The Gaps in Retirement Savings "Gaps"

As spring follows winter, so apparently do dire predictions about the nation’s retirement prospects.

For example, the Center for Retirement Research (CRR) at Boston College now claims we are looking at a $7.7 trillion dollar “retirement gap” for American workers, up from $6.6 trillion five years ago. Meanwhile, a new report by the National Institute on Retirement Security (NIRS) on what it called the “Continuing Retirement Savings Crisis” didn’t cite a specific aggregate gap, but a year ago NIRS employed a similar approach to suggest that that gap was likely somewhere between $6.8 trillion and $14 trillion.

While these outcomes are cited widely (the CRR’s as recently as last week in a U.S. Senate hearing), the underlying methodologies and assumptions are worth understanding. Both rely heavily on self-reported numbers from the Federal Reserve’s Survey of Consumer Finances (SCF), and while both track the progress of American retirement readiness by examining how individuals in the SCF did over time, they fail to acknowledge that doing so compares the balances and readiness of two completely different groups of individuals at different points in time. The NIRS analysis builds on that shaky foundation by incorporating some assumptions about defined benefit assets and extrapolating target retirement savings needs based on a set of age-based income multipliers — income multipliers, it should be noted, that have no apparent connection with actual income, or with actual spending needs in retirement. But then, the math is easier.

There’s no question that there is a gap between what Americans are likely to need to live comfortably in retirement and the resources available to fund it. The non-partisan Employee Benefit Research Institute (EBRI) recently updated its EBRI Retirement Readiness Rating and found that the retirement savings gap was $4.13 trillion for all U.S. households (not just those who have retirement plan balances, though it uses actual 401(k) data for those who do have such plans, rather than relying on self-reported estimates), where the head of the household is between 25 and 64, inclusive. That may be well short of the projections offered by the NIRS and CRR, but it’s a big number, nonetheless.

Indeed, considering the enormity of that gap, policymakers — and Americans generally — might well feel like throwing up their hands and despair of ever closing it (indeed, earlier this month NIRS published a survey indicating that 86% of Americans believe the nation faces a retirement crisis).

What is unfortunately often lost in the trillion-dollar gap headlines (and the concurrent surveys that, unsurprisingly, talk about our deteriorating confidence about our retirement) is that not everyone has a retirement savings gap. Ironically, considering their differing methodologies, the CRR, NIRS and EBRI all put the number at about 50%. (EBRI’s number, which in its assumptions and use of actual data seems more conservative, says the number at risk of running short of money in retirement is in the low 40% range.)

How big is the gap at an individual level? The EBRI analysis breaks it down into manageable numbers: For those on the verge of retirement (Early Baby Boomers), the deficits vary from an aggregate of $19,304 (per individual) for married households, to $33,778 for single males and $62,734 for single females. If you look only at the individuals who do have gaps (EBRI’s projections, which take into account the potential costs of nursing home care and living expenses based on real experience, rather than arbitrary replacement ratios, indicate that about 57% will have sufficient retirement income), the gap for Early Boomers ranges from $71,299 per individual for married households to $93,576 for single males and $104,821 for single females.

Not surprisingly, those eligible to participate in workplace retirement plans fare better. Also not surprisingly, those who have jobs are more likely to have incomes and access to a workplace retirement plan — and those who work for larger employers are more likely to have both larger incomes and access.

However, even EBRI’s estimates include a wide range of personal circumstances, from individuals projected to run short by as little as a dollar to those projected to fall short by tens of thousands of dollars. For those seeking to understand, and perhaps craft solutions for, the current projected shortfalls, this is an important distinction, and one given short shrift by a headline’s focus on the aggregate.

There are, of course, broad policy changes that can, and have, made a big difference, nationally and at a plan level — things like automatic (and immediate) enrollment, contribution acceleration and prudent selection of a default investment option, not to mention ideas (or legislation) that expand access to those plans.

That said, ultimately the retirement savings gap is an aggregation of individual savings gaps. And as advisors well know, you close those one individual at a time.

- Nevin E. Adams, JD

The Troubble With Tibble

Ours is a complex business. For one thing, it’s fraught with potential peril for inattentive plan fiduciaries, many of whom find themselves tasked with the responsibilities of the role (frequently as part of a much wider range of responsibilities) with little in the way of background, training or explanation to help.

And then you have the defendants in the Tibble v. Edison International case: a large ($2 billion-plus) plan that not only had an investment committee, but also one separate from the benefits administration function. Moreover, that investment committee had access to the services of an investment advisor (Hewitt’s investment consulting arm) to review, select and monitor funds and, according to the findings of the lower courts, a review process that was attentive to the requirements of an investment policy statement (IPS).

What they did not do was ask about the availability of lower-priced institutional shares.

However, that wasn’t the issue before the U.S. Supreme Court this past week. Rather, the Court was asked to decide how to apply ERISA’s statute of limitations to the action of selecting these funds. Three of the retail class funds were added as plan investment options in 1999; three more were added in 2002. The plan sponsor plaintiffs had successfully argued before the 9th Circuit that when the suit was brought in 2007, the funds which were added in 1999 had been on the plan menu for more than six years — beyond ERISA's statute of limitations. At issue was whether the prudence of that older selection could be challenged.

In the presentations before the Supreme Court, both parties agreed that there was a fiduciary duty to review plan investments, and both parties were willing to concede that the initial review and selection of an investment fund should be more extensive than just considering the retention or replacement of a fund that was already on the investment menu. It was the nature and extent of that review that consumed much of the discussion during the hearing.

In the initial ruling in the case, the district court said there had to be a change in circumstances significant enough to make the continued investment in that investment option an imprudent one, and cited legal precedent for its view. The discussion last week noted precedents in the 9th, 4th and 11th Circuits saying that change would have to be tantamount to adding a new fund. In Tibble, there doesn’t appear to have been a change in the funds on the menu per se, but rather, the mere existence of lower-cost institutional shares.

However, the Assistant to the Solicitor General, appearing in support of the plaintiffs’ position as a friend of the court, told the justices that in its assessment, the ongoing monitoring of investment options was "not limited to circumstances in which the fund changed so much that it's like a new fund is being put in place.” 

It remains to be seen how the Supreme Court’s view of the level of review and the circumstances that trigger it will affect the outcome of this case. We’ll have an answer by June.

