4 Things Plan Sponsors Are Scared of – and 3 More They Should Be

Halloween is the time of year when one’s thoughts turn to trick-or-treat, ghosts and goblins, and things that go bump in the night. But what are the things plan sponsors are scared about?

Getting sued.

Plan sponsors will often mention their fear of getting sued, and little wonder. The headlines are full of multi-million-dollar lawsuits against multi-billion-dollar plans, and if relatively few actually get to a judge (and those that do are decided in the plan fiduciaries’ favor), they nonetheless seem to result in multi-million-dollar settlements. Oh, and not only has this been going on for more than a decade, the issues raised are changing as well.

As a plan fiduciary, you can still be sued of course; and let’s not forget that that includes responsibility for the acts of your co-fiduciaries, and personal liability at that (see 7 Things an ERISA Fiduciary Should Know).

That said, those cases seem to involve a rather small group of rather large plans. Most plan sponsors won’t ever get sued, much less get into trouble with regulators, of course. And those who do are much more likely to drift into trouble for things like late deposit of contributions, errors in nondiscrimination testing, or not following the terms of the plan.

Changing recordkeepers.

Any plan sponsor who has ever gone through a recordkeeping conversion knows that, however smooth the transition, and regardless of how much better the experience on the new platform is, moving is a lot of work. And, as with relocating your home, the longer you have been in a particular location, the harder it seems to be. Knowing that, it’s little wonder that many plan sponsors make those changes only under a duress of sorts, forced by poor service, a lack of capabilities, (relatively) high fees, or more than one of the above.

And that, of course, means that the transition, however badly needed or desired, will likely be rougher – and take longer – than desired (see 3 Things Plan Sponsors Should Know About Changing Providers).

Offering in-plan retirement income options.

While surveys suggest that plan participants are interested in the concept of retirement income solutions, and other surveys indicate that plan sponsors are concerned about participants’ abilities to manage their retirement income flows, there has been little movement in the addition to current plan designs, nor little indication that participants, given access to that option, are quick to embrace it. Plan sponsors remain concerned about the cost and operational implications, not to mention an extension of their fiduciary responsibility to a product that is neither required nor requested.

That said, new legislation has been introduced that might at least mitigate some of those concerns – were it to become law (see also, 5 Reasons Why More Plans Don’t Offer Retirement Income Options).

The ‘squeaky’ participant.

We’ve all heard (and likely experienced) the response to that squeaky wheel that every organization has, and that every plan sponsor fears, or at least dreads. Other than sheer human inertia, there is perhaps no more powerful force in freezing proposed plan changes in their tracks than concerns about the response that this individual (and the individuals whose attention they always seem to garner) might wreak on those responsible for those changes.

We all know who they are. We all know what they do. And yet they continue to be a force to be reckoned with in many organizations.

And 3 They Should Worry About

Now, arguably most of the foregoing concerns are overblown – they loom larger in the abstract than they should in reality. But loom large they do. But what about the things they should be “scared” of, but often aren’t?

Their personal liability

Most of the aforementioned concern about being sued seems borne from a concern about the damage – both reputational and financial – to their organizations. While that is certainly a well-founded and rational concern, plan fiduciaries, particularly plan sponsors, often seem oblivious to the reality that their liability is personal.

You can, of course, buy insurance to protect against that personal liability — but that’s likely not the fiduciary liability insurance that most organizations have in place. And it may not be enough.

Participants not having enough money to retire

For much of their existence, workplace retirement plans have been, and been viewed as, voluntary affairs. The focus of plan sponsors was to provide benefits that served to both attract and retain valued workers, and the retirement savings program was high on that list. A variety of discrimination tests served to provide incentives to encourage a certain rate of participation, while others worked to either foster a certain rate of deferrals, or brought with them the pain of restraining the contributions of the more highly compensated. Despite those, encouragements the focus was almost always on the amount of contribution going in, not the amount of income that would eventually come out.

That has begun to shift in recent months amidst the growing evidence that workers, fearful of outliving their savings, are contemplating extending their working careers (the data still suggests that such notions are aspirational compared to the realities) at a point in time where the costs to the employer – both out-of-pocket and organizationally – of that employment are problematic. Moreover, there is a growing sense that concerns about retirement security while employed have costs of their own on productivity, as well as health – which contributes to the costs of things such as absenteeism, etc.

