Comparison “Points”

Every year about this time, we get reports from firms that purport to tell us how much time is spent in preparations for the NCAA basketball tournament—and, no, not by the teams and coaches. The “studies” (ironically, they’re always put out by firms that are in the business of helping people find jobs) generally make some assumptions about the amount of time people spend on the workplace pools as well as how many people will participate, and their compensation levels, and—voila—the productive time ostensibly “lost” to these activities. Now, they make a lot of assumptions to get to that result, including the assumption that, but for these pools, people would be doing nothing but working. But the results give journalists something easy—and “fun”—to write about, and the rest of us to read and talk about (some day someone should do a study on how much time and money is wasted writing and reading about those “studies”).

Our lives are filled with such reports: perhaps valid points that are, like it or not, supported by data that is—well, let’s just say it’s “squishy.” These reports are designed to provide some interesting if “low hanging” fruit for media coverage—and it works. The sponsoring firm gets some free press, the journalist gets some easy copy, and the reader—well, you get some interesting, if not completely meaningful, information.

And our industry is no exception. Here are some of the industry “data points” that, IMHO, are things we probably shouldn’t care about.


How the tiny minority of participants who realign their balances in any given month choose to do so.

Let’s face it, in any given month—heck, in any give YEAR—only the tiniest numerical sliver of retirement plan participants make a change in how their accounts are invested. Those who do could be doing so for any number of reasons, but inevitably those who do seem to be selling—and buying—the wrong things at the wrong time, fleeing stocks when the market takes a tumble and buying at the peak. And yes, it’s hard to avoid a certain “can you believe these idiots?” undercurrent in reporting on these movements.

Sure, highlighting the missteps of the few can provide fodder for reinforcing positive long-term investing messages. But the vast majority of participants never—ever—touch their balances.

Not that we should be wholly comfortable with that.

The investment performance of defined benefit versus defined contribution plans.

Every so often, a report comes out that reminds us that defined benefit plans turn in a better performance than defined contribution plans. What we’re apparently supposed to draw from that is that DB plans are better-managed in terms of asset allocation by professionals, better able to negotiate lower fees than their DC counterparts, and generally provide a better return on investment. In other words, DB plans are “better.”

But those who get to that result generally do so by sampling against a finite number of plans, and sampling matters (sampling ALWAYS matters). Plan size is a factor, of course, but while a defined benefit plan is ostensibly a single pool of money being managed to obtain a certain aggregate objective, a defined contribution plan is an aggregation of individually managed objectives. Now, I’m not saying that all, or even most of, those individually directed DC plan allocations are as well-designed or maintained as that put in place by a DB investment committee, but unless your defined benefit plan has a single participant, those programs have completely different objectives and timeframes. You might as well be comparing a sports car to a Hummer; which is “better” depends on the distance, the terrain, the length of time you have to complete the journey – oh, and how much fuel you have.

That said, in 2009, guess which did “better”?

That “average” 401(k) balance.

If there is one number I wish our industry would quit publishing, it’s the average 401(k) balance. As noted above, “averages” have their limitations, but the variations in this particular average are enough to make one’s head spin. Here you have participants who may (or may not) have a DB program, who are of all ages, who receive widely different levels of pay, who work for employers that provide varying levels of match, and who live (and may retire) in completely different parts of the country. But in preparing this number, we slop them all together and create—mush.

Worse than mush, actually. That number is never “enough” to provide anything remotely resembling an adequate source of retirement income, a point that is reiterated somewhat incessantly (and without the caveats about what it is an average of) in the press. I’ll allow that some of the permutations of this calculation—such as when we see that average by age demographic—can be instructive for longer-term trends, though my strong preference is for a median reading, but an average 401(k) balance is akin to an average reviewer rating on Amazon.com. It’s mathematically accurate—and completely useless.

IMHO, averages often obscure as much as they reveal—and this average does so more than most.


—Nevin E. Adams, JD

See “DB Returns Beat DC Returns Through 2008”

http://www.plansponsor.com/IMHO_Goal_Lines.aspx

Court Costs

Last week brought to light an aspect of 401(k) litigation that doesn’t generally get a lot of coverage—and the participant-plaintiff was presented with a $50,000 bill.

