Goals Tending

The bad news is that times are still tough for many Americans—and surveys suggest that even those with jobs are nervous about their prospects for the future. The good news is that the current level of economic uncertainty seems to have brought about—at least for some—a heightened awareness of the need to set money aside for a rainy day, perhaps even those rainy days in retirement.

That said, the weak economy has certainly constrained the ability of many to save. In fact, a recent national survey found that an increasing number of Americans are having difficulty saving to meet goals ranging from meeting emergencies to affording retirement. The survey—released as part of America Saves Week(1)—noted that over the past three years, there has been a decline in the number of people who spend less than their income and save the difference, are building home equity, have adequate emergency savings, and think they are saving enough for retirement.

However, the survey also revealed that having a savings plan has beneficial financial effects, even for lower-income families. Consider that 85% of those who had a savings plan spent less than their income, (86% of this group felt they had sufficient emergency savings), and 3 in 4 said they were saving enough for retirement.

On the other hand, just 44% of those without a savings plan claimed to be spending less than their income, while 43% said they had sufficient emergency savings. Fewer than 1 in 4 of those with no savings plan said they were saving enough for retirement.

And yet, while those with a plan for savings had significantly better savings behaviors, fewer than half of survey respondents said they had “a savings plan with specific goals.”

It is admittedly simplistic to chasten those truly unable to save because of challenging economic circumstances. On the other hand, there are surely some today better able to weather those economic storms because they chose to set money aside during less tumultuous times.

That first step on that path, and it’s a critical one, is to Choose to Save.® As America Saves Week reminds us—and those trying to help others save—there’s no better time to start on that path to Save For Your Future® than today.

- Nevin E. Adams, JD

Note: Organizations interested in building/reinforcing a workplace savings campaign can find free resources—and a handy schedule of events around which to construct a program—here courtesy of the American Savings Education Council (ASEC).



Endnotes

(1) America Saves Week is an annual event where hundreds of national and local organizations promote good savings behavior and individuals are encouraged to assess their own saving status. America Saves Week is managed by the Consumer Federation of America (CFA), and the American Savings Education Council (ASEC). ASEC is a program of the Employee Benefit Research Institute (EBRI), which commissioned the survey, undertaken by Opinion Research Corp. You can find out more about America Saves Week here.

(2) Choose to Save® is sponsored by the nonprofit, nonpartisan Employee Benefit Research Institute Education and Research Fund (EBRI-ERF) and one of its programs, the American Savings Education Council (ASEC). The website and materials development have been underwritten through generous grants and additional support from EBRI members and ASEC Partner institutions.

“Short” Comings

In this business you are frequently asked “how much should people save for retirement?” Some try to answer that question with a degree of specificity that can be somewhat simplistic.

Let’s face it, even if those close enough to retirement to have a sense of what their pre-retirement income level is (and, flawed as that can be, most projections start from that assumption as a baseline for what you’ll want/need to spend in retirement—see “Replacement” Window ), most struggle to turn that into a real savings figure.

Ultimately, of course, a reliable answer to that retirement savings question requires an understanding of the individual’s goals and/or financial needs—and, predicated on certain assumptions, there are any number of tools that can help individuals set a target and (based on that) establish a savings plan.

However, the planning question that almost never gets asked is: “And how certain do you want to be of achieving that target?”

Asked that question, I suspect most individuals would respond, “100%.” Unfortunately, much of the modeling that is being used to help individuals set those targets is based on averages: things such as average life expectancy, average investment experience, and—in the really in-depth models—average health care expenditures in retirement.(1) As a result, those models (useful as they might be in terms of framing a planning discussion) produce a result that will fall short…50% of the time.

In fairness, some of those shortfalls could be small. After all, if you’re a dollar short, you’re still short a dollar. But in some cases those shortfalls could be larger—much larger, in fact(2).

And that’s a fact worth keeping in mind.

- Nevin E. Adams, JD


(1) For more information on these kinds of projections—and EBRI’s Retirement Readiness Rating—see EBRI Issue Brief No. 344

(2) For a more detailed discussion about those projected shortfalls—and how they can vary according to such factors as gender, marital status, and income levels—see the October 2010 EBRI Notes, Vol. 31, No. 10.

Road "Construction"

The Senate Finance Committee is positioned to pass a highway bill, funded at least in part by changing the tax treatment on retirement accounts.

Specifically, the modified chairman’s mark of the proposed Highway Investment, Job Creation and Economic Growth bill would require that age 70-1/2 account distributions be treated, for tax purposes, as distributed within five years of the death of the account holder (unless the beneficiary is the account holder’s age, a child with special needs, or older than 70).

Under current law, holders of IRAs and 401(k)-type accounts are required to begin taking taxable distributions from those accounts once they reach age 70-1/2, though if the account holder dies, the taxation of the account is spread over the life of the beneficiary. According to a Senate Finance Committee press release, this particular provision is estimated to raise $4.648 billion over 10 years.

The bill’s prospects in the Senate remain unclear, and the Wall Street Journal notes that the House version does not contain the retirement account tax change. However, the Senate provision demonstrates how the current budgetary and economic pressures in Congress—particularly in an election year—make the tax treatment of retirement savings a major target for any number of legislative initiatives, including those that have little or nothing to do with retirement.

The Employee Benefit Research Institute (EBRI) has long provided a credible and objective source of information for both policymakers and regulators, including recent testimony provided to:

• The Senate Finance Committee on “Tax Reform Options: Promoting Retirement Security”, and “The Impact of Modifying the Exclusion of Employee Contributions for Retirement Savings Plans From Taxable Income: Results From the 2011 Retirement Confidence Survey.”

• The Senate Committee on Health, Education, Labor, and Pensions on “The Power of Pensions: Building a Strong Middle Class and a Strong Economy,” and

• The House Committee on Education and the Workforce, Subcommittee on Health, Employment, Labor, and Pensions, regarding “Retirement Security: Challenges Confronting Pension Plan Sponsors, Workers, and Retirees.”

The impact of certain tax reform proposals was evaluated in the November 2011 EBRI Issue Brief, and will be updated to include input from the 2012 Retirement Confidence Survey next month.

- Nevin E. Adams, JD


The Employee Benefit Research Institute is a private, nonprofit research institute based in Washington, DC, that focuses on health, savings, retirement, and economic security issues. EBRI offers a unique perspective in that we do not lobby nor take policy positions. The work of EBRI is made possible by funding from its members and sponsors, which includes a broad range of organizations involved in benefits issues. For a full list see EBRI’s Members.

Above “Average”

Every so often an industry survey will come out with an “average” 401(k) balance(1). The specific numbers vary, but they are consistently less than even the most optimistic would see as sufficient to provide a financially viable retirement.

Now, in fairness, the validity of an “average,” while mathematically simple, depends heavily on its components. Most are no more than the total of all the balances of those in the 401(k), from those just entering the workforce (and thus, by definition, with negligible balances) – and with decades to go to retirement – to those who are perhaps just days away from that point. Looking at no more than the “average,” you can’t tell how many are in which category. So, while the average can, over time, provide a sense of the direction in which things are moving, it tells you very little about the adequacy of that savings to fund an individual retirement.