Enter a growing focus on what has been termed “financial wellness” that encompasses not only a focus on financial security post-retirement, but also in taking the steps ahead of retirement that allow individuals to successfully build toward that day. It is perhaps too soon to describe this as a “fear” – but it is a concern, and a growing one for attentive plan sponsors.

Not having the knowledge of a prudent expert

ERISA’s “Prudent Man” rule is a standard of care, and when fiduciaries act for the exclusive purpose of providing benefits, they must act at the level of a hypothetical knowledgeable person and must reach informed and reasoned decisions consistent with that standard. The Department of Labor notes that “[l]acking that expertise, a fiduciary will want to hire someone with that professional knowledge to carry out the investment and other functions.”

Indeed. Because, when it comes to the former, most people do – and as for the latter, many still don’t.

- Nevin E. Adams, JD

6 Things People Who Need to Save for Retirement Need to Know About Saving for Retirement

When it comes to retirement, Americans seem to be a pretty insecure bunch. But then maybe it’s because they don’t know all the things they need to know.

This, of course, is National Retirement Security Week, a week devoted to making employees more aware of how critical it is to save now for their financial future, promoting the benefits of getting started saving for retirement today, and encouraging employees to take full advantage of their employer-sponsored plans by increasing their contributions.

In the spirit of the week, here are six things that people who need to save for retirement (and who doesn’t?) need to know about saving for retirement.

You should save to at least the level of the employer match.

Many employers choose to encourage your decision to save for retirement by providing the financial incentive of an employer matching contribution. That match is often referred to as “free money” because you get it just for saving for retirement. That match is not actually “free” of course – but it is free for you. If it’s 25 cents for every dollar you save, it’s like getting a 25% return on your investment.

You should save to at least the level of the employer match – especially if your plan’s default savings rate is lower.

While most education materials provided with your 401(k) emphasize the benefit of the employer match (generally referencing that you don’t want to leave “free money” on the table), a growing number try to make it easier for you by automatically enrolling you in the plan. That’s the good news.

The bad news? That default savings rate (generally 3%) will almost certainly be less than you need to save to get the full employer match (see above). And it will almost certainly be less than you need to achieve your retirement goals/needs (also see above).

So, if you do take advantage of the convenience of the default, make sure that you remember to make the change to the savings rate at the first opportunity.

You can save more than the match.

A lot of people save only as much as they need to receive the full employer match. That’s certainly a good starting point, but it may not be the right amount for you. 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. That said, 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.

Uncle Sam will help.

Beyond the tax advantages to saving for retirement on a pre-tax basis – the ability to watch those savings grow without paying taxes until they are actually withdrawn – there is another savings incentive with which many are not as familiar. It’s the Saver’s Credit, and it’s available to low- to moderate-income workers who are saving for retirement. For those who qualify, in addition to the customary benefits of workplace retirement savings, it could mean a $1,000 break on your taxes – twice that if you are married and file a joint return!

That said, just 24% of American workers with annual household incomes of less than $50,000 are aware of the credit, according to the 15th Annual Transamerica Retirement Survey. However, that’s twice as many as found by the 11th Annual Transamerica Retirement Survey. You can find out more about the Saver’s Credit here.

Older workers can save more.

Thanks to a provision in the tax code, individuals who are age 50 or older at the end of the calendar year can make what are called annual “catch-up” contributions. In 2016, up to $6,000 in catch-up contributions may be allowed by 401(k)s, 403(b)s, governmental 457s, and SARSEPs (you can do this with IRAs as well, but the limits are much smaller).

The bottom line: If you haven’t saved enough, these catch-up provisions can help. You can find out more here.

Even if you’re capped in your 401(k), you can still save more.

There’s little question that saving for retirement at work is the way to go – there are tax advantages, the support of the employer matching contributions, and access to investment choices that are screened and reviewed on a regular basis by the plan fiduciaries. However, there are certain legally imposed annual limits on how much you can save in your 401(k). If you hit those limits (and most don’t), there’s nothing that says you have to limit yourself to saving there.

But you’d be foolish not to take full advantage of your workplace savings opportunity first.

- Nevin E. Adams, JD

A Hallmark Holiday?