That said, the words that linger in my mind — and that I think plan fiduciaries should remember — also came from the Assistant Solicitor General: “You have a duty to look on a periodic basis and, really, how are you going to know if there have been changes unless you looked.”

How indeed.

- Nevin E. Adams, JD

The Importance of Having a Plan

Over the course of my career, I’ve had the opportunity to participate in any number of “projects,” and to manage more than a few.

Some were explicitly tagged as such at the start, while others simply expanded to fit that name. Most of those projects turned out well; others faded into the woodwork after a time; some drew to a close after “redefining success;” and a couple actually “crashed and burned.” A lot of variables determine whether a project will be a success or failure, but in my experience, projects that lack either a limited budget and/or a specific timeframe are doomed from the outset.

I was therefore interested in some of the findings from the 8th annual America Saves Week survey this week. The survey, sponsored by the Consumer Federation of America, the Employee Benefit Research Institute (EBRI) and the American Savings Education Council (ASEC), found that more than half (57%) of those with a savings plan with specific goals said they were making good or excellent progress meeting their savings needs — nearly three times the number without a plan.

Moreover, nine-in-ten of those with a plan were spending less than their income and saving the difference (compared with only half of those without a plan), and more than twice as many (65%) of those with a plan said they were saving enough for retirement as among those without that specific savings plan (31%).

While those gaps were found between those who had a specific, individual, savings plan with specific
goals, it’s long been established that having access to a retirement plan at work makes a big difference in terms of whether people save for retirement or not — and the impact transcends income, gender and age. In fact, data prepared by the nonpartisan EBRI shows that more than 70% of workers earning from $30,000 to $50,000 participated in employer-sponsored retirement plans when a plan was available, whereas less than 5% of those middle income earners without access to an employer-sponsored plan contributed to an IRA. In other words, middle class workers are 15 times more like to save for their families’ retirement at work than on their own.

During this America Saves Week, it’s important to reinforce the importance of saving. However, it may be even more important to remember the positive impact of having a specific plan.

Not to mention the positive impact of having access to a retirement plan at work.

- Nevin E. Adams, JD

See also: “4 Things You Need to Know if You are Not Saving for Retirement.” 

For an idea as to the impact that eligibility for participation in a workplace retirement plan can make, see “Retirement Savings Shortfalls: Evidence from EBRI’s Retirement Security Projection Model.” 

3 Things Every Plan Committee Member Should Know

Plan investment committee members come in all shapes and sizes, sometimes drawn exclusively from staff of the employer sponsoring the plan, sometimes not. More importantly, they are frequently tapped for this important role for reasons that may have little to do with their background or expertise in the matters that will come before the committee.

Now, with luck they’ll learn early on about 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.

But as important as those considerations are, there are some important things that every plan committee member should know before they sit down at their first committee meeting.

You are an ERISA fiduciary. Even as a small and relatively silent member of the committee, you’ll direct and influence retirement plan money — and it’s that influence over the plan’s assets that makes you an ERISA fiduciary.

As an ERISA fiduciary, your liability is personal. How personal? Well, you may be required to restore any losses to the plan or to restore any profits gained through improper use of plan assets. 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.


Having established those basics, 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 diversify 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 additional points on fulfilling those duties; it’s going to be hard to follow the terms of the plan documents if you haven’t read them, and it’s likely to be difficult to ensure that the plan pays only reasonable expenses if you don’t know what the plan is paying, or for what.

And finally, should you, as a plan fiduciary lack the expertise to carry out those duties, you will, of course, want to hire someone with that professional knowledge to carry out the investment and other functions.

Additional information on fiduciary responsibilities can be found here.

- Nevin E. Adams, JD

The Impact of Assumptions on the Impact of Leakage

It has become something of an article of faith in our industry that “leakage,” the distribution of money from retirement accounts prior to retirement, is bad.

Bad, of course, in the sense that those “premature” withdrawals, via hardship withdrawals, loans or the so-called “deemed distributions” that result when a termination occurs when a loan is outstanding, reduce individual retirement savings.

So when the Center for Retirement Research at Boston College published a paper last week entitled “The Impact of Leakages on 401(k)/IRA Assets,” it really wasn’t a question of “if” there was an impact, it was a question of how much. The answer, according to the paper: a reduction in wealth at retirement of a jaw-dropping 25%.

Now by any measure, a 25% reduction in retirement wealth is a massive problem — and one that would, if valid, call for the kind of countermeasures touted by the Boston College researchers.

But consider the findings published recently by the non-partisan Employee Benefit Research Institute (EBRI) based on its massive participant database of actual participant balances and activity. Among participants with outstanding 401(k) loans at the end of 2013, the average unpaid balance was a mere $7,421, and the median loan balance outstanding was $3,973.

Moreover, the report notes — as it has for a number of years examining trend analysis in that database — that overall, loans from 401(k) plans tended to be small, with a sizable majority of 401(k) participants in all age groups having no loan outstanding at all: 88% of participants in their 20s, 73% of participants in their 40s, and 86% of participants in their 60s had no loans outstanding at year-end 2013.

So, how did the Boston College researchers manage to come up with a 25% reduction in retirement wealth? Quite simply, they started by deriving an estimate based on a “host of simplifying assumptions” — their words, not mine.

What are those simplifying assumptions? It starts with a hypothetical participant who initially makes $40,000/year, gets a 1.1% annual pay increase in real terms, assumes that he/she defers 6% of pay, is matched at a rate of 50 cents on the dollar, and whose investments gain a 4.5% real annual return. But the key assumption — and the one that arguably creates the conclusion of the paper — is their further assumption that 1.5% of assets leak out each year!

Under these assumptions, the leakages result in accumulated 401(k) wealth of $203,000 at age 60 compared with $272,000 with no leakage. So their math (and assumptions) lead to a conclusion that these leakages reduce 401(k) wealth by 25%. To “prove” the point, they provide a simple chart of the numbers they just produced, and direct the reader to it as though it provides some sort of independent corroboration.

They go on to clarify: “This estimate represents the overall impact for the whole population, averaged across both those who tap their savings before retirement and those who do not.” That’s right — averaged across everyone, not just those who actually dip into those savings prior to retirement.

Now at that point, it’s arguably just math, not so much a quantification of the impact of leakages as the mathematical impact of a series of simplifying assumptions. As for the so-called impact of leakages? It might more accurately be described as the impact of assumptions.

