Hire Powers

One of the first things you learn in any kind of ERISA primer is that, as a fiduciary, you are expected to conduct yourself either as if you are an expert, or hire someone to help you who is. This so-called “prudent expert” rule is, of course, a significantly higher standard than the one applied to mere common- law fiduciaries—in fact, it is generally described as the highest legal standard. Of course, plan sponsors have long relied on the help of experts—attorneys, third-party administrators, investment managers, and recordkeepers—if only because so much of what a plan sponsor must do in operating their retirement program requires their active involvement.

Not so retirement plan advisers, who, for many plan sponsors, remain something of an optional enhancement to their program. That said, in an environment that remains a legislative, regulatory, and operational thicket for even the most active and engaged plan sponsor, it is a plan option that is rapidly becoming standard equipment. Well-intentioned as such hires often are, they can be done for the wrong reasons. In the February issue of PLANSPONSOR, we asked previous winners of our Retirement Plan Adviser of the Year how plan sponsors can find the “right” adviser.

Today I’d like to turn that around. How can you, as an adviser, get connected with plan sponsors that will not only hire you, but will allow you to do your very best work for them, and for their plan participants?


Start with your friends and/or professional associations. Long a primary source of business for the advisers in our special “panel,” this is now the only channel for many of them. Now, for plan sponsors, this gives them the benefit of a personal reference from a colleague who knows and has perhaps already worked with you. But it also turns out to be a good way for you to “vet” the plan sponsor for a good philosophical fit.

Give them a chance to see you in action. It’s one thing to meet them at the Rotary Club, perhaps even better when you share some kind of board affiliation, but more and more advisers offer local seminars on topics of interest to plan sponsors. It gives you a chance to demonstrate your expertise—and you’ll get a chance to do so in front of potential clients who, by their attendance, have already expressed a more-than-passing interest in the topic.

Don’t be shy about references. This is admittedly a sensitive issue for advisers. After all, having spent a lot of time, energy, and money to develop those relationships, the last thing you want is to put those in the hands of folks who might try to steal them from you. But the top advisers I spoke with didn’t “hide” those references behind a “furnished upon request” curtain. For them, it was a statement of confidence not only in their ability to retain those relationships regardless of a potential “poaching,” but also a testament to the scope of their expertise and the tenure over which those relationships had been developed.

Be clear and concise about your fees. The regulatory winds are making this less of an issue than it once was, but it remains a way to distinguish yourself and your services from those who are less serious about working with retirement plans. I often tell plan sponsors that a good adviser will nearly always be able to save their plan money—though I also caution them that if saving money is their primary motivation, they are likely going to be disappointed.

Be able to demonstrate your commitment. Plan sponsors are increasingly wary of recordkeepers teetering on the brink of “exiting the business,” but when it comes to retirement plan advisers, the worry is that, for you, retirement plans are just a “hobby.” There are any number of ways to do it, but having the answers to the questions below will put your practice in the appropriate light.

Don’t take the relationship for granted. Like any relationship, things change and needs evolve—and that’s true for your relationship with a plan sponsor plan as well as the plan sponsor. Birds of a feather flock together, and ultimately you can really only do your best work if you are working with plan sponsors who are not only committed to their plan, but are open to, and supportive of, your recommendations to make it better.

But IMHO, if they are interested in hiring you as a retirement plan adviser—well, that’s a good sign.

—Nevin E. Adams, JD
You can read the article from PLANSPONSOR magazine here


How to prove your commitment to the retirement plan business.

1. What percent of your firm’s revenue is from retirement plan consulting?
2. How long have you been servicing retirement plan clients? Can this be documented?
3. What recognition have you achieved from independent sources that establishes your expertise and credibility?
4. How many retirement plan clients are handled by the team that will work on a prospective client’s plan? Does that team have individuals with different specialties?
5. How many different vendors do you work with for their existing clients?
6. Can you document ways in which you have helped clients through DoL audits, IRS audits, voluntary compliance issues, partial plan termination determinations, plan mergers or spin offs, plan terminations, and corrective contributions?
7. How—and how often—do you inform clients of regulatory changes and updates?

Source: Chad Larsen, Moreton Retirement Partners

Expectations Set

Thousands of protestors took to the streets this past week—in Wisconsin.

They were protesting legislation that would restrict the scope of collective bargaining power, while at the same time requiring public-sector workers to pay more for their pensions and health care. Last week, reportedly 40% of Madison, Wisconsin, schoolteachers called in sick (ostensibly they were in attendance at the state capital, and by appearances bringing some of the student body with them). The protestors (at least the ones on camera) drew comparisons to their actions with those taken recently by those in Egypt protesting for freedom and a democratic system of government.

But to my eyes, it looked more like Greece.

Don’t get me wrong. The Wisconsin protests were boisterous but appeared to be peaceful, and I’ve heard no reports of the kind of violence and arson that accompanied the protests in Greece a year ago (see Grecian Formula).

But in Wisconsin, as in Greece, a big issue is pensions and benefits1; more specifically, that certain promises had been made to workers by a government that said it was no longer able to meet those obligations, certainly not on the original terms.


During the Greek protests, I was hard-pressed to find anyone sympathetic to their cause. Most had read with some incredulity coverage of the sanctioned state retirement age (61, though reports said many retired as early as 53), and considering the enormous financial straits of that nation, most seemed to think the protestors needed to be reintroduced to reality. Of course, I wasn’t talking to any Greek nationals about this—just associates in this country and others who are living with (and within) a completely different set of economic and retirement expectations.

Which brings us back to Wisconsin—or New Jersey, or California, or Ohio, or perhaps even your town. Doubtless some of those protesting workers are overpaid and underworked, as in any workplace, but surely most are undertaking to do an honest day’s work for a fair amount of pay and benefits. These people are, as President Obama said recently, our friends and neighbors. Heck, in my case, they are also family members. And I can promise you that the teachers and/or police officers in my family are NOT overpaid.

On the other hand, I have plenty of friends and family in the private sector who have lost their jobs through no fault of their own, and had to figure out a way to make ends meet without the protection of tenure, or the safety net of a pension or retiree medical coverage. They weren’t overpaid before they lost that job, and they surely weren’t afterwards. Many who still have jobs have had to absorb pay and/or benefit cuts (or had those cut into by higher prices and co-pays). They have had their pensions frozen, if they ever had one at all, and not a few saw their 401(k) match suspended over the past couple of years. Many haven’t seen a “regular” cost-of-living increase capable of keeping up with the increases in the cost of living in a very long time.

They are, quite simply, living with (and within) what appear to be a completely different set of economic and retirement expectations than those now in, and descending upon, the Wisconsin capital.

And, as a result, I can’t help but wonder if they’ll be sympathetic.

—Nevin E. Adams, JD

See also “IMHO: Promises Premises” at

1 Some might argue that the real issue in Wisconsin is proposed changes in collective bargaining rights rather than pensions, but at issue, among other things, is the right to collectively bargain for wages, pensions, and benefits, so….

Service Charges

As Valentine’s Day looms, you have perhaps seen those increasingly ubiquitous advertisements for a certain online florist.

Now, I’ve used that particular service on many an occasion over the past several years; they are not only convenient, they deliver a quality product, and on time (yes, some “assembly” is required). In sum, I’ve used them before and will doubtless use them again.