I’ve always had a certain ambivalence about what are cynically referred to as “Hallmark holidays.” You know the ones I’m talking about – the ones that seem (and in many cases, are) crafted for the sole purpose of generating sales for greeting card sellers.

Next week some – and I hope many – will commemorate National Retirement Security Week (which used to be called National Save for Retirement Week). Sponsored by the National Association of Government Defined Contribution Administrators (NAGDCA), it runs from October 16-22. It’s a national effort to raise public awareness about the importance of saving for retirement – and it’s even managed to obtain a Senate resolution in support of its observance.

That said – and despite the hard work, talented designs, and sponsorship of a number of large and reputable financial services organizations, I suspect many of you haven’t even heard of it. More’s the pity.

The week is focused on three key objectives:

• Making employees more aware of how critical it is to save now for their financial future
• Promoting the benefits of getting started saving for retirement today
• Encouraging employees to take full advantage of their employer-sponsored plans by increasing their contributions

We’re all too aware of the challenges that confront our nation’s retirement savings system. I’d go so far as to wager that just about everybody taking the time to read this post thinks about those items every working day, and doubtless spends a good part of their week trying to advance those causes – so, what’s the point of a single week devoted to that emphasis?

The point, of course, is not for us – but for those who don’t have these issues on their mind every day. Because, even if we should be thinking about this every day of the year, special “events” like National Retirement Security Week give those of us who do a chance to, as a collective group of professionals, remind those who don’t of the importance of thoughtful preparations for retirement. Better still, with the plan design improvements available today, you might only need one week – or one hour – of getting an individual – or group of individuals – to think about those messages.

Consider, for example, if that period of focus got an individual (or group of individuals) to enroll in their workplace retirement plan, or led an employer to embrace automatic enrollment, or, for those who already auto-enroll, to increase the default contribution rate. What if that focus prompted those who are already participating to increase their deferral rate, or to boost that rate so that they got the full benefit of the employer match? And what if that period of focus – or the actions above – led workers to stop and figure out how much they might need to save to sustain their retirement?

Sure, a cynic might see National Retirement Security Week as nothing more than a Hallmark “holiday.” But I see it as an opportunity – an opportunity to pay attention to the people – and things – we often take for granted.

Let’s take advantage of the “occasion.”

- Nevin E. Adams, D

Litigation, Regulation, and Tax Reform – Oh My!

It’s been a busy year, a crazy summer – and we’ve still got a presidential election to go.

It has been years since things actually slowed down in the summer (at least in the way we all seem to remember it), but this summer has been busier than any I can remember. Not only has everybody been making preparations for the implementation of the Labor Department’s fiduciary regulation (and it’s affecting different business models very differently), we’ve had the looming prospects of litigation regarding the legality of the regulation itself, and the authority of the Labor Department to undertake it.

The challenges to that regulation share certain critical aspects, and yet each has its own unique flavor – and let’s not forget that they are filed in three different federal venues (four, counting the one filed just last week). Could one prevail in convincing a federal judge to grant a preliminary injunction to stop the rule’s implementation? Could such a ruling actually serve to maintain the status quo until after the presidential election? Could that presidential election result in new leadership at the Labor Department? If so, might a new president decide to halt implementation, and set a new course for that regulation? It seems unlikely now, but that’s pretty much what happened in 2008 with the then-pending advice regulation from the Labor Department.

Oh, and what about the series of excess litigation lawsuits taking on some of the nation’s largest (and we’re talking multi-billion dollar) university retirement plans? A decade ago, the law firm of Schlichter, Bogard & Denton galvanized the retirement industry’s attention with about a dozen such lawsuits filed against similarly mammoth 401(k) plans.

Things have changed since then, of course. Sure, revenue sharing is still an issue, as is the disclosure of such transactions to participants. But there is a greater sophistication in the current wave of allegations – it’s not just the use of retail versus institutional shares, but the failure to consider investment vehicles like collective investment trusts and separate accounts, the choice of active management funds with an S&P 500 benchmark instead of an S&P 500 index option itself, the choice of a poor-yielding money market fund instead of a stable value option – and in some cases, the choice of what is alleged to be a high-priced stable value choice rather than a relatively straightforward money market fund.