One way to help provide a more meaningful measure is to segment those balances by specific age demographics. In fact, EBRI has long provided not only an average 401(k) balance, but also totals for different groups. To give you a sense of the difference that can make, at year-end 2010, while the average 401(k) balance was $60,329, the average 401(k) balance for those in their 60s – at least for those with 20 years of tenure – was $159,654.

In fairness, $159,654 may not look like very much to have saved by someone in their 60s. But even then, there are many things we don’t know about that person’s individual circumstances. We don’t know if they have a defined benefit pension, for one thing, nor do we know if they have savings outside their workplace. Perhaps just as significantly, we don’t know if that average takes into account their accumulated savings in all defined contribution plans, including those savings that might have been rolled into individual retirement accounts (IRAs) along the way.

In testimony before the Senate Finance Committee last fall(2), EBRI Director of Research Jack VanDerhei noted that “[p]articipation in a retirement plan through current employment at a specific moment in time does not tell the full story of a worker’s preparedness for retirement or the availability of some form of retirement income from an employment-based retirement plan.” He went on to caution, “Unfortunately, the ‘success’ of these plans are sometimes measured by metrics that are not at all relevant to the potential for defined contribution plans to provide a significant portion of a worker’s pre‐retirement income. For example, some analysts will merely report the average balance in defined contribution plans (most commonly the 401(k) subset of this universe) and attempt to assess the value of these plans by determining the amount of annual income that this lump sum amount could be converted to at retirement age. Of course, this concept does not adjust for the fact that the vast majority of 401(k) participants are years, if not decades, away from retirement age. Moreover, even if one does look at the average balances for workers near retirement age, it is obviously not correct to look only at the 401(k) balance with the employee’s current employer. For example, an employee age 60 may have very recently changed jobs and rolled over a substantial account balance from his previous employer to an IRA.”

Sure enough, as I sit here today, I have three separate 401(k) accounts at three separate employers, a rollover IRA, and a SEP.

Anyone trying to glean a sense of my retirement prospects while looking only at my current 401(k) balance surely wouldn’t feel very optimistic.

But then, they’d only be looking at part of the picture.

- Nevin E. Adams, JD

(1) Including EBRI – see “401(k) Plan Asset Allocation, Account Balances, and Loan Activity In 2010”

(2) A copy of the testimony is available here. See also “Tax Reform Options: Promoting Retirement Security”

Pats or Giants? Your Portfolio May Care

There could be a lot more riding on Sunday’s Super Bowl than you think.

If the results of the Super Bowl exert any influence on the markets – as proponents of the so-called Super Bowl Theory claim – then 2012 could prove to be truly tumultuous.

For the "uninitiated," the theory (invented/popularized by the late New York Times sportswriter Leonard Koppett) says that a win by a team from the old National Football League is a precursor to rising stock values for the year (at least as measured by the S&P 500), but if a team from the old American Football League (AFL) prevails, stocks will fall in the coming year.

This year we have a team from the old NFL (the NY Giants) taking on one from the old AFL (the New England Patriots, who once were the AFL’s Boston Patriots). So, if the Giants prevail, 2012 should be a good year for stocks – and if things go the Patriots’ way, well…

On the Other Hand…

Of course, as even loyal proponents will admit, this theory used to work a lot better than it has in recent years. The most obvious (and recent) proof of that was Super Bowl XLII, where these same two teams met – and the underdog New York Giants pulled off a remarkable victory – but the S&P 500 still shed…well, we don’t really need to relive that here (particularly for Patriots fans).

Last year’s contest brought together two classic NFL teams; the Pittsburgh Steelers (representing the American Football Conference) and the National Football Conference’s Green Bay Packers. Both those teams had some of the oldest, deepest, and yes, most “storied” NFL roots, with the Steelers formed in 1933 (as the Pittsburgh Pirates), and the Packers, founded in 1919. So, according to the Super Bowl Theory, 2011 should have been a good year for stocks (because, regardless of who won, an NFL team would prevail). But, as you may recall, while the Dow gained ground for the year, the S&P 500 was – well, flat.

On the other hand, 2010 turned out pretty well – a year when the New Orleans Saints bested the Indianapolis Colts, though it was, after all, also a Super Bowl featuring two teams with NFL roots. And it was also the case in 2009 when both Super Bowl teams - the Arizona Cardinals and the Pittsburgh Steelers – had NFL roots (the Arizona Cardinals by way of one time being the St. Louis Cardinals), AND in 2007 when the S&P 500 rose 3.53% as the Indianapolis Colts beat the Chicago Bears 29-17. That also turned out to be the case in 2006 when the Pittsburgh Steelers (yes, again) defeated the Seattle Seahawks in another battle of two legacy NFL clubs. That turned out to be a good year for equities, with the S&P 500 closing up more than 13%.

Except When It Doesn’t…

Of course, as even loyal proponents will admit, this theory used to work a lot better than it has in recent years. The most obvious (and recent) proof of that was the aforementioned Super Bowl XLII where the New York Giants pulled off a remarkable victory – but the S&P 500 still shed…well, we don’t really need to relive that again (particularly for Patriots fans).
Times were better for Patriots fans in 2005 when they bested the NFC’s Philadelphia Eagles 24-21. According to the Super Bowl Theory, the markets should have been down for the year. However, in 2005 the S&P 500 climbed 2.55%.

Of course, the 2002 win by those same New England Patriots accurately foretold the continuation of the bear market into a third year (at the time, the first accurate result in five years). But the Patriots 2004 Super Bowl win against the Carolina Panthers failed to anticipate a fall rally that helped push the S&P 500 to a near 9% gain that year, sacking the indicator for another loss.

Consider also that, despite victories by the old AFL Denver Broncos in 1998 and 1999, the S&P 500 continued its winning ways, while victories by the NFL legacy St. Louis (by way of Los Angeles) Rams (with the just-retired Arizona quarterback Kurt Warner calling plays) and the Baltimore (by way of NFL legacy Cleveland Browns) Ravens did nothing to dispel the bear markets of 2000 and 2001.

Winning “Streaks”

All in all, the Super Bowl Theory has been on the money more often than not – much more often than not, in fact - but in true sports fashion, has had some winning streaks and some rough patches. Consider that it “worked” 28 times between 1967 and 1997 – then went 0-4 between 1998 and 2001 – only to get back on track from 2002 on (purists still dispute how to interpret Tampa Bay’s victory in 2003, since the Buccaneers spent their first NFL season in the AFC before moving to the NFC).

As for Sunday – the oddsmakers are giving the nod to the Patriots – though not by much.

It looks like it could be a good game – and that, whether you are a proponent of the Super Bowl Theory or not – would be one in which whoever wins, we all will!

Nevin E. Adams, JD


Note:

Other exceptions included: 1970, when AFC Kansas City won, and the S&P index gained 0.1%; 1984, when AFC Los Angeles Raiders won, and the S&P rose 1.4%; 1990, when NFC San Francisco prevailed, and the S&P lost 6.56%; and 1994, when NFC Dallas triumphed, but the S&P index fell 1.53%.

“Essential” Information

About a month ago, the Department of Health and Human Services (HHS) released a bulletin outlining proposed policies that it said would “give states more flexibility and freedom to implement the Affordable Care Act.”