Now, at some level, this case was “just” another stock drop suit where some kinds of accounting issues contributed to a sudden (and ostensibly unexpected) drop in the price of company shares, including those held in the company’s 401(k) plan.1 These types of cases have cropped up one after another in the wake of the market downturn, and while the fact patterns behind the drop in share price vary slightly, the suits themselves allege pretty much the same thing: The plan fiduciaries kept the stock as a plan investment after it was no longer prudent to do so; to wit—after it suffered a precipitous drop in value.

Most of these cases don’t seem to get very far, the courts either deferring to a “presumption of prudence” (see “IMHO: Prudent Mien?” or, as in this case, finding that ERISA 404(c)’s safe harbor provided shelter (see”Court Gives Baxter 404(c) Protection in Stock Drop Suit”).


What’s interesting to me about this case isn’t that it is a stock drop suit, not that the judge found 404(c) applicability as a shield (honestly, I’m not “getting it” in this case), and certainly not that the employer prevailed (that seems a pretty common result in stock drop cases). No, what I found interesting—and what one would hope that plaintiffs who get lured to these actions in the future might want to keep in mind—is that they might lose more than just their day in court.

Not that it was an all-out victory for the defendants. Sure, they’ll get $50,000 from the participant-plaintiff, but they had asked for roughly $500,000—and that didn’t include attorney fees! But in this case, after spending some time discussing whether such awards could be made and on what grounds, Judge Gottschall decided that such fee awards were allowed—and then proceeded to pick apart the itemized requests for reimbursements with the fine-tooth comb of someone auditing a business expense reimbursement request (disallowing most for either a lack of specificity or an inability to document the origins of the expense).

Regardless, I found the list of expenses to be eye-opening2, and while the defendants may well have had other resources to tap to cover them, it was a stark reminder of just how expensive litigation can be, how much court costs, even when you win.

But maybe there’d be less of that if those who set such things in motion had to spend some of THEIR money when they’re wrong.

—Nevin E. Adams, JD

1 Specifically, U.S. District Judge Joan B. Gottschall of the U.S. District Court for the Northern District of Illinois granted the assessment of some $50,000 in costs associated with the litigation against David E. Rogers, who filed the suit against Baxter International in 2004. The suit, rejected by this same judge in 2010, alleged that Baxter continued offering company stock in its 401(k) plan after it was no longer prudent to do so (specifically, after its stock twice took tumbles after the reporting of disappointing earnings results, one involving fraud at a Brazilian subsidiary). Judge Gottschall ultimately dismissed the suit because she found that the employer qualified for protection under ERISA 404(c)’s safe harbor (see “Court Gives Baxter 404(c) Protection in Stock Drop Suit”).


2 From Baxter and former Baxter CEO Harry Kraemer:

(1) $23,163.44 for transcripts and video recordings of court hearings and depositions,
(2) $6,956.60 for photocopying court documents and preparation materials for depositions,
(3) $112,648.13 for exemplification and copying costs incurred in connection with responding to discovery requests (including nearly $78,500 in fees paid to an “e-discovery vendor” to process data into a readable format that could be reviewed and produced to plaintiff, as well as $15,000 spent digitalizing documents that existed in hardcopy format—at a rate the court said was about twice as expensive as simply copying them),
(4) $163,474.09 for the cost of computerized legal research.

From former Baxter CFO Brian Anderson:

(1) $4,070.95 for transcripts,
(2) $10,673.10 for photocopying,
(3) $2,687.04 for exemplification of trial exhibits,
(4) $173,150.00 for expert-witness expenses (apparently without providing any supporting documentation, so it was rejected).

“Conversation” Starters

There’s been a lot of talk coming from Washington of late about the need to have “an adult conversation” with the American people.

That conversation ostensibly includes discussion around the need to make changes to how this country spends its money and/or how much it needs to fund that spending. Almost certainly that “adult” conversation means decreasing entitlement benefits and/or increasing the tax “contributions” we make to fund those entitlement benefits. The politicians wonder if we’re ready for it; personally, I think the politicians are the only ones who aren’t.