That said, if you’ve been lured to their Web site by their ads touting a dozen roses for $19.99—well, let’s just say you could be in for a surprise. See, that advertised price doesn’t include a vase (well, not a pretty one, anyway), the delivery charge (which, depending on when you want it delivered, adds another 50%, or more, to the price), not to mention the standard “care & handling” charge of $3 (regardless of when you want it delivered). A guaranteed morning delivery on Valentine’s Day is another $15. Oh, and if you’ve procrastinated until the last week or so, you’ll find an additional $9.99 charge for “guaranteed Valentine’s Day delivery.” In sum, depending on when you get around to ordering those $20 roses, you could easily wind up spending three or four times that amount (but, hey—what’s it worth to you to stay in your sweetheart’s good graces?). And, most of that disclosure doesn’t happen until the screen right before you place your order.1

Of late, I have been talking about 2011 as “the year of disclosure.” It’s the year when I think most plan sponsors will begin really looking at those new 5500 disclosures, perhaps alongside those newly minted 408(b)2 disclosures (or would have until Friday’s announcement from the Labor Department that the deadline was being pushed back six months (see “EBSA Sets New 408(b)(2) Deadline for January 2012”).
Additionally, the issue of participant fee disclosure is back on the table, an outcome that will surely heighten the focus of plan sponsors on the issue.

The question, of course, is what will plan sponsors DO in response? For years now, there has been an undercurrent of thought that, once they saw what they were paying (and to whom), plan sponsors would rise up and demand change and/or a change in providers. Advisers would lead this charge, armed with these expanded disclosures, and the federal government would even play a role by not only mandating these disclosures, but providing plan fiduciaries with some “sticks” to spur compliance by reluctant providers (personally, I’d just find some new providers, but…). Indeed, all of this is being brought to bear at the same time, and the prospects for expanded, if not enhanced, disclosures seem bright.

Interestingly enough, these disclosures don’t really change the obligations or responsibility of plan fiduciaries to ensure that the fees paid and services rendered to the plan are reasonable. Indeed, most of the burden for disclosure falls on those who provide services to the plan, not the plan sponsor. That said, once the plan sponsor/fiduciary is apprised of such things in black and white (not to mention the Labor Department via the Form 5500), IMHO, it will be a lot harder to profess ignorance of such things.

Ultimately, I think those who provide services to these plans will be more thoughtful about the services they offer and what (and how) they charge for those services, and surely some will decide to no longer offer those services in this market and/or at those prices. Surely it will be easier—at least eventually—for advisers to help plan sponsors make apples-to-apples comparisons of services and costs, to make a more thoughtful—and prudent—determination.

That doesn’t mean that plan sponsors will act on that information. But then, if the process of disclosure has the kind of antiseptic effect we might hope it could have on the business of fees charged, then it’s entirely possible they won’t have to.

—Nevin E. Adams, JD

1 However startled one might be by the additional service charges on that online flower order, odds are your local florist charges about the same thing for the total package (with fewer options), perhaps without detailing the “extras.”

“Money Back” Guarantees

We’re seeing a renewed focus on retirement income of late, and for good reason.

Most participants seem barely able (or willing) to deal with the most rudimentary decisions about saving, much less investing those savings; and while the industry has developed tools and approaches to better their odds, IMHO, those challenges pale before that of crafting a workable, widely accepted, and readily implemented retirement income solution.

Not that retirement income solutions don’t exist for participants. Setting aside the long-standing availability (and viability) of “traditional” annuities, over the past several years, a number of innovative solutions have been brought to market. Indeed, by my count, three more were introduced just last week.


Clearly the market for such offerings is large, and getting larger by the day—and yet, despite a great deal of time, energy, expense, and focus, well, let’s just say that plan sponsors (still) seem as confused by the variety of choices in that arena as they were (mostly) oblivious to the distinctions in target-date fund structures. And, quite frankly, they’re sceptical (if not downright cynical) in a way that they never were—but should have been, IMHO—about the ability of a fund complex to craft an investment allocation perfectly aligned with the needs of an individual’s retirement date.

Most trying to “solve” the retirement income problem presume that we already have a workable, viable product available—we need only figure out better ways to get participants into “it”. As a consequence, legislators (and some product providers) talk about things like “auto” annuitizing—the implementation of an annuity default for distributions to overcome resistance—while academics are inclined to focus on behavioral finance design modifications: better ways to “frame” or position the option, to “nudge” participants to make the “better” decision.

At its simplest, an annuity is nothing more than an investor handing over money (or a stream of money) to an entity that promises, at some point in the future, to return it to the investor, ostensibly with some kind of return, above and beyond whatever fees are taken. Consequently, at least in theory, a participant who has spent their working career saving for retirement should be able to take those savings and hand them to an entity that can return it over time as a retirement paycheck.

But that remains a big step of faith for most, particularly in the wake of the financial crisis. After all, who CAN, or should, you trust with that much money—literally your life’s savings?

Don’t get me wrong—I’m encouraged by the new product developments, the interest of regulators in helping lay out a better course, the suggestions and insights of the academic community in fostering better plan designs, and the willingness of plan sponsors to keep an open mind.

But ultimately, when it comes to spurring the widespread interest of participants, IMHO, the best product design will be one that offers them a “get your money back” guarantee (1).

—Nevin E. Adams, JD

(1) Editor’s Note: Let me attempt to stave off correspondence from the American Council of Life Insurers who, the last time I penned a column suggesting that participants might be a bit queasy about the notion of converting their savings into an annuity, wrote to assure me (and presumably all of us) that “The five trillion dollar life insurance industry, which alone can provide annuity contracts, remains a pillar of the nation’s financial system. While the effect of the nation’s economic downturn has been widespread, not one annuity owner has missed receiving annuity payments.”

Making a List

Believe it or not, PLANADVISER Magazine is five years old this year.

As such, we wanted to commemorate our fifth anniversary by recognizing as “legends” five individuals who had made a “significant personal impact to the retirement plan industry and the advisers who support it”.

Now, perhaps you think that would be easy—but I can promise you it’s harder than it looks. And over the past several weeks we have gone through our list—moving some off, bringing others on, and “sleeping on it” more nights than you might think.

First off, we limited the list to five individuals (for five years), and we also tried to focus in on the past five years. Limiting the list to five was hard enough (certainly once we got started), but trying to focus in on the period since we launched the magazine created an even more daunting task. Sure, it was “only” five years ago, but it’s amazing how much has happened during that time. That was the year the Pension Protection Act was signed into law, after all, not to mention the year that the first wave of revenue-sharing lawsuits was filed, and the year that the Securities and Exchange Commission (SEC), responding in the aftermath of the mutual fund trading scandal, introduced rule 22c-2. In fact, the cover story of the first issue of PLANADVISER was titled simply, “Now What?”.

When it came to compiling that list, however, while some names were, IMHO, obvious,
some were perhaps “too” obvious. There are those who have had an impact, albeit a controversial one, while others have arguably had an impact, but one that is softer, quieter, or perhaps simply not as pervasive as others.

The discipline of a finite list forces you to make tough choices, but it also inevitably leaves you wanting to create a list that is longer, and perhaps more inclusive, if only to give full recognition to the many professionals who have had—and continue to have—that “significant personal impact.” That said, we have chosen five individuals.

They come up in conversation with advisers all the time, and for good reason.
They are people we have watched and are watching—and people who bear watching in the years to come.

They are, quite simply, legends—and on Tuesday we’ll “introduce” them to you.

—Nevin E. Adams, JD

The PLANADVISER “legends” will be featured in the fifth anniversary issue of PLANADVISER and will be honored at our annual Awards for Excellence celebration in New York City on March 24. At that event, along with sister publication PLANSPONSOR, we will also be honoring our Retirement Plan Advisers and Adviser Teams of the Year, as well as our Plan Sponsors of the Year, as well as other retirement industry luminaries.

Warning “Labels”

Litigation—or more accurately, the fear of litigation—frequently serves to put us on notice. It’s why we find labels on hair dryers cautioning against bathtub use, why hemorrhoid cream comes with an admonition that it is not to be taken internally, why that fast food coffee cup is emblazoned with a note that the contents are, in fact, “hot.” And yet, we know that as silly as these warnings seem, somewhere along the line either someone actually engaged in the activity in question, or some corporate attorney was afraid that they might.