Since the beginning of the year, the cases brought against 401(k) plans – and this has found its way into the 403(b) litigation – have challenged not only the methodology for recordkeeping fees (dismissing asset-based revenue-sharing in favor of per-participant approaches), but attempted to set markers as to what that reasonable per-participant charge should be. Needless to say, millions of dollars are at stake – and one suspects we’re not near the end of even this litigation cycle.

And then there’s the prospects for tax reform. Sure, we may have been lulled into complacency by the gridlock in Congress that calls to mind a Friday afternoon traffic jam on the Beltway. But the major party candidates are already talking about changes to tax rates, and the rates they plan to cut – and in some cases plan to raise – could, if enacted, have a ripple effect on the current tax structures for retirement plans. Could the current 401(k) deferral be rejected in favor of a Roth-only approach? Might the contribution limits and benefit levels be frozen in place – or even reduced? Tax reform means different things to different people – and can impact different people in very different ways. And make no mistake, those kinds of changes are being contemplated as you read this. Could something actually happen?

In the midst of all this change and potential disruption lies opportunity for advisors. There will be plan fiduciaries looking for guidance, and plan sponsors more open to plan design changes than they may have been otherwise. It’s likely that firms (and advisors) that had previously been committed to the retirement business will rethink that commitment, and advisors who merely dabbled in this space may well decide it has simply become too rife with potential litigation to continue their dalliance.

That said, if the field is winnowed, the firms – and advisors – who remain will doubtless be made of sterner stuff. Those who survive and who hope to prosper will likely have to step up their game to compete effectively in this new, and more challenging arena.

- Nevin E. Adams, JD

Rescuing Retirement from the ‘Rescuers’

Delegates to last week’s NAPA DC Fly-In Forum were treated to a discussion about a proposal touted as “rescuing retirement.” But the math (still) doesn’t seem to work. And it’s likely to kill the 401(k) (or at least its tax benefits). Here’s how.

The proposal itself isn’t new – its the Guaranteed Retirement Account (GRA) concept initially introduced by the New School’s Professor Teresa Ghilarducci, now somewhat modified, and embraced by Hamilton E. (Tony) James, President and COO of money management Blackstone. This newest version was rolled out earlier this year. Writ large there seem to be two significant differences in this newest version (packaged in a nice 119-page softbound book, Rescuing Retirement):

• James’ involvement, which lends some investment cred to the assumptions of the proposal; and
• a reduction in the mandatory contributions from employer and employee (the original proposal called for 5%, the new one only 3%).

The Ghilarducci/James team firmly believes that the current tax preferences inordinately benefit higher-paid workers, and therefore they have no trouble taking those away from all workers (they’ll let employers keep their current preferences for sponsoring the plan) in order to “pay” for the $600 non-refundable tax credit that is supposed to make the mandatory 1.5% employee contribution “free” for lower-income workers.

Under the GRA proposal, workers won’t be able to access the money prior to retirement – no more loans or hardship withdrawals. They assume, and perhaps rightly so, that emergency savings shouldn’t be taking place in your retirement account. Additionally, when you do retire, you will have to access the money in an annuity form – no more lump sums, and no bequests. You annuitize the payment at retirement (it can be a joint and survivor), but once you pass, any residual amount stays in the pool.

Ghilarducci and James actually seem to think they are doing employers a favor by giving them a way “out” of the bother (and expense) of providing workplace retirement plans. (James went so far as to refer to some conversations he’s had with some Fortune 500 CEOs, and apparently they’d love nothing more than to be done with these plans.) Oh sure, for those who have not previously offered a plan their new 1.5% mandatory contribution will represent an additional cost – but for everyone else, that 1.5% is likely a drop in the bucket compared to what they are spending now – and they won’t have to deal with the administrative responsibilities or fiduciary liability of a qualified plan.

But aside from my very real sense that killing the tax preferences for 401(k) savers would also serve to “kill” the 401(k), policymakers can’t help but be drawn to the notion of a proposal that purports to “rescue” retirement without costing the taxpayers. Well, without “costing” the taxpayers more, anyway (remembering, of course, that these are deferrals – a postponement of taxation, not a permanent deduction).

But does the proposal actually do what it claims?

First off, it does nothing for Boomers. As James aptly noted at the Fly-In, “It’s too late for them.” So whose retirement is being rescued? Well, younger workers – Millennials particularly, but more specifically, lower income workers – who in some cases are also part-time, part-year. Those workers are less likely to have access to a plan at work, and – likely because of their lower incomes — are certainly less likely to take full advantage of it.