- Nevin E. Adams, JD

That’s not to say that leakages don’t have an impact on retirement accumulations, and doubtless for some, that impact is significant. EBRI’s analysis found that among loan defaults, hardships and cashouts at job change, cashouts were found to have a much more serious impact on 401(k) accumulation than either plan loan defaults or hardship withdrawals (even with the impact of a six-month suspension of contributions included). The leakages from cashouts resulted in a decrease in the probability of reaching an 80% real replacement rate of 5.9 percentage points for the lowest-income quartile and 4.5 percentage points for those in the highest-income quartile. In fact, the effect from cashouts (by themselves) — not loans or hardship withdrawals — turns out to be approximately two-thirds of the leakage impact.  

It’s also worth noting that it’s one thing to quantify the impact of not allowing early access to these funds — and something else altogether to assume that participants and plan sponsors would not respond in any way to those changes, perhaps by reducing their contribution levels, or by either deciding to continue to participate or to participate in the first place.

A Deja View on Retirement Policy?

One of my favorite movies — and perhaps my favorite “holiday” move — is Groundhog Day, the 1993 film starring Bill Murray as an arrogant weatherman who finds himself stuck in Punxsutawney, Penn. by a blizzard, who then discovers that he is also “stuck” reliving February 2 — over and over and over. A feeling, quite literally, of “déjà vu all over again.”

Murray’s character goes through some semblance of the five stages of grief (denial, anger, bargaining, depression and acceptance) as he comes to terms with his predicament, but even as he tries to break out of this cycle, he learns from his past experience(s) and modifies his behaviors accordingly; avoiding stepping in a deep puddle of slush, ducking an insurance salesman, and even carrying his own jack to help change a tire. Eventually, of course, all that “learning” pays off, though not without a lot of pain and frustration.

There was, in fact, something of a feeling of déjà vu in President Obama’s budget proposal yesterday, certainly with regard to workplace retirement plans. In addition to some new incentives around encouraging automatic enrollment and expanding access to part-time workers, making a return appearance was giving the Pension Benefit Guaranty Corporation (PBGC) the authority to set risk-based premium rates for pension plans and the administration’s proposal to mandate employer offering of “automatic” IRAs who do not already offer a workplace retirement plan, this time channeled to the myRA structure outlined a year ago.

The 2016 budget proposal also resurrects the notion of imposing a reduction on the value of itemized deductions to 28% — including retirement contributions, and the imposition of a retirement savings cap.

Arguably, these proposals stand little chance of making their way into reality. That said, the latter two proposals in particular are blunt policy instruments, and seem likely to reduce, not enhance, the nation’s retirement security prospects.

Consider that a year ago when the savings cap was introduced in the 2015 budget, projections by the nonpartisan Employee Benefit Research Institute (EBRI) show that more than 1 in 10 current 401(k) participants are likely to hit the proposed cap sometime prior to age 65, even at the current, albeit historically low, discount rate of 4%. When you apply the higher discount rate assumptions closer to historical averages, the percentage of 401(k) participants likely to be affected by these proposed limits increases “substantially,” according to EBRI.

As for the itemized deduction cap, it would mean that those affected — likely those making the decisions on matching contributions of offering a plan in the first place — would pay taxes on contributions in the year the contributions are made, and then again at the full rate when contributions are distributed at retirement. How’s that for dis-incentivizing workplace retirement savings?

Indeed, perhaps the thing most troubling about the latter two proposals in particular is that they reveal a basic misunderstanding about the interrelationship between the incentives to employers to offer these programs, and the existence and expansion of these plans.

In sum, they don’t appear to understand that if you diminish the incentives to employers of participating in workplace retirement plans, you’ll likely see fewer retirement plans in the workplace.

So, while we’d like to think that those guiding retirement policy would learn from their mistakes, it looks like instead it’s déjà vu all over again.

- Nevin E. Adams, JD

Stocks Swayed by the Super Bowl?

Will your portfolio soar with the Seahawks, or get pummeled by the Patriots?

That’s what adherents of the so-called Super Bowl Theory would likely predict. The Super Bowl Theory holds that when a team from the old National Football League wins the Super Bowl, the S&P 500 will rise, whereas when a team from the old American Football League prevails, stock prices will fall.

It’s a “theory” that has been found to be correct nearly 80% of the time; for 38 of the 48 Super Bowls, in fact.

It certainly “worked” in 2014, when these same Seattle Seahawks bumped the Broncos, a legacy AFL team, and in 2013, when a dramatic fourth quarter comeback rescued a victory by the Baltimore Ravens who, though representing the AFC, are technically a legacy NFL team via their Cleveland Browns roots. Admittedly, that the markets fared well in 2013 was hardly a true test of the Super Bowl Theory since, as it turned out, both teams in Super Bowl XLVII — the Ravens and the San Francisco 49ers — were NFL legacy.

However, consider that in 2012 a team from the old NFL (the NY Giants) took on — and took down — one from the old AFL (the New England Patriots, who once were the AFL’s Boston Patriots). And, in fact, 2012 was a pretty good year for stocks.

On the other hand, the year before that, the Pittsburgh Steelers (representing the American Football Conference) took on the National Football Conference’s Green Bay Packers — two teams that 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.

There was the string of Super Bowls where the contests were all between legacy NFL teams: 2010 (when the New Orleans Saints bested the Indianapolis Colts, who had roots back to the NFL legacy Baltimore Colts)), 2009 (the Pittsburgh Steelers took on the Arizona Cardinals, who had once been the NFL’s St. Louis Cardinals), 2007 (where the Indianapolis Colts beat the Chicago Bears 29-17), and 2006, when the Steelers besting the Seattle Seahawks. The markets were higher in each of those years.

As for 2008? Well, that was the year that the NFC’s New York Giants upended the legacy AFL’s Patriots’ hopes for a perfect season, but it didn’t do any favors for the stock market. In fact, that was the last time that the Super Bowl Theory didn't “work.”

Patriot Gains

Times were better for Patriots fans in 2005 when they bested the NFC’s Philadelphia Eagles 24-21, and, 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 (AFL legacy) 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 and the Baltimore Ravens, did nothing to dispel the bear markets of 2000 and 2001, respectively.

In fact, the Super Bowl Theory “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).