There’s something of that concern still lingering around the target-date fund concept. Many participant-investors (and not a few plan sponsor fiduciaries) were caught unawares in 2008 when the hugely popular 401(k) investment option turned out to be as varied and unique in approach and assumptions as its marketing materials doubtless claimed it would be. Regardless, many plan sponsors—and probably most retirement plan participants—glossed over those differences, doubtless focusing instead on the message that this was an investment option managed by professionals who not only knew what they were doing, but could be trusted to keep an eye on things while we went about our daily lives.

Having learned the hard way that those structural differences exist, our industry—and those who regulate it—has spent the past two years trying to figure out how best to avoid a recurrence of the surprise, if not the result, from those designs. After a lot of discussion and several regulatory and legislative hearings, last November the Employee Benefits Security Administration (EBSA) issued a proposal to enhance the disclosure of these offerings (see “EBSA Unveils Target-Date Disclosure Proposal”), shortly after the Securities and Exchange Commission (SEC) issued its own ideas. IMHO, the latter was a pretty modest effort; the former—well, let’s just say it struck me as a lot of information to share with a participant who, in all likelihood, probably didn’t actively make the investment choice in the first place.1


I’ve always found the issue of participant disclosure to be a tough one. Participants clearly need all the help they can get in terms of better understanding and preparing for their retirement. On the other hand, it seems that the more paper we present to them, the less inclined they are to pay any attention to it.

However extraordinary the events that culminated in the target-date “surprise,” and however complicit participants (and plan sponsors) may have been in ignoring the information they may have had access to, it would be unconscionable not to try and prevent a recurrence. That said, IMHO, the situation won’t be resolved by a lot of legalese, even if offset by colorful charts—and I’d advise caution in trying to squeeze too many complicated concepts into the disclosure, however well-intentioned or valid. I’ve no objection to providing that information (and more) to participants who request it, nor do I mind them being told such things are available as part of a general communication. But it seems to me that imposing such materials en masse will only serve to deter a better understanding—and doesn’t that defeat the purpose?

Asset allocation funds generally, and target-date funds in particular, have, IMHO, been a godsend for participants who know they ought to save but lack the knowledge, interest, or time to make sound investment decisions. That said, most of the investors who seem to have been blind-sided appear to have been caught off guard by one simple factor: How much of the fund was invested in stocks at the projected retirement date, a date that, in most cases was part of the name of the fund? What people tell you (at least with 20/20 hindsight) is that if they had only known that their 2010 fund had so much money invested in stocks, they would have made a different, and ostensibly better, choice.

Consequently, I wonder if we couldn’t just give the vast majority all the “heads up” they need by a simple notation as to the allocation to stocks, bonds, and cash at the projected retirement date. It’s a solution that surely lacks “nuance,” but I suspect that participants inclined to pay attention to such things would glean what they need to know to avoid being caught off guard again; and those who don’t will almost certainly not read the types of disclosures currently under contemplation. It’s a recommendation already encompassed in the proposals, but one that IMHO is quickly being obscured by the “kitchen sink” approach so often attendant with legal disclosures.

I’ve often thought (and said) that many of the disclosures in our lives are written “by the lawyers, for the lawyers.” This time, wouldn’t it be nice if we had one that was designed to be read and understood by the rest of us?

—Nevin E. Adams, JD

1 In fact, in a recent letter to the Employee Benefits Security Administration (EBSA) commenting on the proposal, the SPARK Institute expressed concern that some of the proposed target-date fund disclosures would be over participants’ heads (see “SPARK Calls for Simplification of Target-Date Disclosure Rules”), and ERIC President Mark Ugoretz cautioned that “[i]nundating participants with excessive information has serious consequences; too often it results in participants simply ignoring critical information that is overcome by excessive data” (see “ERIC Calls for Balance in TDF Disclosures”).

In contrast, in its comments on proposed target-date fund disclosure regulations, the American Society of Pension Professionals and Actuaries (ASPPA) and the National Association of Independent Retirement Plan Advisors (NAIRPA) suggested additional disclosures—including a focus on the impact of taking a lump-sum distribution, and a statement as to the potential impact of disparate ages between spouses (see “ASPPA Suggests Additional Target-Date Fund Disclosures”).

Group “Think”

Somewhere over the course of your academic or professional career, I’m sure you’ve been exposed to a group exercise dealing with being stranded in an inhospitable place (the moon, or maybe a deserted island) with a limited amount of supplies, and a limited amount of time to choose from those supplies to ensure your survival.

In these exercises, you’re asked to make those picks as an individual exercise, and then put together with a group to make group choices. Not only are the group choices generally different, they are nearly always “better” (more likely to ensure survival) than those made by individuals. The point of the exercise is, of course, that we make better decisions working together as a team than we do trying to make them on our own—and it generally works out that way.

Sure, that may work in hypothetical situations where none of the group members has any particular expertise. But if I’ve crash-landed on the moon, and there’s a trained astronaut in the group—well, let’s just say you’re probably better off following their lead than putting things up for a vote.

That said, to me, the point of that exercise isn’t necessarily that group decisions are better than individuals’—they frequently aren’t, IMHO—but that groups we are part of make different decisions than we might as individuals.


Now, sometimes that inures to our benefit. There is certainly value in a collective experience/perspective, and there is an important collaborative element in just being able to bounce ideas off other people. Moreover, there are times when individual members of the group have knowledge and/or expertise that everyone doesn’t have. And let’s face it—plan sponsors make a lot of individual decisions, but even relatively small employers are inclined to rely on the collective experience of a group when it comes to making plan design and investment decisions. That’s supposed to make for better decisions but, as any retirement plan adviser can attest, not always.

Behavioral finance purports to explain why people make the financial choices they do, choices that are frequently at odds with what “rational” decisionmaking would support. In recent years, a lot of attention and focus have been directed toward behavioral finance, particularly as it applies to participant decisionmaking or the lack thereof (in fact, thus far most of those behavioral finance-oriented solutions – automatic enrollment, contribution acceleration, QDIAs - have been directed not toward helping participants make better choices, but rather toward making better choices for the participants).

In fact, in the cover story of the January issue of PLANSPONSOR, Gary Mottola, Associate Director of Investor Education at the Washington-based Financial Industry Regulatory Authority (FINRA), observes: “Plan sponsors are very aware of the biases that affect individuals, but I do not think a lot of sponsors are aware of these biases” that can affect them. Plan sponsors make most of their decisions in groups and committees, so they are vulnerable to both group and individual biases.”

What kinds of biases? Well, there are things like “shared-information bias,” where groups tend to focus on things of common knowledge/interest, even if it isn’t the most pertinent/critical. My favorite is “group polarization,” which speaks to a group’s tendency to make more-extreme decisions—both in cautious and risky directions—than individuals. In essence, the group tends to reinforce its own prejudices—and then some.

Even the best committees can make bad decisions, not because they aren’t well-intentioned, or even well-equipped to make complex financial decisions, but because they may make decisions based on dynamics of which they aren’t even aware.

What’s ironic, IMHO, is how intertwined the acknowledgement of such behaviors has become in thoughtful plan designs—and yet how infrequently we acknowledge their impact on those who make the complex financial decisions that affect the participant decisions.


- Nevin E. Adams, JD

Check out “Misbehavioral Finance”

What Lies Ahead - Part 2

If 2010 was not quite the return to “normal” we might have hoped, there was more than enough—both new and old—to draw the attention of plan sponsors. Here is the second part of our look at the trends that were on our mind this past year—and those just over the horizon.

Stop Gaps: Closing the Pension Funding Gap

What we said last year: It remains more expensive—and complicated—to walk away from pension commitments than most realize, though many employers remain committed to their pension plans for reasons that transcend those financial considerations. Still, it seems likely that freezes, both hard and soft, will continue to be applied, certainly in the private sector. The public sector’s commitment to pensions remains largely unabated—and yet, a sense remains that it may only be a matter of time before fiscal realities bring about a different result.

Where we are: For the very most part, little has changed. Pension funding remains a challenge, with the funding gap seemingly constantly buffeted between the ups and downs of the markets and interest rates, despite the conscientious efforts of most plan sponsors to keep up with ever-tightening funding requirements.


