

Now, for the most part, those in the first category are in pretty good shape. Oh, there are a plethora of ways in which a fiduciary can fail to uphold his or her responsibilities under the Employee Retirement Income Security Act (ERISA)—but, in my experience, if you’re at least trying to do the right thing(s), and taking the time to document that effort, you’re in good shape. Still, even those who are trying to do the right things—and who embrace that role—don’t always fully appreciate the implications.

The second category mostly tends to include those folks or firms that provide services to the retirement plan fiduciaries. Most enjoy that status because they don’t technically have any authority to do anything on their own; they just help those who do know what to do. Of course, there are some who think they are in the second category—who are actually in the third category.

As for that third category—well, if your plan sponsor clients are there, IMHO, it means you aren’t doing your job as a plan adviser. Here are seven things that every plan sponsor should know about being a fiduciary:

If you’re a plan sponsor, you’re a fiduciary.

Fiduciary status is based on your responsibilities with the plan, not your title. If you have discretion in administering and managing the plan, or if you control the plan’s assets (such as choosing the investment options or choosing the firm that chooses those options), you are a fiduciary to the extent of that discretion or control. If you’re not sure—and are worried that you aren’t sure—there’s a good chance you are.

Note that every plan must have at least one fiduciary (either a person or an entity) specifically named in the written plan document, a “named fiduciary” that is either identified by office or by name.

Of course, if there is a title less well-understood than “fiduciary,” it may well be “plan sponsor.”

For the very most part, you can’t offload or outsource your fiduciary responsibility.

ERISA has a couple of very specific exceptions; more precisely, ways in which you can limit—but not eliminate—your fiduciary obligations. One exception has to do with the specific decisions made by a qualified investment manager—and, regardless, you remain responsible for the prudent selection and monitoring of that investment manager’s activities on behalf of the plan. The second exception has to do with specific investment decisions made by properly informed and empowered individual participants in accordance with ERISA’s 404(c). Here also, even if your plan meets the 404(c) criteria (and it is by no means certain it will)—you remain responsible for the prudent selection and monitoring of the options on the investment menu from which they are selecting (1).

Outside of these two exceptions, you’re essentially responsible for the quality of the investments of the plan—including those that participants make.

If you’re responsible for selecting those who are on the committee(s) that administer the plan, you’re a fiduciary. If you are able to hire a fiduciary, you’re (probably) a fiduciary.

The power to put others in a position of power regarding plan assets is as critical as the ability to make decisions regarding those investments directly.

Hiring a co-fiduciary doesn’t keep you from being a fiduciary.

Moreover, all fiduciaries have potential liability for the actions of their co-fiduciaries. If a fiduciary knowingly participates in another fiduciary’s breach of responsibility, conceals that breach, or does not take steps to correct it, both are liable.

You have personal liability as an ERISA fiduciary.

That’s right, the legal liability is personal (you can, however, buy insurance to protect against that personal liability—but that’s not the fiduciary liability insurance you may already have in place).

You may be required to restore any losses to the plan or to restore any profits gained through improper use of plan assets. Consider that, in the Enron case, the outside directors and committee members settled for about $100 million, most of which was paid by the fiduciary insurer. However, the individuals also had to pay approximately $1.5 million from their own pockets.

Once you’re a fiduciary, you can’t just quit and walk away.

The Department of Labor cautions that “fiduciaries who no longer want to serve in that role cannot simply walk away from their responsibilities, even if the plan has other fiduciaries. They need to follow plan procedures and make sure that another fiduciary is carrying out the responsibilities left behind. It is critical that a plan has fiduciaries in place so that it can continue operations and participants have a way to interact with the plan.”

You’re expected to be an expert—or to hire help that is.

ERISA’s Prudent Man rule is a standard of care, and when fiduciaries act for the exclusive purpose of providing benefits, they must act at the level of a hypothetical knowledgeable person and must reach informed and reasoned decisions consistent with that standard. None other than the Department of Labor itself notes that “[l]acking that expertise, a fiduciary will want to hire someone with that professional knowledge to carry out the investment and other functions.”

As a plan fiduciary, it’s never too late to start doing the right things the right way. But doing the right things means understanding what is expected of you—and appreciating the implications.