Still, if today’s savings rates are deemed insufficient to help today’s retirement savers achieve their goals, how in the world can a combined 3% savings rate (employer and employee) possibly “rescue” retirement?

Well, despite their book’s auspicious title, from our discussion last week (and there were a couple of hundred witnesses), the only people who are being “rescued” are those who aren’t saving anything at all now (they’d be forced to save under this proposal) who also happen to be making $46,000 a year or less. That’s the group that Ghilarducci and James say will, under this proposal, achieve a 70% replacement rate (assuming Social Security, and no reductions there) in retirement. Everybody else? Well, you can keep saving for retirement, but Ghilarducci and James don’t see any reason to “underwrite” that responsible behavior by allowing you to defer paying taxes on compensation you haven’t yet received.

But even if you’re only focused on shoring up the prospects of lower-income workers, could a 3% contribution be enough? Even with the 7% return¹ that Ghilarducci and James assume for their GRAs, I just couldn’t see it adding up.

So I asked Employee Benefit Research Institute (EBRI) Research Director Jack VanDerhei to run the GRA program assumptions – for younger workers only (ages 26-30) – and asked him to compare that to what those same workers might get if they simply continued in their 401(k)s.

The EBRI analysis took actual balances, contribution rates and investment choices across multiple recordkeepers from more than 600,000 401(k) participants, looking at those currently ages 26-30, including those with zero contributions, with 1,000 alternative simulated outcomes for stochastic rate of returns based on Ibbotson time series (with fees between 43 and 54 bps), including the impact of job change (an assumption was made that 401(k) participants would continue to work for employers who sponsored 401(k) plans), cashouts, hardship distributions, loan defaults, and with contributions based on observed participant data as a function of age and income and asset allocation based on observed participant data as a function of age. For the Ghillarducci/James GRA, EBRI assumed no cashouts, hardship distributions or loan defaults (they aren’t allowed), assumed a deterministic 7% nominal return with no fees, and took their assumptions about the 3% mandatory contributions. And then compared the two outcomes at age 65.

The result? Well, as you can see in the chart to the right , the median for all income quartiles fares worse under the GRA proposal than under their current 401(k) path. (To download a full-page pdf of the chart, click here.) That’s not to say that every 401(k) path will provide sufficient income in retirement, of course – but it does affirm the common sense logic that if current rates of saving aren’t sufficient, 3% – even mandatory, and even with no leakage – won’t match the performance of the 401(k).

Of course, we know that today not everyone has access to a 401(k), and we’re all working to change that. But those truly trying to rescue retirement should probably do so with a life preserver, not an anchor.

- Nevin E. Adams, JD

Footnote

1. They view this return as conservative next to the 8.5% returns assumed by public pension plans, and think 401(k) investors only get 3-4%.

The Fourth Quarter

In most professional sports, the clock – the time remaining in the contest – is a factor (baseball being a notable exception – those nine innings are going to be played, regardless of how long it takes).

The clock can be your enemy if you’re trying to hang on to a slender lead – or it can be your friend – if your team needs some extra time to catch up.

Retirement also has a clock – the problem is, we generally can’t see it. Little wonder that time – our retirement clock – is perhaps the biggest uncertainty when it comes to retirement planning. Not just the when it starts, but mostly the “how long” aspect. Surveys suggest that fear of outliving one’s assets is a primary concern about retirement – little wonder since so few have stopped to figure out how much they have, not to mention the uncertainty as to how long it has to last.

I recently read an interesting article by Dr. Joe Coughlin, founder and director of the Massachusetts Institute of Technology AgeLab (and closing keynoter at the 2016 NAPA 401(k) Summit). He notes that if we assume that a person with some or more college education and good income is now likely to live to about 85 or 87 years old, that person’s life can be divided into four periods.

Birth to college graduation is about 7,700 days. College graduation to midlife crisis at about 45 years old is another 8,700 days. Midlife to the retirement age of 65 is another 7,300 days.

Oh – how long for retirement? Well, based on the foregoing assumptions, Coughlin suggests that you can – and for planning purposes I would argue should – add about another 8,000 days from your retirement party to life’s end.