Indeed, the Buccaneers’ move to the NFC was part of a swap with the Seattle Seahawks, who did, in fact, enter the NFL as an NFC team in 1976 but shuttled quickly over to the AFC (where they remained through 2001) before returning to the NFC.¹ And, not having entered the league until 1976, wherever they began, can the Seahawks truly be considered a “legacy” NFL squad? Bear in mind as well, that in 2006, when the Seahawks made their first Super Bowl appearance — and lost — the S&P 500 gained nearly 16%.

As for Sunday’s contest, after the Seattle Seahawks opened as 2-point favorites, the Patriots now appear to be 1-point favorites — and this is the first time since 1975 that we actually have two Number 1 seeds facing off in the Super Bowl. It looks like it will 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 do!

- Nevin E. Adams, JD

1. In fact, Seattle is the only team to have played in both the AFC and NFC Championship Games, having relocated from the AFC to the NFC during league realignment prior to the 2002 season. The Seahawks are the only NFL team to switch conferences twice in the post-merger era. The franchise began play in 1976 in the NFC West division but switched conferences with the Buccaneers after one season and joined the AFC West.

Third Time a Charm for Fiduciary Reproposal?

So, advisors, how does it feel to be compared to a termite?

That’s right, a powerful coalition of retirement, union, and so-called consumer protection groups has launched a new attack on retirement plan advisors.

They’re doing so ahead of the president’s State of the Union address, and doing so now because he is expected to throw his support behind the Department of Labor’s fiduciary rule (re)proposal. Yes, that one.

Not that they yet know what they are supporting. In a new website launched to help promote their position, even they say “If the Department gets the rule right…”, apparently relying on the word of the Department of Labor that “…its goal is to make sure that all financial professionals have a legal obligation to put the interests of their customers first when they offer retirement advice.”

We don’t yet know what will be in this latest version. What we do know is that the last version raised significant concerns about its impact on the retirement plan marketplace, especially with regard to plans for small business, for IRAs, and for distributions from qualified retirement plans. We know that they saw fit, as part of an unprecedented power grab, to create a right to impose Labor Department oversight on non-ERISA individual retirement accounts that has not existed since the origins of those programs a generation ago. We know that they didn’t believe that a comprehensive and transparent disclosure of potential conflicts and financial interests were sufficient to preserve the long-standing seller’s exception for business owners who might be considering offering a workplace retirement plan.

As for this newest version, there is reason to think it may go even further; that it might actually prohibit existing plan providers from advising participants on investment options for plan distributions, blocking retirement plan participants from the plan advisor they most know and trust — while at the same time effectively leaving them vulnerable to the solicitations of others outside the plan who often offer more expensive options.

No, we don’t yet know what will be in the latest version — because, having brought two previous flawed versions to light, the Labor Department seems to have developed a case of stage fright when it comes to sharing, much less discussing the new version. Will the third time be a “charm?” Not likely, with so little input from, or dialogue with, those actually working with these programs.

As for those advocacy groups backing this as-yet-sight-unseen regulation — well, they might see advisors as a colony of termites, but the so-called solutions that the Labor Department has put forth thus far seem more likely to burn down the house of America’s retirement than to save it.

- Nevin E. Adams, JD

The saveourretirement.com website is funded by AARP, AFL-CIO, AFSME, Americans for Financial Reform, Better Markets, the Consumer Federation of America, and the Pension Rights Center.

6 Things 401(k) Participants Need to Know

Our industry spends a lot of time and money educating workers about the advantages and mechanics of saving for retirement.

But here are six things I think too often go unsaid.

Your 401(k) isn’t free.

That’s right, it isn’t free. It may be heavily subsidized by your employer, and you’re likely paying a lot less for the fund(s) and features you have access to than if you were to try and buy them on your own (say, via an IRA or brokerage account) — but even then, it’s probably not “free,” nor should you expect it to be. But if you don’t know how much you are paying, you should find out.

You’ve probably been provided some information about your 401(k) plan fees already. You can find out how to use that information here. More information about 401(k) fees is available here.   

That employer match isn’t “free” either.

You may have heard that you should save enough to receive the full employer match — that “you don’t want to leave that free money on the table.” It is, of course “free” money to you when you save in your workplace retirement plan. But not every employer provides a matching contribution, and it’s a real out-of-pocket cost for those that do. Remember that, if you’re lucky enough to have an employer who makes a matching contribution — and thank them.

Saving to the level of the match is probably not enough.

As noted above, many employers choose to encourage your decision to save for retirement by providing the financial incentive of an employer matching contribution. While there are a number of factors that go into determining the amount and level of the match, how much you need to set aside for your own personal retirement goals is almost certainly not one of those factors.

You certainly don’t want to leave any of that match on the table by not contributing to at least that level. But if that’s where you stop saving, you’re probably going to come up short.

How much you save is more important than how you invest what you save.

There are bad investments that can cost you money, and good investments that can help your account grow faster. But what really matters in achieving financial security for retirement is how much you save (including the amount of the employer match, if any).

For more information, see “Missing the Forest for the Trees” here.  

If you’ve never tried to figure out how much you’ll need to live in retirement, you may not live very comfortably in retirement.

Surveys routinely show that most Americans have not even tried to guess how much money they will need to live on in retirement, much less actually made an educated guess. Sure, it sounds complicated, and sure, things can change over time — and yes, you’re busy. But saving for retirement with no idea of how much you might need is a bit like going on a long trip in a car you don’t know with a gas gauge that isn’t working.

Chances are, your 401(k) plan has some resources that will help you do the calculation. If not, or if you’d like a “second opinion,” try the free Ballpark E$timate at choosetosave.org. 

If you don’t know what you’re doing, get help.

And not the kind you might get from Joe in the lunchroom, Sally in accounting or “experts” you’ve never met. If there’s a professional advisor working with your 401(k) plan, that’s a great place to start.

- Nevin E. Adams, JD

5 Things Plan Sponsors Should Know

Whether or not you’re in the habit of making New Year’s resolutions, this is a time of year when reassessments seem appropriate, and perhaps in no area as much as that of retirement plan administration. Many find themselves in the role of plan sponsor (or plan committee) with no background, limited training, and far more responsibility than they may appreciate at the outset.

For those of you who find yourself starting the year with new plan sponsor clients, or new members of the plan committee, or perhaps even incumbents who could benefit from some New Year’s resolutions, here’s five things every plan sponsor should know:

How much your 401(k) plan costs.