—Nevin E. Adams, JD

For more information, see Fiduciary Fundamentals

http://www.dol.gov/elaws/ERISAFiduciary.htm

(1) With the enactment of the Pension Protection Act of 2006 (PPA), fiduciaries who automatically enroll participants in accordance with the provisions of the automatic enrollment safe harbor into a qualified default investment alternative (QDIA) get the protections of 404(c ) for those balances. However, the plan fiduciary remains responsible for the prudent selection and monitoring of the QDIA itself.

“Talent” Ed

As a kid, I remember sitting in church listening to a sermon about what I have since come to know as the “parable of the talents,” found in the book of Matthew in the New Testament.

Now, for those of you who slept through those sermons, the story(1) is about a man who is going out of town and gives three of his servants different amounts of money to hold for him while he is gone. The first is given five “talents”(2), and on his master’s return, he proudly gives him back the five he was left with—and another five! The second servant, who was left with two, returns those to the returning master—and two more besides. Both of these servants are commended and given more responsibility.

However, the third servant, who was only entrusted with one talent, tells his returning master that, knowing his master was the demanding type, he opted instead to bury his talent, so that he could return it safely—which he does. For his conservatism, this poor guy is called wicked and lazy, has the one talent taken from him and given to the guy who already has 10, and gets tossed out on the street.

Now, in church this was supposed to illustrate the importance of using the talents endowed on you by the Almighty to their fullest. Years later, I saw this as some kind of capitalist saga (Matthew was a tax collector, after all). But I remember wondering—even as a small boy—what would have happened if one of the two “good and faithful” servants had lost some of that money. Surely the poor guy who managed to give back everything with which he had been entrusted would have looked pretty good by comparison.

Another Look?

The ERISA Advisory Council recently heard testimony about (among other things) stable value and retirement security—and yes, stable value as a QDIA default option (see “Prudential Calls for Stable Value Funds as QDIAs”). Now, in view of what has transpired over the past several months, it’s hardly surprising that people might want to take another look at a less volatile investment. On the other hand, well before we slid into the current market slump, I spoke with, and heard from, many plan sponsors who “got” the logic behind the asset allocated solutions sanctioned by the Department of Labor as a QDIA option—but really weren’t comfortable putting “other people’s money” in an option that could fluctuate in value (see “IMHO: Other People’s Money”). In fact, way back in 2007, only about a third of respondents to a NewsDash poll (albeit an unscientific sampling) said that stable value shouldn’t be accorded QDIA status, while nearly half were in favor of that proposition (see “SURVEY SAYS: Should There be a Stable Value QDIA?”).

Of course, that perspective was pretty roundly criticized at the time by the “experts” in the field, frequently in the kind of condescending tones reserved for those who question the science behind global warming claims. Indeed, much like the parable’s servant who sought to safeguard, rather than put at risk, his master’s money, those who pressed for its inclusion, were taken to task for having the temerity to suggest staying with a default that had long been in place without incident.

But from the beginning, plan sponsors realized that there was a downside to diversified investment solutions: They could lose value. And, while stable value investments have their share of problems, they seem to have—in a way that not all target-date funds have—delivered what people expected.

The Issues

Don’t get me wrong—I “get” the issues with stable value; the concerns about transparency, illiquidity, fees, even insurer risk. These need to be addressed. I also appreciate that much of the current discomfiture with target-dates will dissipate with the next market upturn (other than the whole “misunderstanding about how much would be invested in equities when a participant hit retirement age” thing). And I do believe that, over the long haul, a diversified solution doubtless serves the average participant “better.”

I appreciate that fiduciaries are expected to make the “right” decisions, even when they aren’t the easy ones, and that participants defaulted into funds of whatever ilk are generally free to change that at their discretion. Moreover, I understand and appreciate the value and importance of a diversified portfolio—and acknowledge that, just because the DoL didn’t include stable value in its list of “core” QDIA vehicles, plan sponsors are in no way precluded from having it on their menu, or using it as a default fund (many have, and haven’t changed—and now, IMHO, probably won’t, QDIA status notwithstanding).

Still, when it comes to retirement planning, I think there is something to be said for getting what you expect—and getting back what you put aside.

—Nevin E. Adams, JD

1 Matthew 25:14-30 (King James Version)

2 A unit of value, though this is said to be the origins of the word “talent” as a reference to a gift or skill