What’s ahead: It remains more expensive—and complicated—to walk away from pension commitments than most realize, though many employers remain committed to their pension plans for reasons that transcend those financial considerations. Still, it seems likely that freezes, both hard and soft, will continue to be applied, certainly in the private sector, while in the public sector, financial pressures seem likely to result in a different future solution for newer hires. Sound familiar?

Conflicts of Interests—Advice Regulations

What we said: Will we ever get final advice regulations? Almost certainly, though almost certainly regulations very different from the ones put forth a year ago. Or perhaps they will not come until after the concepts embodied in the PPA have been recrafted by legislators, such as Congressman Rob Andrews (D-New Jersey), who has already introduced legislation (the aptly named “The Conflicted Investment Advice Prohibition Act of 2009”) that would do just that. Between now and then, participants will continue to get advice the way they always have—or have not.

Where we are: Well, we now have those regulations—a proposed final version, anyway. For the most part, they seem to have restored and shored the status quo. Not that that’s a bad thing.

What’s ahead: The final proposed regulations will, likely, become the final regulations, at least in the important areas. The big change in advice seems more likely to emerge from a different direction—the recently proposed regulations on the definition of a fiduciary, not so much because it will change the rules on advice, but because the controversy on advice has largely revolved around trying to avoid becoming a fiduciary while offering advice (and getting paid for doing so). And it seems likely that if the proposed fiduciary regulations become law, the advice net some have tried so hard to become ensnared in will, quite simply, be inescapable.

Tax Treatment—Paying Now or Paying Later

Where we are: For years, much of the impetus for the growth in tax-deferred savings plans has been the premise that one’s taxes and/or income would be lower in one’s retirement future. Those prospects no longer seem quite so certain, and new Roth provisions for workplace retirement plans offer today’s retirement savers a different kind of choice. That, coupled with a unique window of opportunity to convert tax-deferred balances (albeit at a price), has some seeing the benefits of tax-deferred saving in a whole new light.

What’s ahead: As with self-directed brokerage accounts, the Roth conversion window (and its affiliated tax acceleration) seems most likely to appeal to the highly compensated minority. Of course, the impetus for the conversion itself is not only the timing window, but also the (still) looming sunset of the Bush Administration’s tax cuts (well, it was looming when I wrote this). Of course, the real issue may be a shift in assumptions about taxes; what if they won’t be dependably lower in retirement?

—Nevin E. Adams, JD

Editor’s Note: If you missed it, you can check out the rest of the list HERE

What Lies Ahead

If 2010 was not quite the return to “normal” we might have hoped, there was more than enough—both new and old—to draw the attention of plan sponsors. Here is a look at the trends that were on our mind this past year—and those just over the horizon.

Doctor Bill? "Curing" Health Care?

What we said: It is still hard to believe that the Senate and House positions on any number of key issues can be reconciled—but then, there was a point in the summer of 2006 when many felt the same way about the Pension Protection Act. But if it does pass—or if it does not—it seems safe to say that the issue is not going away any time soon. What remains to be seen is if the “cure” is worse than what it aims to remedy.

Where we are: Given the legislative hurdles that the Patient Protection and Affordable Healthcare Act (PPACA) faced a year ago, it still seems amazing that the legislation passed. Of course, the dominant majorities in Congress that were necessary to carry that off are no more (some would argue in no small part because of their role in passing the legislation), legal challenges have been filed by roughly half the states, and the newly resurgent Republicans in Congress are threatening to “repeal and replace.”

What’s ahead: Common wisdom is that the legal challenges will fall short, and that President Obama’s certain veto of any attempt to repeal (much less replace) the legislation will keep those efforts at bay as well. Those in support of the legislation continue to believe that the American public will eventually warm to the idea (in fairness, many already do), while those opposed find vindication in the results of the recent mid-term elections. My guess is that we will still be talking about this a year from now—and that the issue will loom large in the 2012 election cycle.


Fee Fie? Revenue-Sharing Litigation

What we said: Barring a smoking gun discovery among the cases already filed, it seems likely that the laws—and disclosures—will change before the litigation has any real impact. On the other hand, it is entirely possible that the mere existence of that litigation—and the ever-present litigation threat—will serve to reform the system in a way, and on a schedule, that would not otherwise have been possible.

Where we are: No smoking gun yet, but four years in, a number of the cases have settled, another group has been dismissed and, by my count, only one has been fully adjudicated (and that in favor of the plaintiffs). The courts are split on the issues, and many have been willing to extend plan fiduciaries the benefit of the doubt, so long as participants had the ability to make their own investment choices. As litigation worries go, this brand drew the highest level of concern in PLANSPONSOR’s annual Defined Contribution Survey—but it wasn’t much. As for that much-anticipated “second generation” of lawsuits? Well, somewhat surprisingly, it has yet to materialize.

What’s ahead: This year the Form 5500 took a big first step in prompting a new level of fee disclosures, and the near-final proposed regulations on 408(b)2 should carry that one step further. The Labor Department continues to challenge the courts’ generous application of ERISA 404(c)’s shield—and has gone so far as to make its point clearer on the application of 404(c) with the addition of language in the recently proposed participant fee-disclosure regulations. Many seem to think that more disclosure—and the more public disclosure in the form of Form 5500—will simply serve to provide the plaintiffs’ bar with fuel for the fire, while others believe that more, and more consistent, disclosure will make it easier for fiduciaries to know what they are paying and if it is reasonable. My guess is that both will turn out to be correct.

Auto-Premonition—Doing It for Participants

What we said: Automatic enrollment may have taken something of a “holiday,” but it seems unlikely to be “over” as a trend. Look for it to pick up the pace again in 2010—and for the Obama Administration to turn its attention to the issue in the next year (or two).

Where we are: Well, in many respects, it was déjà vu all over again—with a sluggish economy doubtless contributing (no pun intended) to another flat year for automatic enrollment adoption rates. Still, while the overall adoption rate in PLANSPONSOR’s annual Defined Contribution Survey was slightly lower this year, there was a discernable uptick in adoption at the largest programs—even if small and micro plans showed no change at all. That said, the primary motivation this year, as it has been the past two, has been to be more proactive in helping workers save, and there’s every indication that it will remain so in the future.

What’s ahead: I’m sure plans will continue to adopt the design—for all the right reasons—but it is hard to see anything leading to any kind of major acceleration in the trend in the short term.

Default Lines—Targeting Target-Dates

What we said: We don’t know yet what regulators may try to do to help ensure that investors—particularly near-retirees—are not misled by the simplicity of a fund title and marketing pitch. Plan sponsors are on notice that there are differences here and, with luck, will continue to ask pointed questions. Because, after all, when you’re selling “you don’t have to worry about it,” somebody has to.

Where we are: Much of the “damage” from 2008 has been restored, providers have taken pains to ensure that buyers understand their underlying glide path assumptions (certainly those having to do with equity allocations at age 65), and regulatory bodies have taken some baby steps in helping individual investors better understand these offerings. All in all, the storm seems, for the very most part, to have passed.

What’s ahead: More and better disclosures, a growing interest in offerings that take more into account than mere retirement date (including managed accounts), and more discussion around the importance of open architecture solutions and concerns about the (lack of) ERISA fiduciary status for the providers who bundle their own offerings together. But as for real change—failing another sharp stumble in the markets—most seem to be content with the way things are.


Next up: Pension Funding, Advice, and the Roth 401(k)

Naughty or Nice?

Editor’s Note: There’s so much going on in the world of retirement saving and investing that I never feel the need (or feel like I have the opportunity) to recycle old columns – but this one has a certain “evergreen” consistency of message that always seems appropriate – particularly at this time of year.

A few years back—when my kids still believed in the reality of Santa Claus—we discovered an ingenious Web site that purported to offer a real-time assessment of their "naughty or nice" status.