Okay, fees are just one of several factors plan sponsors need to consider, but when the fees for services are paid out of plan assets, there is an obligation to understand the fees and expenses charged. This is important because you are expected to ensure that the fees paid and services rendered to the plan are reasonable. It’s hard to know if the fees paid are reasonable if you don’t know what they are. Oh, and even if the plan fees were determined to be reasonable in the past, they need to be monitored. Things change over time, after all.

Need some help? Check out this information from the Employee Benefits Security Administration. 

The services that you receive for those 401(k) fees.

As noted above, determining reasonability of fees and services means not only understanding the fees paid, but also the services provided for those fees. Larger fees may, of course, be reasonable for more expansive or comprehensive services. But also note that paying big fees for unnecessary services could be considered unreasonable.

See also “Tips For Selecting And Monitoring Service Providers For Your Employee Benefit Plan.”

How much of your 401(k) plan fees/costs go to whom.

Arguably, knowing how much who is being paid for what is required to assess reasonableness. But the Department of Labor now requires that “covered service providers” (CSP) furnish in writing “the services to be provided and all direct and indirect compensation to be received by a CSP, its affiliates, or subcontractors. You can find out more about these requirements here.

Who the plan fiduciaries are.

Odds are, if you as a plan sponsor are reading this, you are one. But don’t take my word for it. Check out “Meeting Your Fiduciary Responsibilities.”

The responsibilities — and obligations — of plan sponsors.

Since you (probably) are one, you should make sure you know what your responsibilities are, the extent of your personal liability, and what kind of insurance is maintained by your employer to address that exposure.

Fiduciaries have important responsibilities and are subject to standards of conduct because they act on behalf of participants in a retirement plan and their beneficiaries. In addition to paying only reasonable plan expenses, these responsibilities include acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them, following the terms of plan documents, and carrying out their duties prudently.

That brings up a sixth item for our plan sponsor list: If a plan fiduciary lacks the expertise to fulfill those duties, they should, of course, consider hiring a professional to help them.

- Nevin E. Adams, JD

Did YOUR 401(k) Increase by $50,000 This Year?

The winner of the year’s most ridiculous 401(k) headline may well be one that ran just last week.

The post was titled, “Did Your 401(k) Balance Increase $50,000 This Year? If Not, You May Be Falling Behind.”

Or, as I am inclined to think when I see such nonsense, “you may not.”

The article was mostly a simple recycling of information just released by BrightScope on their determination of the “Top 30 401(k) Plans of 2014.”  In looking at those 30 plans, BrightScope chose several data points to highlight — including the point that, among those 30 plans, the average account balances have increased nearly $50,000 since the top 30 list of 2013 was compiled.

In drawing insights from those results — specifically the $50,000 increase in average balance — the article’s author (a Certified Financial Planner, no less) opined:

That may be a good benchmark to determine just how effective your retirement savings plan is working for you. If your balance has grown an amount equal to or greater than that, congratulations — you're above average. Less than $50,000 of annual appreciation and maybe it's time to consider some changes.

So, let’s think about this for a minute. We’re supposed to consider as a benchmark for 401(k) plan performance the change in average account balance (which could, of course, include individuals of widely differing age, tenure and compensation levels), of just 30 plans (which could, of course, include widely different match levels, investment options and workforce compositions, not to mention the differences in participant characteristics noted)?  

Oh, and we’re not even talking about the same plans; more than a third of those 30 plans highlighted by BrightScope were not even on the firm’s 2013 list. So, on top of everything else, we’re told that a “good benchmark” may be drawn from comparing a one-year average increase in balance among a completely different set and diverse set of individual participant circumstances among a completely different set of plans.

There may be sillier points of comparison to be made in establishing a benchmark for your 401(k) — but I’ll be darned if I can think of one.

- Nevin E. Adams, JD

If you’re interested in a more realistic and real-world assessment of 401(k) plan growth, see “What Does Consistent Participation in 401(k) Plans Generate? Changes in 401(k) Account Balances, 2007–2012” here.  

 

"Retirement Ready" Resolutions

As the New Year begins, we are often of a mind to think about making a fresh start. If you are an individual, you may (finally) be ready to be serious about saving for retirement - or you may have mailed in that last tuition check - or crossed that age 50 threshold where you can start "catching up" on retirement savings. If you're an employer, you may well have established new goals for your retirement plans this year—a new threshold for participation, perhaps—or maybe you’ve just rolled out a new fund menu for your participants.

But whether your plans - or your programs - have undergone change or not, this is a good time of year to help participants reexamine their savings goals—and perhaps even some of their “bad” retirement savings habits.

Here’s a short list of “resolutions” that can help you get started.

___ Resolve to participate in your workplace retirement savings plan.

If you are not already saving for your retirement in your workplace program, you are missing out on one of the most important—and easiest—ways of making sure that you are on track for a financially secure retirement. Unless, of course, you have a rich (old) uncle.

___ Resolve not to miss out on the company match.

Odds are your employer matches your contributions to your retirement savings account up to a certain level, say 5% of 6% of your pay. Whatever that level is, if you do not contribute up to that point, you are letting “free” money slip through your fingers.

___ Resolve to increase your savings rate in your workplace retirement savings plan by at least 1%.

If you are already saving, are you saving enough? Have you ever made an attempt—with some kind of planning tool or the assistance of a financial adviser—to figure out how much you will need? Even if you have, it is remarkably easy to increase your current rate of savings by as little 1%--and you might be surprised just how much difference that will make!

___ Resolve to consider rebalancing investments at least once this year.

Your retirement savings account is being rebalanced all the time—by the investment markets. You can start out the year with half of your account balance in stocks and the rest in bonds, and a month later find that 70% is now in stocks and just 30% in bonds, or the reverse. How much and how fast depends on how your balance is allocated, and what is happening in the market. The bottom line: Once you have taken the time to put together a thoughtful allocation, you need to keep an eye on things. Once a month is good, once a quarter is probably enough, and once a year—well, that’s a minimum. Try picking a day that you won’t forget—your birthday, an anniversary…. Or any three-day weekend.

___ Resolve to use target-date investments properly.

Target-date funds are a pre-mixed investment solution—and most are designed in such a way that they assume that you are investing all of your retirement savings in that one investment. If you mix and match that with other funds on your retirement savings menu—or split your savings between two (or more) target-date funds—you will probably wind up with a mess. Just pick one. It’s the basket you SHOULD put all your eggs into.

What would YOU add to this list?