It did that by proposing to allow individual states to select a single benchmark to serve as the standard for qualified health plans inside the Exchange operating in their state – and for the plans offered in the individual and small group markets in their state. The Patient Protection and Affordable Care Act requires that health insurance plans offered in the individual and small group markets, both inside and outside the ”Affordable Insurance Exchanges” (Exchanges), offer a comprehensive package of items and services, known as “essential health benefits(1).” This benchmark would set the standard of the items and services included in the essential health benefits package called for in PPACA(2).

Acknowledging that “[t]There is not yet a national standard for plan reporting of benefits,” HHS also noted that PPACA does not provide a definition of “typical,” and it therefore gathered benefit information on large employer plans (which account for the majority of employer plan enrollees), small employer products (which account for the majority of employer plans), and plans offered to public employees (3).

In releasing its proposal, HHS noted that “[n]ot every benchmark plan includes coverage of all 10 categories of benefits identified in the Affordable Care Act” and that “the most commonly non-covered categories of benefits among typical employer plans are habilitative services, pediatric oral services, and pediatric vision services.”

However, HHS did at least suggest some boundaries, noting that states “would choose one of the following health insurance plans as a benchmark”:

•One of the three largest small group plans in the state (4);
•One of the three largest state employee health plans;
•One of the three largest federal employee health plan options;
•The largest HMO plan offered in the state’s commercial market.

HHS is soliciting public input on this proposal – though comments are due by January 31, 2012. You can send comments to EssentialHealthBenefits@cms.hhs.gov.


Nevin E. Adams, JD


The essential health benefits bulletin is online at http://cciio.cms.gov/resources/files/Files2/12162011/essential_health_benefits_bulletin.pdf

A fact sheet on the essential health benefits bulletin is online at: http://www.healthcare.gov/news/factsheets/2011/12/essential-health-benefits12162011a.html

The Institute of Medicine’s report on Essential Health Benefits is online at http://www.iom.edu/Reports/2011/Essential-Health-Benefits-Balancing-Coverage-and-Cost.aspx

Note: The HHS bulletin addressed only the services and items covered by a health plan, not the cost sharing, such as deductibles, copayments, and coinsurance. HHS noted that the cost-sharing features will be addressed in future bulletins and cost-sharing rules will determine the actuarial value of the plan.

See also Paul Fronstin and Murray N. Ross, “Addressing Health Care Market Reform Through an Insurance Exchange: Essential Policy Components, the Public Plan Option, and Other Issues to Consider,” EBRI Issue Brief, no. 330, June 2009.

(1)Beginning January 1, 2014, qualified health plans sold in health insurance exchanges must cover all essential benefits. In addition, new plans sold in the individual and small group markets must cover essential benefits, regardless of whether plans are sold inside or outside of state health insurance exchanges.

(2) The following benefit classes are identified as essential benefit classes
◦Ambulatory patient services
◦Emergency services
◦Hospitalization
◦Maternity and newborn care
◦Mental health and substance use disorder services, including behavioral health treatment
◦Prescription drugs
◦Rehabilitative and habilitative services and devices
◦Laboratory services
◦Preventive and wellness services and chronic disease management
◦Pediatric services, including oral and vision care

(3) HHS noted that it has considered a report on employer plans submitted by the Department of Labor (DOL), recommendations on the process for defining and updating EHB from the Institute of Medicine (IOM), and input from the public and other interested stakeholders during a series of public listening sessions. In 2010, Paul Fronstin, Ph.D, Director, Health Research & Education Program at the Employee Benefit Research Institute (EBRI) was appointed to the Institute of Medicine (IOM) Committee on Determination of Essential Health Benefits. For more information on the essential benefits proposal, you can contact him at Fronstin@ebri.org.

(4) an Illustrative List of the Largest Three Small Group Products by State was just published by HHS at http://cciio.cms.gov/resources/files/Files2/01272012/top_three_plans_by_enrollment_508_20120125.pdf.

Replacement “Window”

There is an old adage that cautions about the consequences “when you assume…”

And yet, the business of retirement planning is replete with any number of so-called “common wisdom” rules of thumb. Doubtless many have well-intentioned origins – to make complicated concepts easier to grasp, and thus to address.

One of the more pervasive notions is that a realistic target for retirement savings can be determined by accumulating a sum that will provide an income stream equal to a percentage of one’s pre-retirement earnings – a sum that is generally expressed as 70-80% of what you earn prior to retirement. This starting point - generally called
a "replacement ratio" - includes any number of imbedded assumptions, perhaps most significantly that the individual will need to spend less post-retirement, generally understood to be on things such as taxes, housing, and various work-related expenses (including saving for retirement).

Moreover, the replacement rate approach represents, at best, an indirect approach in evaluating whether retired workers can maintain their standard of living in retirement – because what matters is not how much you have to spend, but how much you need to spend. A recent research report sponsored by the Society of Actuaries’ Pension Section, “Moving Beyond the Limitations of Traditional Replacement Rates”, also highlights the limitations of relying on replacement rates. A recent paper published by the Center for Retirement Research at Boston College (“How Much to Save for a Secure Retirement”) acknowledges that “the most direct approach would be a comparison of household consumption while working with consumption after retirement” – before launching into a discussion that instead draws on a relatively simplistic series of assumptions , not the least of which is that the goal of retirement saving is a replacement rate of 80-percent of one’s pre-retirement income.

The problem is that these assumptions are just that – and, as a result, in some cases that 80% will be more than is required – and for some it will, unfortunately, be less. Furthermore, most of the assumptions underpinning such replacement ratio targets are implicitly using a 50 percent probability of success.

Additionally, these replacement rate models tend to ignore one – or more – of the most important retirement risks; investment risk, longevity risk, and risk of potentially catastrophic health care costs.

The reality is that there is no “correct” single replacement rate, but the factors that undermine those simplistic rules of thumb are quantifiable. Those factors, and the importance of probabilities in retirement planning are detailed in “Measuring Retirement Income Adequacy: Calculating Realistic Income Replacement Rates (EBRI Issue Brief No. 297).

After all, it isn’t what you have accumulated at retirement that matters, it’s how much you have left at the end of it.

- Nevin E. Adams, JD

'Under' Covered?

One of the more pervasive statistics bandied around about the voluntary retirement system is that only about half of working Americans are covered by a workplace retirement plan.

It’s a data point that is widely and openly presented as fact—not only by those inclined to dismiss the current system as inadequate, but even by some of its most ardent champions, who see that result as a call to action for expanded access to these programs.

There’s only one problem: It doesn’t tell the whole story.

A 2011 EBRI report found that in 2010, 77.6 million workers worked for an employer/union that did not sponsor a retirement plan and 91.0 million workers did not participate in a plan. However, focusing in on employees who did not work for an employer that sponsored a plan, 9.0 million were self‐employed.

Of the remaining 68.5 million:

• 6.2 million were under the age of 21, and
• 3.7 million were age 65 or older.
• 32.0 million (approximately) were not full‐time, full‐year workers, and
• 17.2 million had annual earnings of less than $10,000.

Now, admittedly, many of these workers would fall into several of these categories simultaneously (they might, for instance be under age 21, make less than $10,000 in annual earnings, and not be a full‐time, full‐year worker).

But if you adjust these numbers so that only workers who work full-time, full‐year, make $10,000 or more in annual earnings, and work for an employer with 50 or more employees, only 17.4 million workers (or 26.7 percent) would be included among those working for an employer that did not sponsor a plan.