Now, as Christmas approached, it was not uncommon for us to caution our occasionally misbehaving brood that they had best be attentive to how those actions might be viewed by the big guy at the North Pole. But nothing ever had the impact of that Web site - if not on their behaviors (they're kids, after all), then certainly on the level of their concern about the consequences. In fact, in one of his final years as a "believer," my son (who, it must be acknowledged, had been PARTICULARLY naughty) was on the verge of tears, worried that he'd find nothing under the Christmas tree but the coal and bundle of switches he surely deserved.

Naughty Behaviors?

One might plausibly argue that many participants act as though some kind of benevolent elf will drop down their chimney with a bag full of cold cash from the North Pole. They behave as though, somehow, their bad savings behaviors throughout the year(s) notwithstanding, they'll be able to pull the wool over the eyes of a myopic, portly gentleman in a red snow suit. Not that they actually believe in a retirement version of St. Nick, but that's essentially how they behave, even though, like my son, a growing number evidence concern about the consequences of their "naughty" behaviors. Also, like my son, they tend to worry about it too late to influence the outcome—and don't change their behaviors in any meaningful way.


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

We all live in a world of possibilities, of course. But as adults we realize—or should realize—that those possibilities are frequently bounded in by the reality of our behaviors. This is a season of giving, of coming together, of sharing with others. However, it is also a time of year when we should all be making a list and checking it twice—taking note, and making changes to what is naughty and nice about our savings behaviors.

Yes, Virginia, there is a Santa Claus—but he looks a lot like you, assisted by "helpers" like the employer match, your financial adviser, investment markets, and tax incentives.

Happy Holidays!

- Nevin E. Adams, JD
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The Naughty or Nice site is STILL online (at http://www.claus.com/naughtyornice/index.php.htm). An improved site and much better internet connection speeds produce a lightning fast response – more’s the pity. I used to like the sense that someone was actually going to the list, and having to check it twice!

The Measure of the Plan

Not so long ago, plan sponsors gauged the success of their defined contribution offerings by a single metric: participation rate. It’s not that they didn’t pay attention to other criteria, but participation rate is objective, easy to calculate, and, certainly for a voluntary savings program, it’s not an inappropriate gauge of the program’s perceived value.

Over the past couple of years, a growing number of plan providers have brought to market a new set of plan diagnostic measures, measures that not only show individual and plan balances, but also project those balances out to an estimate of what those balances will provide in retirement income, or presented as a measure of retirement readiness—compared with an established level of income replacement.

It’s not a new idea, of course. Heck, there has even been legislation introduced to place—on participant statements—a projection as to what the participant’s monthly retirement income would be. Meanwhile, despite long-standing fears that participants, confronted with the stark realities of their savings situation, would abandon the cause, the realities seem to be quite different. One might well expect the providers touting such wares to extol the virtues of the approach (and they do), but I have yet to meet a plan sponsor who had adopted these enhanced gauges of retirement readiness who said it had had a negative impact.

That said, there are still many plan sponsors that have not yet taken that step. At the PLANSPONSOR National Conference this past June, I asked the audience of some 200-plus plan sponsors if they had established any kind of target replacement ratio as part of their program design. While the survey sampling was admittedly unscientific (though I would suspect skewered toward more-active, involved, engaged plan sponsors) a whopping 78% said “no.” Just one in 10 said yes, while the remaining 12% responded “not explicitly, but it’s in the back of our minds.” (1)

Based on that result, I wasn’t too surprised that just 28% said their participants will be able to retire comfortably, while 43% said “maybe” (the polling was anonymous). (2)


Now, most of us have a hard enough time answering that comfortable retirement question for our individual situation, much less an entire employee populationbut I was struck by how many of those in that particular attendance didn’t even seem to have a rough notion in the back of their mind. As I explored that poll result with the audience, a couple of themes emerged: First, plan sponsors only know so much about an individual participant’s lifestyle, sources of income, and/or plans for retirement, and generally don’t have the time or inclination to know any of that, anyway. Second, these are voluntary programs, and while plan sponsors take seriously their responsibility to see that they are well, reasonably, and efficiently run, most don’t see it as their responsibility to make sure that participants are doing what they need to do (in fairness, most plan sponsors have their hands full just trying to make sure that THEY are doing what they need to do).

In casual conversations with plan sponsors about these types of programs and their reluctance to embrace them, it isn’t the cost or complexity that holds them back, nor is it concern about the response of newly enlightened participant-savers. Rather, it’s an underlying concern that, once those retirement replacement goals have been established at a plan committee level, and once those readiness results are presented in black and white (or multi-color) to plan fiduciaries, they could be held accountable for the results and/or shortfalls. Ignorance, to some it seems, is not only bliss, it’s a litigation shield.

Personally, I think plan sponsors already carry burdens and responsibilities beyond what many, perhaps most, are compensated for (and some beyond what they are aware). That said, it seems to me that presenting plan participants with specific information about their retirement savings situation, coupled with the kinds of diagnostic tools that accompany most of these offerings (not to mention the counsel of a trusted adviser) not only serves to help them make better decisions sooner, it effectively undermines their ability to later turn on the plan fiduciaries and try to hold them accountable for the participant’s results.

Now, some might argue that sponsoring these programs with no specific goal in mind is not much better than participants who save with no goal or focus to those efforts. Others would go so far as to suggest that failing to administer these programs with those kinds of specific goals in mind runs afoul of ERISA’s fiduciary charge.

For me, it’s not about measuring your program—it’s about seeing how your program measures up.

—Nevin E. Adams, JD ,

(1) While I don’t have a correlation between the responses and the program designs represented, it seems fair to say that many were in the DC-only camp.
(2) As for the rest of the responses, 16% said “no,” 10% were “not sure,” and 3% said “I’ve no idea.”

Fiscal Therapy?

This week I will undergo one of those “you’re getting older” physicals. This has been scheduled for about six months now (yes, that’s how long it takes to get in for a physical these days)—and I have dreaded it, more or less consistently (and, more recently, constantly) ever since the appointment was made.

I know that I’m eating too much of the wrong things, and not exercising enough (at all?)—and while I sincerely meant to alter some of those behaviors over the past six months, other things have taken priority. What remains to be seen is what my doctor will see/say—and what, if any, lifestyle changes lie ahead.

In random conversations over the past several weeks, it was easy to find people who were supportive of the need to do something about the yawing federal deficit, and even easier to find folks who had problems with one—or more—of the recommendations of the so-called Deficit Commission that were made formal last week. Like my trip to the doctor, we all knew that we had some fiscal behavioral imbalances that needed to be addressed—we just didn’t know how painful the cure might be1.

Retirement Plans

Those in our industry were primarily focused on two things: the reduction of tax-favored treatment for benefits (impacting both workplace retirement and health benefits) and changes to Social Security. The latter drew a lot of focus and angst though, at least as I read them, they seemed relatively modest, certainly compared with the 1983 moves (though, make no mistake—in my reading, a large number of decidedly middle-income workers will pay much more and get less in benefits under the proposal).


My issues with the proposed Social Security reform were that they ultimately seemed to be just one more step down the path of institutionalizing it as a kind of uber-welfare program, rather than one that retains at least a modest cognizance of individual contributions to the system. But the real pushback on Social Security reform seemed mostly of the type that has staved off serious discussion for decades 2; to wit, the program is not REALLY in trouble, because it can keep paying benefits for a long time with no changes at all (clearly Social Security isn’t hemmed in by the accounting rules that have been brought to bear on the funding premises of defined benefit pension programs).

Regardless of this proposal’s fate (or its inevitable progeny), sooner or later we all know that the “normal” retirement age will be lifted, the rate of FICA tax withholding imposed will be raised, and more of the benefits paid will be taxed. Like my exercise regimen, the longer we put that off, the bigger the changes will have to be.