Said another way, for a large, and growing number of individuals, retirement is, in a very real sense, their fourth quarter. One that you “coast” through at your peril, and only if you have built up a large, comfortable, and perhaps unassailable cushion.

For those who tend to see arriving at retirement as a finish line, it may instead be more appropriate to be thinking – and planning – as though we still have another quarter to play.

And the clock… is ticking.

- Nevin E. Adams, JD

Retirement Plans and Retirement Income: It’s Complicated

One of the great concerns of our industry — when we aren’t worrying if people have saved enough for retirement — is worrying about how those savings are going to last through retirement.

Enter to that debate a recent report from the Government Accountability Office (GAO) that basically takes the Labor Department to task for not doing enough to encourage the use of lifetime income options in workplace retirement plans.

Sure enough, it’s been hard for lifetime income options to get traction with retirement plans. The GAO rightly outlines a number of the concerns typically articulated with these options — which are well known to those who have looked to remedy the situation (see “5 Reasons Why More Plans Don’t Offer Retirement Income Options”).

GAO Alternatives

So, what suggestions does the GAO have for the DOL? Well, the GAO has several specific suggestions, including that the DOL:

• do more to clarify the safe harbor for selecting an annuity provider;
• consider providing legal relief for plan fiduciaries offering an appropriate mix of annuity and withdrawal options;
• help encourage the use by incorporating references to selecting a lifetime income/annuity provider in both its current publications, or by issuing new guidance to do so;
• include participant access to advice on the plan’s lifetime income options from an expert in retirement income strategies; and
• consider providing required minimum distribution (RMD)-based default income plan distributions as a default stream of lifetime income based on the RMD methodology beginning, unless they opt out, when retirement-age participants separate from employment, rather than after age 70½.

The GAO goes so far as to suggest that the Labor Department encourage plan sponsors to use a record keeper that includes annuities from multiple providers on their record keeping platform (as if one wasn’t complicated enough), to encourage them to offer participants the option to partially annuitize their account balance, and to take into account changing providers that could put the current lifetime income products at risk.

The Logic

The thinking, of course, is that if you made it (feel) safer for plan sponsors to offer lifetime income options, more would do so. And that if you had more plan sponsors offering the options, more participants would have a chance to, and ultimately would, choose them. And that if you set up those options as a default, even more participants would “choose” them, or at least wind up with them. It’s hard to rationally argue with that logic. And yet, for years I’ve watched a number of truly innovative and objection-responsive solutions come to market — and, for the most part, fail to live up to expectations. Why? Well, it’s complicated.

Consider that, unlike automatic enrollment — around which the Pension Protection Act so carefully crafted provisions that provided an exit path for participants who had second thoughts — unwinding lifetime income options is generally seen as more… complicated. Not impossible, mind you — but “complicated.”

As for the enhancements to the current safe harbor that GAO recommends — well, if plan sponsors are to be believed, that would certainly help. But let’s not ignore the reality that the DOL has already taken some pretty significant steps in that direction (and seems reluctant to go further). Despite those steps, I think it’s fair to say that plan fiduciaries still find it their responsibilities with regard to those options… complicated, certainly compared to the other providers/services for which they are accountable.

Behavioral Barriers

There’s little question that participants need help structuring their income in retirement — and little doubt that a lifetime income option could help them do that. That said, the biggest impediment to adoption may simply be that (industry surveys notwithstanding) participants don’t seem to be asking for the option — and when they do have access, mostly don’t take advantage, even when defined participants have a choice, they opt for the lump sum. Not that those dynamics can’t be influenced by plan design or advisor input, but justifiable concerns remain about fees, portability and provider sustainability. Moreover, there are significant behavioral finance impediments — be it the overweighting of small probabilities, or mental accounting — or simply the fear of losing control of finances, a desire to leave something to heirs, or simple risk aversion. It’s often not just one thing. It’s… complicated.

Ultimately, while the GAO’s recommendations would surely expand the availability of these options, would it have an impact on participant adoption? An income option with all the features participants want will be even more complex (and expensive) — and, if there were to be a default withdrawal option into a lifetime income option, I suspect that the opt-out rates would be high, for (all) the reasons noted above.

Why? Well, because it’s (still) complicated.