Still, when someone talks about the need for an “adult” conversation, what they mean is that we need to talk about things you’d probably just as soon not think about, much less talk about. Those are generally serious topics with painful choices.


Regardless, we’re only just beginning to have those “adult conversations” with retirement plan participants. Sure, we talk about the need to save as much as they can, beginning as soon as they can—but still, for the very most part, the goals (and goal line) are vague and ambiguous. Here’s the adult conversation I think we should be having:

1. Social Security won’t be as much as you think it will be.

The Social Security Administration notes that for a worker retiring at age 66 in 2011, that maximum benefit amount is $2,366 per month, a figure based on earnings at the maximum taxable amount for EVERY year after age 21. In other words, that’s probably more than most of us would get. Note that the maximum benefit depends on the age a worker chooses to retire, among other things1. And that, of course, assumes that the current questions regarding Social Security’s longer-term financial viability are addressed, and/or that current benefit levels aren’t reduced.

In sum, the odds that you’ll get that current maximum aren’t large—and the odds that current benefits will be reduced seem pretty good.

2. Everybody doesn’t have a pension, and you probably don’t.

Now, by “pension” I mean the traditional defined benefit pension plan; one that, in the private sector anyway, was largely employer funded. According to EBRI, in 2008, 31% of all private-sector workers participated only in a 401(k)-type defined contribution plan, and 3% participated only in a defined benefit pension plan, while 12% were covered by both. So, only about 15% of private-sector workers were covered by a pension plan (coverage is much more common in the public sector).

The rest? Well, they didn’t have any kind of workplace retirement plan.

Despite this, studies pop up every so often that indicate that a remarkably large number of workers think they DO have a pension. Where do you fall out?

3. You won’t be able to work as long as you think you will.

According to the U.S. Census Bureau, the average retirement age in America is 62 (the average length of retirement is 18 years). Several years back, McKinsey & Co. did a survey and found that while nearly half of baby boomers expect to work past 65, only 13% of current retirees surveyed actually worked past that age. Forty percent of current retirees were forced to stop working earlier than they had planned (being laid-off was the most common reason, and the survey was taken well before the recent downturn). The average age when current retirees left the workforce, according to McKinsey: 59.

Think you’ll work past 65?2 You may, but perhaps not in the job you think.

4. You aren’t saving enough. That goes double if you’ve been automatically enrolled in your retirement savings plan.

How much you need to save is, of course, a matter of personal circumstances and even preference. It’s also impacted by things like the amount of support provided by Social Security, how old you are when you retire, and more importantly how—and how long—you live after you quit working. That said, if you’re only saving up to the level of the employer match (at least at most companies), and you don’t have a pension (see above), then it’s likely you’re not going to have enough saved at retirement to last you through your retirement. In fact, many workers don’t even save to the level necessary to receive the maximum employer match.

As for those who are automatically enrolled, they typically start their savings at a much lower rate than those who have taken the time to fill out an enrollment form. So you’ll have even less.

As for how much you need, last year a study by Hewitt Associates (now Aon Hewitt) said that the average U.S. employee would need 15.7 times their final pay in retirement resources to maintain their current standard of living during retirement.

How much do—and will—you have?


There you have it: the makings of an adult conversation with American workers. Have you had it with the participants you work with?

—Nevin E. Adams, JD

1 Not that Social Security isn’t an important source of retirement income. The biggest source of retirement income for Americans has been Social Security, and many older Americans (age 65 or older) rely entirely on their monthly Social Security checks. According to the Employee Benefit Research Institute (EBRI), in 2009, Social Security accounted for 49.0% of elderly women's income, compared with 35.9% of elderly men’s income. Compare that to pensions and annuities, which in 2009 accounted for 21.2% of elderly men's income, compared with 16.6% of elderly women’s. MORE at http://www.ebri.org/pdf/FFE176.30Sept10.IncEld-Gndr.Final.pdf

2 One of the most common responses of workers who know—or suspect—they haven’t saved enough is to assume that they’ll just keep working a few years longer. After all, these days most of us have jobs that can be done well beyond the traditional retirement age. And would that we could: working, and saving, five years longer will “cure” a surprising number of inadequate retirement savings situations.