The implications for workplace benefit programs that would be sheared of much of their current tax-advantage are more complex. Now, I’ve certainly had in mind the tax preferences accorded my pre-tax contributions when I make them (and the future of tax rates as I begin to slide some into my Roth account)—and, if I’m reading the recommendation correctly (and there’s less than a paragraph of the 66-page report devoted to this3), the individual limitations would still allow most workers to save at the pace they do at present (there’s also a call for an expansion of the Savers’ Credit in the report).

The presumption by some industry advocates was that once the tax preferences for employers sponsoring the programs were removed, employers would no longer sponsor the programs. Also, that the aforementioned change, along with the limitation of tax preferences for individual savings to the lower of $20,000 or 20% of income would, in the words of the American Society of Pension Professionals and Actuaries (ASPPA), “effectively eliminate employer sponsored profit-sharing plans, shifting responsibility for retirement savings to workers.”

Indeed, one has to wonder: If the federal tax incentives for sponsoring workplace retirement (and health care) programs were removed, would employers still sponsor the programs?

The answer to that question is key because, while some of the changes advocated by the proposal might have unforeseen consequences 4, I’m reasonably certain that if employers don’t continue to sponsor these programs, private retirement savings will almost certainly go on a crash diet.

—Nevin E, Adams, JD

1 On an unrelated note, the editor in me was completely perturbed by the Commission report’s misspelling of “Pension Benefit Guarantee Corporation” (it’s “Guaranty”). Perhaps a Freudian slip?

2 Many opponents this time around claimed that, since Social Security doesn’t technically contribute to the deficit, it shouldn’t have been on the table for consideration by this particular commission.

3 You can read the report at http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/TheMomentofTruth12_1_2010.pdf

4 In all likelihood, this effort was doomed from the beginning. The problem it is trying to solve—a $13 TRILLION deficit—is daunting both in its size and scope. Not that the proposal claims to solve the whole problem; rather, it just takes a good “whack” at it (a whack in this case being $4 trillion in savings, through 2020). To get to that result, the proposal cuts a broad swathe through the nation’s tax system and structure; calls for caps, though not cuts, in discretionary spending (albeit at 2011 levels and not until 2012); calls for a near doubling in the federal gasoline tax; and a three-year freeze (though again, no cut) on federal worker pay, among other things.

Liability Driven?

Having recently had a couple of new members join our 401(k) investment committee, I asked our investment adviser to conduct a briefing so that the new members – and those already serving on the committee – would have a better understanding of the responsibilities of being on that committee.

Most of that session focused on what was expected of them: the requirement to act solely in the interests of plan participants and beneficiaries, the importance of process (and documenting that process), and the implications of the prudent expert rule.

However, aside from the obvious motivations in helping my co-fiduciaries know what was expected of them1, at the conclusion of our session, I tried to summarize for our committee three things I think every investment committee member should know—and that, IMHO, kept top of mind, serve to keep an appropriate focus on those responsibilities:

You are an ERISA fiduciary.

Even as a small and relatively silent member of the committee, you direct and influence retirement plan money. I’m not saying that some crafty attorney couldn’t cobble together some kind of legal or practice exclusion that would technically suffice to erect some kind of legal shield—but I suspect that even that would be readily penetrated by a court2.


As an ERISA fiduciary, your liability is personal.

You may be required to restore any losses to the plan or to restore any profits gained through improper use of plan assets. Now, you can obtain insurance to protect against that personal liability—but that’s probably not the fiduciary liability insurance you may already have in place, or the fidelity bond that is often carried to protect the plan against loss resulting from fraudulent or dishonest acts of those covered by the bond. If you’re not sure what you have, find out. Today.

You are responsible for the actions of other plan fiduciaries.

All fiduciaries have potential liability for the actions of their co-fiduciaries. For example, the Department of Labor notes that if a fiduciary knowingly participates in another fiduciary’s breach of responsibility, conceals the breach, or does not act to correct it, that fiduciary is liable as well. So, it’s a good idea to know who your co-fiduciaries are—and to keep an eye on what they do, and are permitted to do.


—Nevin E. Adams, JD

1 As an ERISA fiduciary, you are expected to act SOLELY in the interests of plan participants and their beneficiaries, and with the exclusive purpose of providing benefits to them; to carry out those duties prudently (and by prudent, it is intended that you be a prudent expert); to follow the terms of the plan documents (unless inconsistent with ERISA); to diversifying plan investments (specifically with an eye toward minimizing the risk of large investment losses to the plan); and to ensure that the plan pays only reasonable plan expenses for the services it engages.

A couple of points of clarification: IMHO you can’t follow the terms of the plan documents if you haven’t read them, nor can you ensure that the plan pays only reasonable expenses if you don’t know what the plan is paying, or for what.

2 IMHO, “you don’t have to be a fiduciary to be on the investment committee” should be added to the list of great lies—like “the check is in the mail….”

Thanks Giving

Thanksgiving has been called a “uniquely American” holiday, and one on which, IMHO, it is fitting to reflect on all we have to be thankful for.

Here's my list for 2010:

I’m thankful that the vast majority of plan sponsors continued to support their workplace retirement programs with the same match and options as they had in previous years—and that so many of those who had to cut back in 2009 made the commitment to restore some or all of it in 2010.

I’m thankful that participants, by and large, hung in there with their commitment to retirement savings, despite the lingering economic uncertainty. I’m especially thankful that many who saw their balances reduced by market volatility and, in some cases, a reduction in their employer match were willing and able to fill those gaps, in most cases by increasing their personal deferrals.

I’m thankful that most workers defaulted into retirement savings programs tend to remain there—and that there are mechanisms in place to help them save and invest better than they might otherwise.

I’m thankful for the time, cost, and effort employers expend each year on health-care coverage for their workforce—never more so than this year with the absorption and assimilation of requirements under the new health-care law.


I’m thankful that those who regulate our industry continue to seek the input of those in the industry—and that that input continues to be shared broadly in open forums. I’m thankful that so many in our industry take the time to provide that input.

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

I’m thankful that a growing number of advisers—and the firms that employ them—are willing to accept responsibility as an ERISA fiduciary.

I’m thankful that the “plot” to kill the 401(k)…hasn’t…yet.

I’m thankful that we might—finally—be ready to have a national, adult conversation about retirement income and entitlement programs.

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

I'm thankful for the warmth with which readers, both old and new, have embraced me, and the work we do here. 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.

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!

"Sure" Things

In a very real sense, this has been a “rebuilding” year for many plan sponsors and participants: a time spent rebuilding account balances, resurrecting and/or reviving employer matching contributions, a time for shoring up participation rates, and—in some cases—restoring trust. The markets, overall, have been sympathetic to those causes, but in many respects, the still-soft economic trends doubtless weighed on the kinds of dramatic trend shifts that we have seen in recent years.

That said, only a quarter (24.9%) of some 6,000 plan sponsor respondents said that “all or nearly all” of their participants were deferring enough to take full advantage of the employer match, a reading that declines sharply with plan size. Additionally, participation rates were roughly flat with a year ago; with responding plans reporting a combined participation rate of 71.5%, compared with 72.3% a year ago. The median participation rate was also lower; 75.0% in 2010, compared with 78% in last year’s survey.

As for automatic enrollment, the 2010 trend line was mixed. While the overall adoption rate was slightly lower this year, there was a discernable uptick in adoption at the largest programs (62.7% in 2010, compared with 52.3% a year ago) and about a 10% increase in the number of mid-size and large programs—but small and micro plans showed no change at all. The overall pace of contribution acceleration—that process of providing for annual increases in the rate of deferral—slipped from a 15.5% adoption rate in 2009 to just one in 10 plans this year (though most of that decline came from the smallest plans). However, even the adoption rate at the largest plans was effectively flat from a year ago.


The number of plans not offering some form of financial/investment advice continued to shrink. In this year’s survey, fewer than one in four plan sponsors did not offer that support, though larger programs were more likely to eschew the option. Relying on a financial adviser outside the plan was the preference for 37.5% of this year’s respondents, though that option was significantly more appealing to micro and smaller employers. While there continued to be different trend lines in different market segments, there was a distinct and noticeable trend across market segments toward offering—and accepting—“help.”