Of course, another way to look at this last number is that 73.3 percent of these workers with those characteristics worked for an employer that DID sponsor a retirement plan in 2010.

And that’s a lot more than 50 percent.

- Nevin E. Adams, JD

Pension Penchants

On Dec. 8, the Pension Benefit Guaranty Corporation (PBGC) convened a forum on “the Future of Pensions.”

The forum was structured around two separate panels of experts (including EBRI President and CEO Dallas Salisbury) who spoke to an audience of pension industry thought leaders on the current retirement landscape, as well as potential enhancements and solutions.

Among the insights/observations shared in the session:

• In 1975, among those over age 65, 23 percent had pension/annuity income; in 2010, that had risen to 33 percent.


• According to EBRI’s Retirement Readiness Rating (RRR) 57 percent of those under age 65 were considered to be at risk of not having sufficient retirement resources to pay for “basic” retirement expenditures and uninsured health care costs, a figure that had declined to 45 percent in 2010.

• In fact, a world in which 30-year job tenure (and associated pension benefit) was never a reality for 80 percent of the nation’s workers. Rather, it was a myth that led “too many to do too little for too long,” leaving many with no retirement resources other than Social Security. Today, more Americans will retire at far more fiscally appropriate times, with more assets from which to draw.

• Financial insecurity looms large, but has increased consumer awareness of the situation, the need to prepare, and the possibility of scaling back retirement expectations.

• Today, about 18 percent of those over age 65 are still in the workforce; 10 years ago, just 11% were.

• People assume they will be able to work longer—but the data indicate they won’t be able to, for reasons outside their control.

• Regulation/legislation does impact/influence the decision by employers to offer workplace retirement plans.

• Employers are rational when it comes to offering benefits—and they consider both shareholder value and employees in their decision-making.

• Employees are also rational when it comes to making decisions; health care a more immediate concern for many than retirement.

• People make rational decisions, but they also tend to be inefficient about those decisions.

• Americans are far too optimistic—they assume that their pay will continue to increase, despite data that indicates that it plateaus for many in their mid-40s. They assume that they will save more later, but they don’t.

• National retirement plan participation rates of 50 percent include workers (part-timers, those under 21) that aren’t normally covered by these plans.

• Health care costs impact certainty/predictability of benefit programs and individual savings rates.

• It’s not how much you have at retirement, it’s how much you have at the end of retirement.

• Guaranteed returns are very expensive.

• The better we understand retirement risks, the better we’ll be able to mitigate them.

• Social Security offers universal defined benefit (DB) coverage—and offers a critical foundation for other retirement solutions to build on.

• If employers are going to take on the risk of offering a DB plan, there has to be some reward beyond just doing right by their retirees.

• Predictability is a key factor in employer decision-making on retirement plan designs.

• Regulations tend to be “one size fits all,” but employers are not, and vary greatly.

• “If you tell employers they can never take it out, they will never put it in.”

• Providing lifetime income in a low interest rate environment is very expensive.

• Employers care about retirement income—don’t drive them away from providing these programs.

• Investment risk, interest rate risk and longevity risk represent the major DB risks for employers. These risks are shifted to workers in the shift to defined contribution (DC) retirement plans, but the impact is very different. Investment risk and interest rate risk have an immediate impact on employer, but not on the individual saver. However, employers have the ability to pool (and thus mitigate) longevity risk—an option not available to individual savers.

- Nevin E. Adams, JD

SURVEY SAYS...

One of the things I enjoyed most about writing/publishing NewsDash over a 16-year span (12 years at PLANSPONSOR, and four before that as an internal email) was doing a weekly survey – on a wide variety of topics, both serious – and not-so-serious.

My favorite of the “regular” surveys (and there weren’t many that repeated, even over all that time) was the annual survey of holiday movies. And while there were certain perennial favorites, it seemed like every year there was a real “battle” for the top slot among readers.

As for this year – well, the survey was admittedly a bit ad hoc – but the results were just as fun. So, here’s the top 5:

Christmas Vacation (26.1%)

It’s a Wonderful Life (15.2%)

Elf (13.0%)

How the Grinch Stole Christmas (4.3%)

A Charlie Brown Christmas (4.3%)

…asked to choose a second favorite, It’s a Wonderful Life and Elf tied for first, with 14% of the vote.

You can check out the NewsDash survey from 2010 at http://www.plansponsor.com/SURVEY_SAYS_What_is_Your_Favorite_Holiday_Movie_2010.aspx

Thanks to all who participated in this survey… and to all a good night! Check back here in 2012 for new blog posts…

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.

This was a Web site that purported to offer a real-time assessment of your "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!

--------------------------------------------------------------------------------
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!

Thanks, Giving

After a dozen years here at PLANSPONSOR, effective November 1, I have joined the Employee Benefit Research Institute (EBRI) in Washington, D.C., as Director, Education and External Relations, and Co-Director of the EBRI Center for Research on Retirement Income.

I have long had a strong personal and professional admiration for the work that EBRI does in helping provide our industry with valuable and objective information and am thrilled to be able to be part of those efforts at this critical juncture.

It has been my great privilege over this past decade and change to share with you some of my thoughts and observations in this space. You have been generous both with your comments and commentary on those musings, as well as our publications overall.

While it’s not quite Thanksgiving, I thought I would dedicate this final “IMHO” to sharing some of the things for which I’m thankful:

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 prior years still seem committed to restoring those original levels.

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—and continue to do so, despite the uncertainties still attendant with health-care legislation.


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 from 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 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 have been given an opportunity to be part of something great here at PLANSPONSOR; to have seen a little internal e-mail publication called “NewsDash” come to reach—and touch—the lives of nearly 70,000 readers worldwide. I’m thankful to have been able, in some small way, to make a difference—and to have before me a marvelous opportunity to continue to do so.

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 years. I’m thankful for the constant—and enthusiastic—support of our advertisers throughout good times—and not-so-good times.

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 over the years—and for the ongoing support and appreciation of readers like you.

Thank you!

Nevin E. Adams, JD

My new email is nadams@ebri.org.

Lessened, Learned?

When I’m talking to plan sponsors (and advisers) about the challenges of being an ERISA fiduciary, I’m generally inclined to emphasize the awesome responsibilities that come with the “assignment”: the impact exerted on participant retirement savings; the admonition to ensure that fees paid by, and services rendered to, the plan are reasonable; the implications of the prudent expert rule; and the liability (and personal liability, at that), not only for your own acts, but for the acts of your co-fiduciaries (and hence an urgency around knowing who those co-fiduciaries are). I’m inclined to talk about the limitations of ERISA 404(c) in providing a shield against all that potential liability.

I’ll remind them that the Labor Department considers them responsible for all participant-directed investments outside 404(c)’s provisions, and note how frequently participant directions tend to fall outside those provisions. I’ll tell them how important it is to read the plan document, and to make sure the plan is operated according to its terms. I will remind them that the power to appoint members to the plan committee has been found to extend fiduciary liability to those who do the appointing, and I will, from time to time, remind them that company stock has been called “the most dangerous plan investment,” in no small part because a group of 401(k) participants is a class-action litigant’s dream team.

And then we get a court decision like the 2nd Circuit’s recent holding in Gray v. Citigroup, Inc., and I wonder if I understand ERISA at all.