- Nevin E. Adams, JD

"Naughty" or Nice?

A few years back — well, now it’s quite a few years back — when my kids still believed in the reality of Santa Claus, we discovered an ingenious website 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 we said ever had the impact of that website — if not on their behaviors (they were 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 that year) was on the verge of tears, worried that he'd find nothing under the Christmas tree but the coal and bundle of switches he so surely deserved.

One could argue that many participants act as though at retirement 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 snowsuit. Not that they actually believe in a retirement version of St. Nick, but that's essentially how they behave, though a significant number will, when asked to assess their retirement confidence, express varying degrees of doubt and concern about the consequences of their "naughty" behaviors. Like my son in that week before Christmas, they tend to worry about it too late to influence the outcome.

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 we believed that 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 — 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 your workplace retirement plan, the employer match, and your retirement plan advisor.

Happy Holidays!

- Nevin E. Adams, JD

P.S.: The Naughty or Nice website is still online, here.

"Choice" Architecture - for Plan Sponsors

In recent years, the notion that the ways in which choices are presented to individuals — known as “choice architecture” — can influence their decisions, has been widely embraced.

Well before the advent of the Pension Protection Act of 2006, the retirement plan industry had acknowledged the positive influences of those behavioral finance techniques on overcoming, or at least countering, certain human behaviors.

Based on the evidence of several decades of adoption, we know that automatic enrollment — even with the ability to opt out — transforms voluntary participation rates of roughly 70% to near-unanimous participation. And yet, even with the structure and sanction of the PPA, today fewer than half of the roughly 7,000 plan sponsor respondents to the 2013 PLANSPONSOR DC Survey have implemented that design (large plans being significantly more likely to do so than smaller programs).

Even plan sponsors that have adopted automatic enrollment tend to do so with a default deferral rate that is almost assuredly too low to assure success for anyone (typically 3%, the rate specified in the PPA safe harbor) — which might not be so bad, but for the lagging implementation of contribution rate acceleration. The PLANSPONSOR survey found that only about a quarter (26.9%) did so. Even among the largest plans (more than $1 billion in assets), only about half (54.2%) “auto accelerate.”

And then there’s the inclination to automatically enroll only new hires. Industry surveys suggest that only about a third of auto-enrolling plans extend that to current workers.

Setting aside for a minute the reality that not every workforce is suited for the administrative rigor of automatic enrollment — and that many smaller employers have in place safe harbor plans that serve to automatically “enroll” workers via that safe harbor contribution — there are real, tangible, and often unacknowledged employer costs to undertaking automatic enrollment.  

Specifically, the transformative participation effects cited earlier frequently carry significant additional costs in terms of the employer match. The math of switching to a so-called “stretch match” — which seeks to ameliorate the cost issue by altering the rate of match (say by matching 25 cents on the dollar up to 12% of pay, rather than 50 cents on the dollar up to 6%) — may work, but workforces that have been accustomed to the latter formula will almost certainly see the former as a reduction in benefits.

Similarly, while PLANSPONSOR’s 2013 DC Survey found that three-quarters of the roughly 7,000 plan sponsor respondents said that it was either very important (41.1%) or important (36.8%) that their plan provide retirement income solutions to participants. Yet most do not offer any income-oriented products/services in their plan. That’s a disconnect, to be sure. But in view of expanding fiduciary concerns in selecting and monitoring those offerings, is it irrational?

Over the years, a lot of thought has gone into plan design features — choice architecture — that can help participants make better decisions (or, in some cases to make better decisions on their behalf). But policymakers and regulators, and the academics who sometimes advise them, tend to forget that the employer’s decision to keep, and to offer these programs in the first place, is also a choice.

A choice that the rules, regulations and limits bounding these programs don’t always encourage.

- Nevin E. Adams, JD

A Second Opinion on "Self-Medicating" Your 401(k)

At a recent event, one of the speakers was taking our industry to task for expecting too much from participants. “We don’t expect individuals to diagnose and treat their own illness,” he said, going on to note that with 401(k)s we expect people who don’t have any knowledge or training in investments to decide how to invest those balances.

Admittedly, those 401(k) investment decisions can be complicated for some — and, since it (mostly) is their money, after all, most do give individual participants the ability to decide how it will be invested. As nice as it would be if individuals were exposed to the basics of finance — saving, budgeting, investments — sometime in their lives ahead of that workplace plan enrollment meeting, or the pages of that 401(k) enrollment kit, that’s not the current system’s fault.

In reality, individuals are routinely asked to make decisions on things in which they have no real knowledge or training. On numerous occasions, I’ve had plumbers and mechanics ask me to make decisions to either replace or repair enormously expensive systems with no ready information other than the explanation of the alternatives from the professional who is asking me to make that decision. A professional who, in some cases, has a relationship dating back only to the point in time at which his or her name was gleaned from the Internet (or Yellow Pages). Fortunately, most of those decisions aren’t matters of life and death, even if there is all-too-frequently a certain urgency to them.


However, the event speaker’s assertions notwithstanding, while we may not expect individuals to accurately diagnose their illnesses, we do ask them to make decisions on complicated matters in which they lack expertise. For example, several years back, a friend of mine received a troubling diagnosis from his regular physician. Now the area of concern was beyond the particular expertise of that doctor, so he suggested that my friend seek the opinion of a specialist. He did, only to find that the specialist’s opinion directly contradicted that of the doctor he knew and trusted.

Now my friend had to make a decision — and one in which he had a vital interest — even though he lacked the personal expertise to fully evaluate and appreciate the options.

Keeping up with a 401(k) isn’t like when the plumbing starts to leak, or the “check engine” light comes on — clear signals that there is a problem that requires prompt attention. For the most part, retirement investment and planning issues are less obvious, though even that hardly makes them unique. My friend’s serious medical situation was diagnosed only because he had gone in for a checkup because he was of an age where you schedule them whether you think you need one or not.

Similarly, you don’t need to be a financial expert to manage your retirement savings — you just need to have the common sense and discipline to schedule regular financial checkups with someone who does.

- Nevin E. Adams, JD

First Things First

This may be the time of year when thoughts turn to stockings hung by the chimney with care, but it’s also the time of year when parents have to deal with assembling some of the things in those packages. And while Santa may have elves on staff to undertake the construction of a tricycle, dollhouse or Little Tykes airplane seesaw, in our house, that "elf" was named “Dad.”