But as I sorted through the results of our annual Defined Contribution Survey, the one thing that emerged as something of a theme across multiple categories was—a lack of clarity. Plan sponsor respondents—and I maintain that those who respond to our survey are some of the most knowledgeable and actively engaged in their responsibilities—expressed what I thought were relatively high levels of uncertainty around several key plan-design elements: fees, target-date glide paths, retirement-income offerings, the focus of their investment policy statements, and even the “best” option for a qualified default investment alternative (QDIA).

Now, that may simply be a reflection of the wide array of choices available, the pace of new product development, and the unsettling effects of volatile markets. In fact, it might even reflect a certain level of prudent humility on the part of serious plan fiduciaries, who are aware of just how much they don’t know in the midst of that change and turbulence and are willing to own up to that reality.

After all, as Mark Twain once said, “It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so.”

—Nevin E. Adams, JD

“After” Thoughts

The morning after last week’s mid-term elections, a plan sponsor friend of mine called me up and asked me what I thought it all meant.

Still bleary-eyed from sitting up watching the returns pile in the night before, I immediately launched into what I felt was an insightful assessment of the mood of the electorate, the trends of various interest groups that had, at least according to exit polling, shifted allegiances since 2008, the influence of the Tea Party, and the historical context of the shifts.

After patiently listening to me ramble for several minutes, he finally interjected—“I mean, what does this mean for retirement plans.”

Well, IMHO, you can’t completely separate the two. By any measure, the results were historic; Democrats lost their so-called 60-vote “super majority” in the Senate and, more significantly, control of the House, and in numbers that outpaced 1994’s turnaround (though that election also gave Republicans control of the Senate). That will certainly slow, if not stop, the pace of legislative change coming out of Washington, and—based on the employers I have spoken with—that will almost certainly be a welcome respite.


Many are inclined to harken back to the 1994 elections as a harbinger, recalling that after that turnabout, then-President Clinton and the Republican Congress managed to come together on several key initiatives, even as the nation entered a period of relative peace and prosperity. However, aside from the fact that, IMHO, those perspectives ignore many differences in approach between the two presidencies, they also gloss over the fairly nasty political period that followed the 1994 elections. It was, after all, a period that led to a number of high-profile conflicts, duelling press conferences, and that infamous (and in my estimation, overhyped) government “shut-down.” In sum, things finally settled down (well, except perhaps for “tiffs” like a presidential impeachment), but there was a lot of venom and acrimony in evidence for an extended period after the election. I think it would be naïve to expect any less/better from the current players (though I’m willing to be wrong).

The bottom line is, the House can pass legislation, but the Senate’s not likely to go along with it—nor would ditto any legislation that might manage to emerge from the Senate seem to have much chance of getting past the House. And that’s without even having to contemplate the power of a Presidential veto (particularly since there are no “veto proof” majorities in sight).

It’s not that the mid-term elections won’t have any impact on retirement plans. I fully expect the debate about Social Security reform to re-emerge, and changes there, though not likely in the next two years, will of necessity at some point have a ripple effect through all our retirement planning assumptions. I wouldn’t expect to see much happen with that automatic IRA legislation, certainly not with its employer mandates intact.

That said, our industry doesn’t need legislation to keep things stirred up. We’ll be busy worrying about disclosing fees, helping plan sponsors (and participants) understand those disclosures, and pondering just exactly what a new definition of fiduciary might mean, while regulatory deliberations about 12(b)1 and target-date funds will also be on the radar screen, and perhaps even retirement income.

Indeed, the regulatory change already in motion seems more than adequate to keep plan sponsors, advisers, attorneys—and journalists—plenty busy trying to sort it all out. In sum, I anticipate a lot of noise, a fair amount of activity, and not much forward motion in Washington for the next couple of years—though I am not sure that is a bad thing.

As always, we’ll worry a lot about matters in Washington; but IMHO, what happens outside of Washington is, more often than not, what matters.

—Nevin E. Adams, JD

Cost of Living "Adjustment"

A couple of weeks back, the Social Security Administration announced that, for the second year in a row—but only for the second time since 1975—there would be no cost of living adjustment (COLA) for Social Security recipients.

Of course, this close to an election, it should come as no surprise that some went scurrying to introduce legislation that would provide some kind of supplemental funding to the nation’s seniors; similar actions were undertaken a year ago, ostensibly in the interests of economic stimulus, as well as the importance of supporting those on fixed incomes. But this election year is one unlike most, perhaps any, in our memory—and concerns about the federal budget deficit have, thus far, overcome the political class’s natural inclinations in such matters.

Whether or not you are on a fixed income, it’s hard to credibly argue that prices aren’t rising on everything from food to gasoline to utilities; from real estate taxes (those reassessments never come as rapidly when prices decline, do they?) to the monthly cable bill. That said, there is a formula on which things are based, one that has, perhaps more often than not, worked to the benefit of those drawing Social Security benefits. It is a formula that, in 2009, provided those beneficiaries with a 5.8% increase in benefits, the largest in a quarter century. That’s right—did YOU get a 5.8% increase in 2009?


Now, some of this is the timing in the formula, which considers the period from September of one year to the next. For example, in the year that provided a 5.8% increase, if the formula had been applied from December to December (rather than September to September), the COLA would have been 0.8%, not 5.8%. Some of it is because the COLA is calculated on an index that considers the purchases that current workers make, rather than retirees1. And yes, some of it is because the Social Security benefit is never adjusted downwards—even when there is a decline in the cost index it tracks2. In fact, the real reason that Social Security recipients/beneficiaries 3 aren’t getting a cost of living adjustment next year is not because prices haven’t gone up, but rather because prices haven’t yet risen above the level of September 2008 (remember $4/gallon gasoline?).

However, for retirees accustomed to an annual, upward adjustment in their benefits, the lack of an increase surely came as something of a shock4, particularly after politicians found a way to smooth it over the previous year (and may yet again).

The good news for Social Security beneficiaries is that, at least under current law, their annual benefits do not decrease and retain the potential to increase based on adjustments, however imperfect, in a designated cost of living index5. Certainly, in a time when many have been asked to absorb a cut in pay or lost their jobs completely, with a family to support, there are worse things than living on a “fixed” income.

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


—Nevin E. Adams, JD

1 There were no automatic COLAs in Social Security until 1975 (see http://www.ssa.gov/policy/docs/ssb/v70n3/v70n3p1.html)

2 Consider that, if costs were adjusted for downward as well as upward moves, last year benefits would have been cut by 2.7%.

3 Disabled workers and their dependents account for 19% of total benefits paid, according to the Social Security Administration (see http://www.socialsecurity.gov/pressoffice/basicfact.htm).

4 I never cease to be amazed at what a high percentage of retirement income Social Security provides—not because it was designed that way, mind you, but rather because it remains relatively constant in an otherwise variable pooling of retirement income sources. The Social Security Administration notes that Social Security provided at least 50% of total income for just over half (52%) of aged beneficiary couples and 73% of aged non-married beneficiaries. Moreover, it was 90% or more of income for more than one in five aged beneficiary couples and 43% of aged non-married beneficiaries, though “total income” in this calculation excludes withdrawals from savings and non-annuitized IRAs or 401(k) plans. Overall, the Social Security Administration says that Social Security benefits represent about 40% of the income of the elderly.

5 More information about the COLA is at http://www.socialsecurity.gov/cola/2011/factsheet.htm. An interesting 2009 webcast on the subject titled “What Happened to My Social Security COLA?” is viewable at http://www.blip.tv/file/2629162, and a transcript is available at http://assets.aarp.org/rgcenter/ppi/econ-sec/transcript_forum_090921.pdf For more information on some of the alternative COLA indexes, the AARP Public Policy Institute has published a fact sheet on the consumer price index and how it impacts Social Security Benefits at http://assets.aarp.org/rgcenter/ppi/econ-sec/fs160.pdf

"Interests" Bearing

Last week the Labor Department issued a proposal that would, by its reckoning, provide the first update to the definition of an ERISA fiduciary since shortly after the birth of the federal regulation (see DoL Broadens Fiduciary Net.