The Case

Gray is a “stock drop” case (see 2nd “Circuit Affirms Dismissal of Citigroup Stock Drop Charges”), brought on behalf of Citigroup participants whose 401(k) balances were invested in the stock of their employer, stock that dropped precipitously in value in the wake of the 2008 financial crisis, in response to the collapse of the subprime mortgage market. As is common in such cases, the participant-plaintiffs alleged that the stock was retained as a plan investment option after it was no longer prudent to do so, and that those on, and who appointed, the plan investment committee were not only in a position to know that, but to know that well before the stock tumbled in value.

However, the 2nd Circuit noted—and supported—the determination of the lower court that “defendants had no discretion whatsoever to eliminate Citigroup stock as an investment option, and defendants were not acting as fiduciaries to the extent that they maintained Citigroup stock as an investment option.” Moreover, it noted—and supported the District Court’s determination that “even if defendants did have discretion to eliminate Citigroup stock, they were entitled to a presumption that investment in the stock, in accordance with the Plans’ terms, was prudent….”

Now, how is it that the plan’s committee had “no discretion whatsoever” to deal with the company stock investment? Quite simply, because the plan document called for that as an investment option.1 That’s right, apparently the court felt that the plan fiduciaries had no choice in deciding to keep that option in the plan and available because, to put it simply, “the plan document made them do it.”2

Presumption of Prudence

As for the alternative argument, the “presumption of prudence”? Well, it’s come up before in Moench v. Robertson, a 3rd Circuit decision not only cited here, but subsequently adopted by other courts. In Moench, the 3rd Circuit found that a plan sponsor that offered stock as an investment in an Employee Stock Ownership Plan (ESOP) was entitled to a presumption of prudence.3 Moench is an older case (1995), and from a time when suits based on employer stock investments were less prevalent than today.

More recently, such cases have become nearly as routine as a 100-point drop in the Dow, and the judicial system, honoring precedent, and what it has chosen to view as a Congressional endorsement for employer stock investment in these programs, has led a growing number of jurisdictions to summarily (if not peremptorily) dismiss many of these actions. Indeed, when all is said and done, it now seems as though the courts are comfortable imposing a less stringent review of the decision to invest in employer stock than in any other investment on the retirement plan menu.4

Moreover, for those that have, since Enron anyway, worried about the potentially conflicting duties owed by certain committee members to shareholders and plan participants, the 2nd Circuit provided a moment of unexpected “clarity,” resolving with a pen stroke a dilemma that has concerned plan fiduciaries for at least the past decade by declaring, “We also hold that defendants did not have an affirmative duty to disclose to plan participants non-public information regarding the expected performance of Citigroup stock….”

Ironically, it was this very 2nd Circuit that, just a few years ago, called to mind the notion that ERISA’s fiduciary standards of conduct are “the highest known to the law.”

Perhaps they still are, but, IMHO, this decision serves only to lessen that standard.

—Nevin E. Adams, JD

Footnotes:

1 More specifically, the 2nd Circuit noted that “[a] person is only subject to these fiduciary duties ‘to the extent’ that the person, among other things, ‘exercises any discretionary authority or discretionary control respecting management of such plan’ or ‘has any discretionary authority or discretionary responsibility in the administration of such plan.’” And then it went on to decide that the plan fiduciary’s obligation to honor the terms of the plan document effectively displaced that discretionary authority.

2 “When, as here, plan documents define an EIAP as ‘comprised of shares of” employer stock, and authorize the holding of ‘cash and short-term investments’ only to facilitate the ‘orderly purchase’ of more company stock, the fiduciary is given little discretion to alter the composition of investments.”

3 More than a year ago, I noted that “in effect, this ‘presumption of prudence’ seems to have become a magic talisman against which no claim of malfeasance can be successfully alleged, much less established, simply because the courts have discovered (a cynic might say created) a presumption that holding employer stock is appropriate.” (see “IMHO: Prudent Mien?”).

4 One needn’t read between the lines here. In the court’s own words, “We reject plaintiffs’ argument—endorsed by the dissent—that we should analyze the decision to offer the Stock Fund as we would a fiduciary’s decision to offer any other investment option. We agree with the Sixth and Ninth Circuits that were it otherwise, fiduciaries would be equally vulnerable to suit either for not selling if they adhered to the plan’s terms and the company stock decreased in value, or for deviating from the plan by selling if the stock later increased in value.” (In the court’s defense, plan sponsors have, in fact, been sued for selling stock that later increased in value in a couple of rare situations.)

The 2nd Circuit’s decision is available HERE.

You might also find the amicus brief filed by the Department of Labor instructive HERE:

IMHO: Catching Your Drift

I recently found myself driving in an unfamiliar city without the aid of a GPS (global positioning system).

Sadly, I had become so accustomed to having that device available, I hadn’t even taken the time to print out instructions from any of the usual Internet sources, and while there were maps in the vehicle, none were of the area in question. That didn’t matter, I told myself—because I had made that drive before, had a pretty good idea of where I needed to be and, armed with a pretty reliable memory for such things, I set out with only a little trepidation.

Just about the time I was getting pretty confident in my ability to navigate without all the high-tech “crutches,” I was thrown a series of curves. The primary route was closed due to construction, the rerouting didn’t seem to take into account where I was trying to get to, an unexpected one-way street suddenly emerged going the “wrong” way, and then I found myself directed onto a parkway whose designers had apparently never contemplated the need of a misdirected driver to pull off and turn around.


In just a matter of minutes, I went from coasting along cool and confident to a state of growing concern (it felt suspiciously like panic) as I began to be drawn what I was sure was miles off my designed course, and heading further away all the time.

Then I remembered that I DID have a GPS on my phone. One that, admittedly, lacked the calm, reassuring voice of the more traditional version giving me step-by-step directions, but it was something. However, it wasn’t the ability of the device to offer routing instructions that I found most useful—the screen was too small (and my need to watch traffic too great) to do much with that feature.

The feature that saved me that day was the blue dot—that element of the GPS that, with a simple touch, will show where you are. That information, presented on the map of my surroundings, allowed me to not only find where I was, but to then visualize where I needed to be and begin heading in that direction. Oh, I missed a turn or two after that, but thanks to that locator “dot,” I quickly saw when I made those mistakes and was able to remedy them before going miles out of my way.

Most participants don’t set out on their retirement savings journey with a confident sense that they know where they are going, much less any real sense of how to get there. Nonetheless, by the time they sit through an education session (or two), make their way through the attendant materials, and try to complete the requisite enrollment forms, they may well feel that they are heading in the right direction.

And then, something happens—it doesn’t have to be an “event” like the financial crisis of 2008 (though it can be); sometimes it’s as simple as just not having had the time to pay attention to your account while the market decides to go on a losing (or winning) streak, or it can simply be a result of the preoccupations that come with those ordinary, but often unplanned, changes in your daily (and financial) life. It can be any of a series of things that pop up just about the time you think you have nothing but smooth sailing ahead; the things that crop up to suddenly “close for construction” the path you had thought you’d be able to follow for a long and uneventful journey.

At times like that—and, arguably, at any time—it’s important for participants—and plan sponsors—to have some kind of idea not only of where they want to be, but where they are relative to that destination.

Because, after all, it’s a lot easier to stay—and get back—on track the sooner you find out you’ve begun to drift from it.

—Nevin E. Adams, JD .