A painful lesson learned over those years was the importance of following the instructions. No matter how self-evident the process appeared at the outset, or how much I thought I remembered assembling something similar in the not-too-distant past, lurching ahead and tackling things in the order I thought made most sense was inevitably a formula for disaster. And then there was the year some miscreant had apparently “liberated” the assembly instructions from the package. Since it was Christmas Eve by the time I discovered this, all I had to go by was common sense and the picture of the finished product on the package.

Debates about the best way to achieve retirement security often seem to resemble an assembly without a set of directions — frequently without even the benefit of an agreed-upon “picture” of what the finished product is supposed to look like.

A recent hearing held by the Bipartisan Policy Commission focused on three key threats to retirement security: longevity (the risk of outliving your resources), leakage (the distribution of retirement funds prior to retirement) and the costs associated with long-term care (LTC).

Jack VanDerhei, research director for the nonpartisan Employee Benefit Research Institute (EBRI), demonstrated the impact that each of these three events can have on retirement security. With regard to leakage, he explained that more than one in five of the middle 50% who are simulated to run short of money in retirement with leakages present would have sufficient funds if leakages were completely prevented. Unlike many who tout this as a solution, however, he took pains to acknowledge that that assumed no response from participants (such as individuals deciding to contribute less (or not at all) if they knew that they wouldn’t have access to those funds prior to retirement.

Of course, once you have attained retirement, longevity risk — the risk of outliving your resources — becomes a factor. VanDerhei noted that while nearly two-thirds (62%) of the middle 50% are simulated to have sufficient retirement income, those in the longest relative longevity quartile — who would live the longest — only had a 33% chance.

One potential solution —a qualifying longevity annuity contract, or QLAC — didn’t help much. Modeling the impact of a 25% QLAC on retirement readiness, and even among those projected to live longest, VanDerhei found increases in retirement readiness of only 6.6% for early Boomers and 9.6% for Gen-Xers. Overall — that is, with no filter for longevity — this option actually reduced retirement readiness, due to the expense of these arrangements.

As for LTC expenses, while this won’t be an issue for everyone, it can have an enormous impact on the retirement security of those who are affected. VanDerhei explained that only 17% of the middle 50% of those in the top LTC quartile (those most likely to incur those expenses) will have sufficient retirement income.

Ultimately, while each of the three highlighted elements (leakage, longevity and LTC) had an impact on retirement readiness, EBRI’s numbers indicate that a bigger threat is simply not being eligible for a workplace retirement plan. How big a difference? Well, looking at the second and third income quartiles (the “middle 50%”) of Gen-Xers, the probability of not running short of money in retirement soars from 51% to 80% when you compare those with no future years of eligibility in a DC plan to those with 20 or more years.

Put another way, regardless of which solutions are put forth to deal with issues like leakage, longevity and long-term care, they’ll be of little value to those who lack access to a workplace retirement plan.

It’s not just a matter of priority — it’s all about putting the “first thing” first.

- Nevin E. Adams, JD

Thanks Giving - A Retirement Plan Professional's List

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

Here’s my 2014 list:

I’m thankful that retirement plan coverage and participation is up, if slightly, and that there seems to be a expanding national dialogue about how to expand that.

I’m thankful that a growing number of policy makers are willing to admit that the “deferred” nature of 401(k) tax preferences are, in fact, different from the permanent forbearance of other tax preferences — even if the governmental accountants and academics remain oblivious.

I’m thankful that so many employers offer access to a retirement plan in the workplace — and that so many workers, given an opportunity to participate, do.

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 that those who regulate our industry continue to seek the input of those in the industry — and that so many in our industry, particularly those among our membership, take the time and energy to provide that input.

I’m thankful that participants, by and large, continue to hang in there with their commitment to retirement savings, despite lingering economic uncertainty, and competing interests, such as rising health care costs.

I’m thankful for objective research that validates the positive impact that committed planning and preparation for retirement makes.

I’m thankful for the perspectives that remind us that the “golden age” of pensions wasn’t. And that allow us to appreciate the strengths of the current system, even as we work to improve it.

I’m thankful that the prospects of fee disclosure seem to have made the realities less of a shock than might otherwise have been the case for some.

I’m thankful that fewer seem to think that their 401(k) is free – though more than a bit concerned that some (including, according to surveys, some plan sponsors) still do.

I’m thankful that plan design enhancements such as automatic enrollment, contribution acceleration, and qualified default investment alternatives continue to be adopted — and hopeful that more plan sponsors will see fit to extend those advantages to their existing workers as well as their new hires.

I’m thankful for qualified default investment alternatives (QDIA) that make it easy for participants to create well-diversified and regularly rebalanced investment portfolios — and for the thoughtful review of those options by prudent plan fiduciaries.

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

I’m thankful, in this anniversary year, for the foresight of those who brought ERISA into being — and for all who have, in the subsequent 40 years, worked to make it better through legislation, regulation and interpretation.

I’m thankful for the team here at NAPA, and for the strength, commitment and diversity of the membership. I’m thankful to be part of a growing organization 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 and members, 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, education programs 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.

 

Here’s wishing you and yours a happy Thanksgiving!

 

- Nevin E. Adams, JD 

The Cost of Living

At a recent conference, our luncheon table got to talking about savings trends and the unique challenges of Millennials, specifically the impact of graduating with so much college debt.

While several at the table had graduated with (and since paid off) college debt, the sums paled in comparison to the kinds of figures bandied about in recent headlines — or did, until I loaded up an online calculator that allowed us to see what our college debt at graduation amounted to in today’s dollars. To the collective astonishment of the retirement experts at that table, the totals, adjusted for inflation, were very much in line with the figures reported for today’s graduates.

Factoring in those kinds of cost-of-living adjustments is, of course, a crucial aspect of retirement planning. Unlike Social Security, there is no annual cost-of-living “adjustment” for retirement savings—no systematic means by which those accumulated savings are increased to offset the increased costs of things like heating fuel, food and medicine. After all, managing to replace a targeted amount of preretirement income is of little consequence if, 10 years into retirement, that amount isn’t sufficient to provide for life’s necessities.

The bottom line is this: We’re well advised as savers to take into account the inevitable cost-of-living increases that occur over time, even in a period of low inflation. To their credit, most retirement savings calculators retain an inflation assumption that can help those future projections reflect potential realities (though you often have to provide that rate).