The move was much-anticipated and, in the eyes of many, long overdue. Clearly, the Labor Department wanted to narrow the exceptions to that definition (that were, somewhat ironically, put in place by the Labor Department of 1975) and, in the process, subject more advisers to ERISA’s fiduciary standards.

At a high level, the Labor Department is seeking to restore the two-part test for fiduciary status found in ERISA, one that was expanded to be a five-part test in the 1975 regulations. The proposal seeks to set aside the additional conditions that the advice be rendered “on a regular basis,” that the advice would serve as a “primary basis” for investment decisions with respect to plan assets, that the recommendations are individualized for the plan, and that the advice be provided pursuant to a mutual understanding of the parties. Instead, the new proposal would impose fiduciary status when a person renders investment advice with respect to any moneys or other property of a plan, or has any authority or responsibility to do so, and receives payment (direct or indirect) for that advice.




The Implications

That change is almost certainly going to drive some of those advisers (and their sponsoring organizations) away from these programs, though I am hard-pressed to mourn that loss (the proposal left intact the exemption for education, and if those lines are easily crossed, by now surely we all know where they are). Those who remain may well charge more for their services in compensation for the extra exposure, certainly in the short run. However, those who do so will be competing against organizations and advisers that made that commitment years ago and who appear to be competing quite successfully already. Consequently, if the newly “converted” seek to profit by a rapid escalation of their fees, I suspect they won’t find that to be a successful strategy.

Those responsible for closely held stock valuations are most likely to feel some pain in the short run. After all, they have long enjoyed a special dispensation from fiduciary status At this writing, I’m not altogether sure how one conducts a security valuation that is exclusively in the interests of the plan participants and beneficiaries—but I’m no more comfortable with the notion of a valuation that ignores the impact that those valuations could have on the exposure of the plan that takes on those assets based on that valuation.

One of the most interesting aspects of the proposal was the Labor Department’s expressed interest in reconsidering its position that a recommendation to a plan participant to take a permissible plan distribution would not constitute investment advice, even when combined with a recommendation as to how the distribution should be invested. Said another way, the DoL is now willing to consider that such encouragement could constitute advice at a level sufficient to trigger ERISA fiduciary status. In announcing its interest, the DoL noted that “[c]oncerns have been expressed that, as a result of this position, plan participants may not be adequately protected from advisers who provide distribution recommendations that subordinate participants’ interests to the advisers’ own interests.” In fact, there has already been litigation involving rollover advice—and there are any number of stories out there about advisers persuading participants to take advantage of early withdrawal provisions and pull their money out of the plan to put it in their hands. Not that that couldn’t be advantageous for the participant—but shouldn’t the adviser encouraging them to pull money from ERISA’s environs be held to that same standard of care?

Of course, at this point, the proposal is just that—though it will be interesting to see the comments that are made on this new definition over the next 90 days (1).

As for where this takes us, it has not always been clear that all plan sponsors fully appreciated the significance of working with advisers willing to put plan and participant interests ahead of their own. But they should; and, IMHO, this proposal will improve the chances that they—and their participants—will benefit from that protection, whether they seek it or not.

—Nevin E. Adams, JD

(1)Comments on the proposal can be submitted electronically by e-mail to e-ORI@dol.gov (enter into subject line: Definition of Fiduciary Proposed Rule) or by using the Federal eRulemaking portal at http://www.regulations.gov.

Paper “Trail”

Last week, the Department of Labor reissued its proposed regulation on participant fee disclosure.
Those familiar with the last proposal (put out by the prior Administration—see “EBSA Finishes Regulatory Package with Participant Disclosure Proposal”) will doubtless find this one to be a modest improvement (see “EBSA Releases Final 401(k) Fee Disclosure Rule”). Aside from the passage of time, this version incorporates additional input from the retirement plan community, financial services regulators, and even participant focus groups—most of it good, and all of it interesting.1

The rule itself is worth a read for, IMHO, it offers valuable insights not only into the suggestions made, but into the Labor Department’s reaction and response to those comments. As always, the devil lies in the final details, but one senses a strong interest in balancing the desire to give participants more information to make better decisions with the practical realities attendant in providing transparency and consistency of disclosure in an industry whose fee structure has become increasingly obtuse and intertwined.

That said, and while this is a marked improvement from the current state of affairs, IMHO, this regulation will still leave us a long way from producing what I think will actually show participants what they are paying for these retirement accounts.


Sure, they’ll get more frequent information on their investments, and sure, there will be more (and probably better) comparative information about those investments, both fees and performance. Yes, they will see fees expressed both as a percentage and as a dollar amount per $1,000 invested, and yes, they will get more information on account restrictions, annuity provisions, and revenue-sharing than many have probably ever received previously. And yet, for all this extra data that will be produced, provided, and distributed, I can’t quite shake the image of a participant’s eyes glazing over as they desperately try to make sense of what they have been given.

Of course, it’s possible that many won’t bother reading it at all, though a large part of the financial justification for these regulations is how much time the disclosures’ availability will spare participants searching for information about these investments. In fact, to my eye, perhaps one of the most significant revisions from the prior regulations was a reset in the estimation of just how many participants are expected to benefit from these reams of paper. The prior proposed regulation estimated that 29% of participants in these programs would realize some kind of time-savings, but the Labor Department, responding to a suggestion from a commentator, has upped that—to an eye-popping 70%-76%!2

Now, that determination isn’t, IMHO, essential to the importance of this effort. Personally, the 29% figure is much more in line with my experience, mostly because what I see, time and again, is that the more paper we sling at participants, the less attention they pay. And, make no mistake, with this new proposal, we will be slinging a lot more paper at participants, and more frequently. Despite the effort to alleviate the complexity of basis points and revenue-sharing, it’s hard to shake the sense that this well-intentioned effort will simply overwhelm participants, while at the same time placing a large and growing burden on the backs of those who must provide, administer, and explain it.

It’s clear to me that the information is needed, and as I read the proposal, it’s clear to me that the regulators have made a good-faith effort to strike a balance in providing it.

That said, I doubt very much that it will make much difference in participant behavior, nor am I optimistic that it will actually enlighten many, certainly not the three of four cited in the Labor Department’s projections. This is not a shortcoming of the DoL’s attempt here—frankly, in view of the tangled web that has become 401(k) retirement fee calculations, I think they are to be lauded for their vigorous and balanced efforts.

However, what participants really want and, IMHO, what they need to really understand what is going on here is to have that single figure on the statement—even if produced only once a year—that tells them what their retirement plan costs.

This new regulation may hasten that day’s arrival. But until it comes, I fear we may be doing little more than papering over the real problems.

—Nevin E. Adams, JD

1 There is another interesting inclusion in this proposal—one that has to do with disclosures, but perhaps not participant fee disclosures, per se. With this proposal, which merges the 404(c) disclosure regulations with those of non-404(c) plans, the Labor Department added a provision to the 404(c) regulation, stating plainly what those of us in the industry have long understood; that, even where ERISA 404(c) protection applies, it does not shield fiduciaries from the duty to prudently select and monitor investments. However, this statement was only referenced in the preamble to those regulations rather than in the body—and thus, some courts had seen fit to disregard its implication in a series of revenue-sharing suit dismissals (see “IMHO: Second Opinions"). That, of course, is fodder for another day.

2 The recommendation was based on a finding from the Employee Benefit Research Institute’s (EBRI) 2007 Retirement Confidence Survey, which indicated that 73% (plus or minus 3%) of workers saving for retirement used written materials received at work as a source of information when making retirement savings and investment decisions.

The regulation is online HERE

A fact sheet summary is online HERE

A model of the information chart is online HERE