The IKEA “Experience”

We spent some time this past weekend getting my eldest daughter squared away in her new apartment. It’s her first, and as with nearly all first apartments, there is a lot you need to get that you never needed in your room at home or in your dorm away at college. So we headed out to IKEA.

Those who have never had occasion to visit an IKEA store should check it out at least once. They are mammoth stores—big on the outside and seemingly even more massive on the inside. It’s the kind of store you can easily get lost in (not to worry, they have their own food court inside), and yet it’s very hard to simply get from point A to point B, even if you know what you want to buy. About the only way to get through the store is to wander along the winding path the IKEA folks have constructed that takes you—literally—through every display imaginable.1

But the really interesting thing about the IKEA shopping process is that you not only have to find what you want, you must write down the part number(s), and—at the end of your journey through this mammoth store—you must assemble the requisite pieces/boxes in the warehouse.2 You not only have to make sure that you have each of your purchases, you frequently have to make sure that you have all the (separate) boxes into which your purchase has been divided. Ironically, the consummation of that IKEA shopping experience is that you get to go home and put your purchases together.


Now, I’ve never met anyone who didn’t like the IKEA “experience.” Oh, some might not care for the quality of the furniture, or the selection—and surely I’m not the only one who wonders why I have to do all the work (I understand that it’s supposed to be cheaper, but I haven’t found it to be cheap). But it’s not for those in a hurry, and at the end of the night, I kept feeling like I should be able to present someone else with the bill!

As I was loading up the family van with our purchases, I wondered if this is how participants feel about the current structure of our voluntary savings system: one (still) fraught with a mind-numbing array of choices that have to be assembled at the point of enrollment by participants who want to do the right thing(s), but who find themselves stuck trying to follow an instruction manual they don’t quite understand, surrounded by people who seem to get it (but probably don’t, either), only to find themselves at the checkout counter wondering if they do, in fact, have everything they need—only to then have to go home and put it together themselves.

And I wonder if, when they tally up that bill, they too will observe that it’s probably supposed to be cheaper that way—but find that it’s not exactly cheap.

—Nevin E. Adams, JD

1 This turns out to be an interesting way to create the kind of “impulse” purchasing that most retail stores only have positioned at the checkout counter, as one continually wanders past interesting things that you hadn’t even thought you needed. On the other hand, the maps posted along the way that purport to show you where you are were not exactly reassuring to those in a hurry.

2 A place reminiscent of that last scene in “Raiders of the Lost Ark” (albeit with numbered shelves and aisles).

“Nigh” Five

A few weeks back, I offered some notions about what the next five years will bring in terms of industry trends (see “IMHO: Fifth ‘Avenues’”). However, in preparing for our recent PLANADVISER National Conference, I came up with five more.

Everybody isn’t going to do automatic enrollment.

Without question, automatic enrollment has done much to shore up the retirement savings rates of American workers. For plan sponsors and participants alike, the efficacy of an approach that doesn’t require participants to complete an enrollment form, deliberate over investment choices, set upon a desired rate of savings, or even darken the door of an education meeting has done much to get tens of thousands of workers off on the right retirement savings foot. And, for the vast majority of workers, the ability to do the right thing without doing anything at all has not only been well-received, but much appreciated as well.

Not that automatic enrollment as outlined by the Pension Protection Act (PPA) doesn’t have its shortcomings. Arguably, the 3% starting deferral rate outlined in the PPA—and still adopted by the vast majority of plans—is better suited to avoid creating a financial burden on workers than to ensuring an adequate level of retirement savings; and some workers, in taking the “easy” path cleared by automatic enrollment, wind up saving at lower rates than they would likely choose for themselves had they only taken the time to actually fill out an enrollment form (see “IMHO: ‘Starting’ Points”).

But at some level, automatic enrollment requires that the plan sponsor “impose” a savings decision on a participant, and even though workers can choose to opt out, many plan sponsors are simply disinclined to set aside the purely voluntary approach. Many smaller programs that might once have been willing to go down that route as a means of avoiding trouble with the nondiscrimination tests have since found the solace required in adopting a safe harbor design. But for many, perhaps most these days, it’s all about economics; simply said, the more participants, the more matching dollars—and considering the potential number of additional participants, those matching dollars could be significant, or significant “enough” in the current economic environment.

PLANSPONSOR’s annual Defined Contribution Survey has, for the past several years, shown a flat or flattening adoption rate for automatic enrollment. There’s no reason to think this will change in the short term.

Everybody who does automatic enrollment isn’t going to do it for everybody.

Among the PPA’s provisions is a safe harbor for those adopting automatic enrolment—a safe harbor that effectively provides plan sponsors with protection identical to that afforded under ERISA 404(c ), so long as certain conditions are met. Among those conditions is that all eligible participants be automatically enrolled and/or given the chance to opt out.

And yet, PLANSPONSOR’s annual Defined Contribution Survey has found, for several years running, that two-thirds of plan sponsors that have embraced automatic enrollment have done so only for newer hires (see “IMHO: A Prospective Perspective”). Anecdotally, plan sponsors are reluctant to “disturb” workers who, at least in theory, have previously been afforded the opportunity to participate and decided not to. Some are hesitant to “insult their intelligence” by doing so, and for others, it’s just the economic dilemma posed above. The PPA doesn’t mandate going back to older workers, of course—but plan sponsors desirous of those safe harbor protections either have to, or have to be able to establish that they have. There is also, of course, the issue of a plan design that, at least on the surface, is more attentive to the financial security of shorter-tenured workers.

Still, the current—and apparently persistent trend—is to adopt this feature prospectively, and it will likely take an improved economy—or perhaps litigation—to change that dynamic.

Roth 401(k)s are going to continue to gain ground.


The advantages of tax-deferred savings have long been part-and-parcel of the pitch behind 401(k) plans. The notion is simple: defer paying taxes on your savings now, and they’ll add up faster, further fueled by the tax-deferred accumulation of earnings on those balances. And then, the logic goes, you pay taxes on those monies as you withdraw them—years from now—and at rates that, post-retirement, will be lower.

Plan sponsors have long been reluctant to push Roth 401(k)s; their pay-it-now concept on taxes at odds with the traditional tax deferral mantra, and their benefits often seen as skewed toward more highly compensated workers.

However, these days, it’s hard to find someone willing to predict lower taxes in the future, even post-retirement. Moreover, today’s younger (and not-so-highly compensated) workers may very well be paying the lowest tax rates they will ever experience.

To date, most surveys indicate that the participant take-up rate on Roth 401(k)s remains modest, something on the order of what self-directed brokerage accounts have garnered (and in many cases, appealing to the same audience). However, the preliminary results of PLANSPONSOR’s annual Defined Contribution Survey suggest that Roth 401(k)s are cropping up on a surprising number of plan menus. It’s a trend that, IMHO, bears watching.

Plan sponsors will (continue to) measure plan success on things (they think) they can control.

Plan sponsors have long measured the success of their defined contribution plans by the rate of participation in the plan. More than just providing a sense of interest and/or the success of inspiring enrollment meetings, the rate of participation, certainly by non-highly compensated workers, has a significant impact on the plan’s ability not only to pass nondiscrimination tests, but to allow highly compensated workers to defer at meaningful rates. However, in an era of automatic enrollment and safe harbor plan designs, the value of this metric has been muted or, in many cases, eliminated.