Underlying Assumptions

Last week the Government Accountability Office (GAO) issued two reports focused on 401(k) plans: one on target-date funds, the other on potential conflicts of interest. As seems to be its custom in such reports, the GAO communicates its conclusion in the titles: “Key Information on Target Date Funds as Default Investments Should Be Provided to Plan Sponsors and Participants” and “Improved Regulation Could Better Protect Participants from Conflicts of Interest”—and, IMHO, there’s little controversy in those statements.

The reports themselves offer a great informational primer on target-date fund designs and issues (you’d be surprised how many plan sponsors still don’t quite grasp the concept of “glide path”) as well as the fee structures and revenue-sharing components that underlie the 401(k) retirement savings system. Both reports acknowledge that efforts are already under way to remedy the shortfalls the reports identified in both, while at the same time promoting solutions to those shortfalls that may not be cost/impact-justified.

As you peruse the target-date fund report (see “GAO Urges More Help with TDFs for Plan Sponsors”), you’re struck once again by the wide variety of answers to the question, “What is an appropriate asset allocation for participants at retirement age?” much less the assumptions that underpin it. One might well expect to find different assumptions regarding the markets, investment classes, and how the latter will respond to the former over the course of decades—and, in fact, these assumptions lie at the core of the target-date fund glide path and design. One might well expect (though many apparently didn’t) that those differences of opinion would translate into very real differences in asset allocation, even at retirement age.


There are, however, assumptions imbedded in these TDF approaches that, IMHO, are not nearly as well-communicated and/or understood by plan sponsors; assumptions that are predicated on certain participant behaviors that, in the words of the GAO report, “may not match what many participants actually do.” There is the assumption about what participants will do at the target date—either transfer those assets to another vehicle or retain their investment in the TDF.

This, of course, is the essence of the “to versus through” debate that has, since the 2008 financial crisis, drawn increasing scrutiny, if only because, IMHO, most plan sponsors (and plan participants) assumed that their target-date fund investment was designed to take them TO that date, not beyond it. Of course, that assumption bears within it another assumption: that the participant has managed to achieve a certain level of savings accumulation. Many haven’t, of course, and this knowledge underlies the assumption of those who employ the “through” approach to TDF designs, assuming that a longer equity exposure will serve to shore up that shortfall. Which, by the way, is another assumption imbedded in the “through” designs—that the participant will leave the money invested in that TDF (if not the plan itself) past their projected date of retirement.

Moreover, even the “to” TDF camp tends to assume that participants will buy an annuity at retirement, though they frequently don’t.

The GAO report noted that each of the eight TDF managers it contacted “considered contribution rates in establishing its asset allocation strategy,” noting that “some explicitly noted that these assumptions did not match the general pattern of contribution rates.” It will surprise few to learn that their assumptions were generally higher, but that they “hoped that rates will increase as workers adjust to DC plans serving as the sole employer-based retirement account,” according to the GAO report.

And, of course, since a growing number of participants were defaulted into TDFs to begin with, nobody has any real idea if they will behave the way participants have historically or not.

That said, the GAO has recommended that the Employee Benefits Security Administration (EBSA) (1) amend the QDIA regulations such that fiduciaries are required to document whether factors beyond age or retirement date are relevant, (2) provide guidance to plan fiduciaries on the limitations of benchmarks on those funds, and (3) expand participant TDF disclosures to provide information regarding the assumptions concerning participant contribution and withdrawal intentions. EBSA was at least open to the first two (though not commenting directly, since they are currently in the process of recrafting those regulations), though it resisted the last as being a “very complicated and subjective undertaking which could affect a plan sponsor’s decision to offer any target date fund option(s),” according to EBSA’s response to the GAO report.

But, IMHO, if that gives a plan sponsor pause in offering a particular option—well, perhaps it should.


—Nevin E, Adams, JD

See also “IMHO: When You Assume…”

The GAO target-date fund report is at http://www.gao.gov/new.items/d11118.pdf

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
--------------------------------------------------------------------------------

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