However, those adjustments are also often incorporated in a projected annual increase in pay (and deferral) that, for a significant number of American workers, may be little more than a quaint anachronism. Unfortunately, the cost of living moves on without our proactive involvement — unlike our rate of savings (in the absence of design changes such as contribution acceleration).  

Every generation has its own challenges, of course. And even if this newest generation of workers lacks the promise of a defined benefit pension (as noted previously, the realities of those promises were often something else altogether), a growing number will find themselves enrolled automatically upon hire and invested in a diversified asset allocation portfolio. Some will also find that their initial deferral is raised automatically each year.

Certainly the level of college debt is daunting for many, and may well dissuade some from saving for retirement, at least until some of that obligation is “retired” — as it did many of their parents.  Doubtless this newest generation of workplace savers feels that they are dealing with a set of extraordinary financial constraints, though those constraints may not be as unique as they may think once one takes the cost of living into account.

Not to mention the costs of living — in retirement.

- Nevin E. Adams, JD

"Missed" Deeds and 401(k) Fees

The Nov. 7 issue of The New York Times included a story about “Finding, and Battling, Hidden Costs of 401(k) Plans.” The story focused primarily on the plight of Ronald Tussey, the named plaintiff in Tussey v. ABB, Inc., one of the so-called “excess fee” revenue sharing cases.

Tussey, now 70, claims that he was told that his retirement plan was “free,” even though, according to the Times article, “middlemen¹ were deducting expenses from his savings.” The story also notes that Tussey “never thought that his retirement plan might be flawed,” and that “he trusted his company so much he kept his money in his 401(k) long after he left.”

Over the years, I have been astounded at the allegations of fiduciary misconduct in these revenue-sharing cases. Each has its own flavor, of course, but for the most part they have struck me not so much as the outcomes of bad acts, per se, but rather steps that should have been taken in keeping with their fiduciary duty to ensure that the fees and services provided are reasonable and in the best interests of participants and their beneficiaries.

In Tussey’s case, ABB (his former employer) is alleged to have been told by a consultant that they were paying too much for record keeping fees, and then did nothing about it — for instance, though their decision to close a balanced fund and force participants into age-appropriate target-date funds. The use of float was also challenged. Both of those charges were dismissed by the 8th U.S. Circuit Court of Appeals; just this week the U.S. Supreme Court declined to hear the case.

But the point of the Times article was all about fees,² outlining places and ways that readers can find out about the “…raft of obscure fees and services that few employees will be able to discern,” while also cautioning that none of those resources can help them figure out how much is too much. (That did not, however, keep the author of the article from redefining ERISA’s prudent man standard of care to mean “…finding a reasonable selection of low-cost funds and services.”)

A couple of weeks back, my wife and I met with our financial advisor to transfer and consolidate some small IRAs. Having attended to the basics, the conversation turned to investments, and then to a couple of fund recommendations. The advisor carefully outlined the expense ratios associated with the fund (which seemed reasonable to me), and then turned to the charges associated with investing in that fund. He didn’t call them a load, of course,  but that’s what it was, and a hefty one at that. And, Ronald Tussey’s status notwithstanding, I was reminded again just how lucky most 401(k) participants are.

Even if, as the article frets, participants aren’t able to find or understand thier 401(k) fees and don’t know what is reasonable — even if they assume such things are free — their retirement savings are under the care and oversight of a plan fiduciary. That fiduciary is personally responsible for ensuring that the fees and services are reasonable, is expected to engage the services of experts, if necessary, to make that determination, and is accountable not only for the things that are done wrong — the misdeeds — but for the “missed” deeds as well.

Nevin E. Adams, JD

1. “Middlemen” in this case seem to have been Fidelity Management Trust Company, the plan’s trustee and record keeper, as well as Fidelity Management and Research Company, the investment advisor to the Fidelity mutual funds on the plan.

2. Lending numerical support to their claims, the Times article cites a 2012 report on 401(k) fees by the left-leaning Demos advocacy group claiming that “nearly a third” of the investment returns of a medium-income two-earner family was being taken by fees, according to its model. That model, it should be noted, assumed that each fund had trading costs equal to the explicit expense ratio of the fund. The report was authored by Robert Hiltonsmith, who some may recall being featured in the 2013 PBS Frontline special, “The Retirement Gamble.”  

Access "Able"

Though I’ve now spent more than three decades working with employment-based benefit plans, I’ve also worked for some very different employers, ranging from organizations that employed tens of thousands of workers to those that were a fraction of that size. Those organizations were all very different, of course, but they all had at least one thing in common: All offered a workplace retirement savings program.

That’s apparently not as common as one might think, certainly among smaller employers. In fact, a new study from the Employee Benefit Research Institute (EBRI) notes that the probability of a worker participating in an employment-based retirement plan increased significantly along with the size of his or her employer.

How significantly? Well, the EBRI report notes that for wage and salary workers ages 21‒64 who worked for employers with fewer than 10 employees, just 13.2% participated in a plan, compared with 57.0% of those working for employers with 1,000 or more employees. Filtering for those workers who are full-time, full-year, at employers with 1,000 or more workers, two-thirds (66.5%) participate, compared with just 16.9% at employers with fewer than 10 workers.

One is inclined to look for other explanations than employer size alone. Perhaps smaller employers pay less, or hire younger workers (who might also be paid less) — and those factors might play some role. However, the EBRI analysis found that, even controlling for age, workers at smaller employers still had persistently lower levels of participation across the age groups.

Moreover, across various earnings levels, workers at small employers (less than 100 employees) were less likely to participate in an employment-based retirement plan. Indeed, even among workers making $75,000 or more, a considerable disparity was found — just 27% of those in that income category working for the smallest employers participated in a plan, compared with 81% of those working for employers with 1,000 or more employees.

But when you adjust for access to a plan — the percentage participating divided by the percentage working for employers that sponsor a plan — you find that those differences largely disappear. For example, while just 16.9% of those full-time, full-year employees who work at workers participate in a plan. That’s about 86% of the 19.5% of workers in that category whose employer sponsors a plan — which is nearly identical to the participation of private-sector employers with 1,000 or more employees.

A few years back the Maryland Lottery had a simple slogan: “You gotta play to win.” That’s a motto that those saving for retirement should take to heart.

However, when it comes to retirement plan participation, it looks like a lot of those who work for small employers aren’t yet getting a chance to “play.”

- Nevin E. Adams, JD