There is, however, a growing discussion among providers that plan sponsors should begin—and in some cases, are beginning—to consider other metrics: things like rates of deferral, diversity of asset allocation, and even adequacy of retirement income. That they are now able to consider such a shift in focus is a testament to a new and exciting generation of tools now available from the provider community, and they may well foreshadow a time in the not-too-distant future where those perspectives are shared with participants who may, for example, increase their current rate of deferral to ensure a higher level of retirement income, or adjust their asset allocation to preserve portfolio gains as they near retirement.

However, it’s not clear to me that plan sponsors will choose to benchmark their plans on criteria that is so individualized and so far outside their control to influence. Consider that about two-thirds of plan sponsors today still benchmark based on participation, and half that number examine deferral rates within various employee groups. These measures may not provide a picture of what the plan will yield in terms of its ultimate goal, but they are indicative of things a plan sponsor can control or influence with plan design, and—for the foreseeable future, anyway—I’m guessing they will continue to be the measures of choice.

Plan sponsors want good retirement outcomes for participants—but don’t feel it is their responsibility to ensure them.

Under the auspices of “best practices” and armed with some of the aforementioned benchmarking measures, some claim that fulfilling the plan fiduciary’s responsibility to act in the interests of plan participants extends to ensuring a good result. Of course, some plan sponsors are reluctant to know the results of that benchmarking for just that reason: that, once apprised of those results, they will one day be held to account for them.

Unlikely as that seems to me, one should never underestimate the creativity of the plaintiff’s bar. The reality is that a voluntary savings system needs goals, and I think participants would save better if they understood more. It also seems to me that plan sponsors who know more about what is going on in their plan might do a better job as well.

—Nevin E. Adams, JD

"Better" Business

There was another judicial decision in another revenue-sharing case earlier this month—and another victory for a plan sponsor.

The case was Loomis v. Exelon (see Another Plan Sponsor Win on Revenue-Sharing), a case argued before the 7th U.S. Circuit Court of Appeals, which had previously weighed in on the case that appears to be setting the tone in most of these cases, “Hecker v. Deere & Co.” Hecker, as you may recall, involved a situation with a large, multi-billion-dollar plan that offered its participants access to a couple of dozen funds from a single provider alongside a self-directed brokerage window that afforded access to funds beyond that. The 7th Circuit dismissed that challenge, finding that the competitive forces of the market were sufficient to ensure reasonable fee levels for the specific funds on the menu, and that, if the participants felt otherwise, they could always pursue other options via the brokerage window.

In Exelon, there was no brokerage window, though there were 32 fund options, mostly (24) mutual funds—mutual funds that were retail-class funds. Once again, the 7th Circuit noted that “all of these funds were also offered to investors in the general public, and so the expense ratios necessarily were set against the backdrop of market competition,” and restated its holding in Hecker that “nothing in ERISA requires every fiduciary to scour the market to find and offer the cheapest possible fund.” And then the court launched off into what, IMHO, was an odd juxtaposition of the benefits of those retail funds against “institutional” funds, which it claimed don’t offer the same level of liquidity, transparency, and ability to benchmark against comparable investments. Really? Have they never heard of an “I” share?


I once opined that, based on the Hecker decision, I would advise plan sponsors to give “participants LOTS of fund choices —via a brokerage window if possible—and I would make sure that there were at least some low-cost fund choices available via that window,” and that, among other things, I wouldn't concern myself “overly much with the fees paid by the plan/participants—so long as those fees were paid via mutual fund expense ratios that are the same as those paid by investors in the retail market” (see IMHO: “‘Winning’ Ways?” ). It was a tongue-in-cheek remark, of course, but the Hecker decision struck me as heavily - perhaps too heavily - dependent on free-market principles: Participants weren’t forced to put money in the plan, those who chose to do so weren’t forced into any particular option, and the fees associated with those options were, almost by definition, reasonable since they were subject to free and fair market forces.

That same court was similarly inclined here—and, if you can’t embrace the rationale, one can at least appreciate the consistency.

More than that, in this case, the 7th Circuit noted that Exelon had no real motivation to put “bad” fund options on the retirement plan menu. “[T]here is no reason to think that Exelon chose these funds to enrich itself at participants’ expense. To the contrary, Exelon had (and has) every reason to use competition in the market for fund management to drive down the expenses charged to participants, because the larger participants’ net gains, the better Exelon’s pension plan is. That enables Exelon to recruit better workers, or reduce wages and pension contributions without making the total package of compensation (wages plus fringe benefits) less attractive. Competition thus assists both employers and employees, as Hecker observed.”

The question here isn’t whether Exelon, or any employer, reaps personal benefit from the plan, or how it is structured. Employers do, of course, reap the recruiting/retention benefits of providing a robust and competitive package of benefits, alongside certain tax benefits—though, in my experience, these pale in comparison to the investment of time, money, and effort required. The decision to offer a plan, like the decision to participate, is voluntary. Bad law and intrusive regulation can weigh on the former, and poor plan design and lax administration can surely restrain the latter.

ERISA fiduciaries are, however, not merely expected to offer a “competitive” program, nor is it enough to simply steer clear of arrangements that enrich their bottom line at the expense of participants. Rather, every plan decision is supposed to be not just in the interests, but in the BEST interests, of participants, and from the perspective—or with the assistance—of experts in the field.

That test may, of course, be satisfied by merely offering access to the same types of investments available to retail investors, but, IMHO, that doesn’t mean we shouldn’t expect—better.

—Nevin E. Adams, JD

IMHO: Working “Outs”?

Last week the Senate Finance Committee held a hearing on “promoting retirement security.”

While options were presented to improve things (see “Industry Groups Urge No Changes to Retirement Savings Tax Advantages”), the discussion quickly veered toward a debate on whether and how well—or poorly—the current system is working.

That said, listening to the witnesses,1 one might well have thought they were discussing completely different systems—from one that is striking a good balance between incentivizing employers and encouraging participants to one that is all about providing tax benefits for saving to those who don’t require such enticements; from one that is putting too much responsibility on individual savers to one that has managed to, on a voluntary basis, draw the support of roughly eight in 10 workers. One that has failed, and seems unlikely to ever deliver a real retirement income solution—or one that has the potential to make that a reality.

Metrics Systems

As always, the devil is in the details—and perhaps in the definitions underlying those details. As the Employee Benefit Research Institute’s (EBRI) Dr. Jack VanDerhei pointed out in testimony submitted for the hearing, “Unfortunately, the ‘success’ of these plans issometimes measured by metrics that are not at all relevant to the potential for defined contribution plans to provide a significant portion of a worker’s pre‐retirement income.” Among those metrics, VanDerhei cited such things as the “average” 401(k) balance and what it would provide in retirement income (with no adjustment for the reality that many, if not most, of the participants in the denominator of that calculation are years, if not decades, away from retirement age), and even the focus on what the average balance is for workers nearing retirement age—but only applying that calculation to the 401(k) balance with the employee’s current employer.2


Judy Miller, Chief of Actuarial Issues/Director of Retirement Policy, American Society of Pension Professionals and Actuaries, outlined several “myths” in her testimony, including the notion that the current tax incentives are dramatically tilted toward upper-income workers,3 that those incentives cost the government money (there is a cost to the government’s deferral of taxation, of course, but the government does get its money eventually, albeit generally outside the government’s projection windows), and that only about half of working Americans have access to a workplace retirement plan. Miller noted the Bureau of Labor Statistics (BLS) found that 78% of all full-time civilian workers had access to retirement benefits at work, with 84% of those workers participating in these arrangements—a far cry from the “common wisdom” that too many in our industry still parrot.4

In fact, the devil in that particular statistic depends on whom you want to include as the “relevant” workforce—or perhaps the point you want to make.

There are some things we do know. First, given the opportunity, the vast majority of workers save for retirement via their workplace retirement plan, and that, outside those structures, they don’t. We know that the vast majority of workers that are automatically enrolled in such programs stay enrolled, that most who have their rate of savings automatically increased leave those increases in place. We know that workers whose deferral rates are set by default don’t change those defaults. We know that workers tend to save at the level of the employer match, when a matching contribution is available. We also have, thanks to EBRI, an emerging body of evidence that the current structures can produce, alongside Social Security, reasonable levels of retirement income.

We also know that most employers that offer a workplace retirement plan contribute something of value to those plans: an employer contribution, a matching contribution, and/or the time/expense of running the plan—or more than one of the foregoing. Moreover, there is strong anecdotal evidence that, lacking the incentives of the current tax structures, fewer employers will offer—or support—those programs than do at present.

Therefore, based on what we do know, it would seem that we should (1) to continue to encourage the establishment of defaults high enough to better ensure a satisfying outcome without undermining participation, and (2) to provide for systems that will move those default savings thresholds higher over time.

More importantly, IMHO, we should do everything we can to encourage more employers to offer, and to continue to offer, these programs.

—Nevin E. Adams, JD

1 Arguably, the best days of our current voluntary savings structures are ahead of us, but the sheer data on retirement savings accumulations in defined contribution plans and individual retirement accounts are impressive. During the hearing, Senator Orrin Hatch (R-Utah) noted that “more money has been set aside for retirement in defined contribution plans and IRAs than in Social Security.” Hatch said, “The Social Security Trust Fund holds $2.6 trillion in Treasury securities. But private, employer-based defined contribution plans hold $4.7 trillion. And IRAs hold even more: $4.9 trillion.”

2 For a broader discussion on this topic, see also “IMHO: Comparison ‘Points’

3 In her testimony, ASPPA’s Miller noted that households with incomes of less than $50,000 pay only about 8% of all income taxes, but receive 30% of the defined contribution plan tax incentives. Households with less than $100,000 in AGI pay about 26% of income taxes, but receive about 62% of the defined contribution plan tax incentives.

4 EBRI’s Jack VanDerhei offers an insightful analysis of these numbers in Appendix B of his testimony. I commend it to your review.

"Back" Pay

During last week’s GOP presidential candidate debate, Texas Governor Rick Perry grabbed headlines by reaffirming his position that Social Security is a “Ponzi scheme.”

Pundits were quick to jump on the comment, apparently believing that such rhetoric will “spook” the electorate (specifically older and independent voters) and ultimately make Perry unelectable, while purists were quick to point out the distinctions between the operation and intent of the two approaches, apparently believing that the technical distinction would matter (to anyone besides purists).

True, a Ponzi scheme, such as the one Bernie Madoff ran, as well as Charles Ponzi’s original design, is positioned as an investment. Investors hand over money to someone, believing that their money will be invested and grow. Instead, the scheme “runner” generally pays off longer-term participants with money invested by newer investors. Sooner or later, there are not enough new investors to fulfill those expectations and the whole thing blows up—though, depending on the sales skills of the Ponzi purveyor (and the expectations of the investors), it can run for years.

Technically speaking, Social Security is not an investment program. Despite those individual withholding statements provided occasionally by the Social Security Administration, nobody has a Social Security “account” into which all those years of FICA withholdings (not to mention the employer contributions) are deposited. People who see those Social Security checks in retirement as a return of the money they put in (with interest) are, IMHO, misguided (at best), though politicians have long found it in their interest for workers to see a link between the two.


That said, IMHO, most Americans don’t “pay into” Social Security because we expect that we’ll receive those benefits; we do so because it is required by law. Whatever that system’s historic success, and the dependence of the nation’s retirees on its benefits, I think most in my generation—and certainly those in my children’s—have doubts as to its long-term financial sustainability. Adjustments have been made over time to address those potential shortfalls—the retirement age has been lifted, the taxes withheld from current pay to fund that system have been increased, the benefits eventually paid from that system have been subjected to taxation (effectively reducing benefits)—and these days, most honest politicians will admit that those same kinds of changes will be required again to avert a future crisis.

Moreover, that payroll tax “holiday” that we took for the past year—and that President Obama has now proposed to extend—is, whatever its benefit to the nation’s sluggish economy, money that is effectively being “diverted” from the Social Security trust fund (as in many American households, retirement savings apparently must take a back-seat to the here-and-now).

Whatever you want to call it, to my eyes, Social Security is basically a societal retirement income insurance policy. Those FICA withholdings are premiums and, depending on our life circumstances, we may or may not collect on it. One thing is for sure, however: Whether it’s for life insurance, car insurance, or Social Security, when we make those payments, we expect that we will receive the benefit(s) for which we contracted. Older workers are, naturally, counting on receiving those benefits—because they have been told they can expect them by a reliable source, because they have spent a lifetime dutifully making those payments, and because they have seen their elders do the same. But whatever label you may put on it, the reality of Social Security is that many of yesterday’s (and today’s) recipients have received benefits far in excess of what they put in, and many, perhaps most, of tomorrow’s recipients will never get theirs “back.”

Is Social Security a “Ponzi scheme”? Perhaps not, but its current design and operation still rely on assumptions and structures that share striking similarities.

A Ponzi scheme needs faith and trust of its investors to be sustained. Ultimately, so will Social Security.

—Nevin E. Adams, JD

Best for Success

Today PLANSPONSOR opens nominations for our Retirement Plan Adviser of the Year awards.

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

At its core, what we hope to acknowledge—and, thus, what we are looking for—hasn’t changed from when we first launched the award in 2005: advisers who make a difference by enhancing the nation’s retirement security, through their support of plan sponsor and plan participant information, support, and education. Since its inception, we’ve focused on advisers who do so through quantifiable measures: increased participation, higher deferral rates, better plan and participant asset allocation, and delivering expanded service and/or better expense management.

A Different World

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

So, what will we be looking for this year? Well, there are many attributes that can make for a good adviser, or an adviser that is good for a particular plan. But when it comes to choosing an adviser or adviser team that stands apart from the rest, that not only sets an example, but a standard for the industry, I look for advisers that:

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


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

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

Encourage and inspire their clients. Client referrals have always been a key element in our award, and as the overall quantitative standards rise, the significance of the qualitative element afforded by client references (and award nominations) will almost certainly increase. How often does your adviser talk with you? How often do they visit? How—and how often—do they communicate with you regarding regulatory and legislative changes? Do you feel like they know what’s going on – or are you generally the one to break the news to your adviser?

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

That’s what I’m looking for—and looking forward to acknowledging—this year. If your adviser – or adviser team – is worthy of that recognition, I hope you will take the time to nominate them today!

You can nominate an adviser colleague or associate for PLANSPONSOR’s Retirement Plan Adviser of the Year, or Retirement Plan Adviser Team of the Year at https://www.research.net/s/5XYL2KR