- Nevin E. Adams, JD

Never Forget

Early on a bright Tuesday morning in 2001, I was in the middle of a cross-country flight, literally running from one terminal to another in Dallas, when my cell phone rang.


It was my wife. I had been on an American Airlines flight heading for L.A., after all — and at that time, not much else was known about the first plane that struck the World Trade Center. I thought she had to be misunderstanding what she had seen on TV. Would that she had…

That day, when family and friends were so dear and precious to us all, I spent in a hotel room in Dallas. It was perhaps the longest day — and loneliest night — of my life. In fact, I was to spend the next several days in Dallas — there were no planes flying, no rental cars to be had — separated from home and family by hundreds of insurmountable miles for three interminably long days. As that week drew to a close, I finally was able to get a rental car and begin a long two-day journey home. While it was a long, lonely drive, it gave me a lot of time to think, though most of that drive was a blur, just mile after endless mile of open road.

There was, however, one incident I will never forget. Somewhere in the middle of Arkansas, a group of Hell’s Angels bikers was coming up around me. A particularly scruffy looking guy with a long beard led the pack on a big bike — rough looking. But unfurled behind him on the bike was an enormous American flag. At that moment, for the first time in 72 hours, I felt a sense of peace — the comfort you feel inside when you know you are going home.

Fifteen years later, I can still feel that ache of being separated from those I love — and yet still remember the warmth I felt when I saw that biker gang drive by me flying our nation’s flag. On not a few mornings since that awful day, I’ve thought about how many went to work, how many boarded a plane, not realizing that they would not get to come home again. How many sacrificed their lives so that others could go home. How many still put their lives on the line every day, here and abroad, to help keep us and our loved ones safe.

We take a lot for granted in this life, nothing more cavalierly than that there will be a tomorrow to set the record straight, to right wrongs inflicted, to tell our loved ones just how precious they are. As we remember that most awful of days, and the loss of those no longer with us, let’s all take a moment to treasure what we have — and those we have to share it with still.

Peace.

- Nevin E. Adams, JD

An 'Educated' Guess

It’s not hard to find scary headlines about 401(k)s – seems as though every week you read how people aren’t saving enough, are worried that they aren’t saving enough, aren’t saving enough and aren’t worried that they aren’t saving enough… Then in the past couple of weeks, a new twist.

First a headline that proclaims that “The 401(k) is Wreaking Havoc on Retirement.” Then one that purports to share “Why 401(k)s are bad for people without a college degree.” As it turns out, the articles are both about the same study, “Disadvantages of the Less Educated: Education and Contributory Pensions at Work.”

The authors of that study (ChangHwan Kim of the University of Kansas and Christopher Tamborini of the Social Security Administration) offer a basic premise – that less educated workers aren’t as well served as college graduates by the current defined contribution-centric plan structures (notably 401(k)s) that predominate the retirement landscape today – which is to say that they are less likely to be covered by those plans, less likely to take advantage when they are covered, and inclined to save less than their degreed counterparts even when they do take advantage.

They present evidence that less-educated workers save less, even when they make the same money as those with college educations. How much less? They say that college-educated people are 1.2 times more likely to be enrolled in a DC plan than high-school graduates are – and that’s even after controlling for income, access to a retirement plan, occupation, job tenure and other factors. Those with college degrees also contribute 26% more to their retirement, on average, according to the report.

But, not content to leave it there, they go on to suggest that less-educated workers were better off in a defined benefit structured environment where they didn’t have to make the decision to participate, and where they didn’t have to decide how much to save. (The most significant distinction – that in the private sector they generally didn’t have to contribute – isn’t mentioned.) Indeed, if the DB system had been as pervasive as many assume – or as generous in result as it was in design – they might have a point.

Wreaked Wrought?

But has that result – and the very existence of the 401(k) – truly “wreaked havoc” on the nation’s retirement system? In fairness, the authors of the study don’t make that claim – that’s left to the journalists looking for a catchy headline (or hoping to press a specific agenda). But those who retain this fond notion of the way things were tend to gloss over the reality that it’s one thing to be covered by, or even to participate in a DB plan, something else altogether to work there long enough to accumulate any real benefit. While some workers did spend their working career at a single employer (and some still do, especially in the public sector), the data show that for the most part we have long been a nation of relatively short-tenured workers.

How short? Well, the median job tenure in the United States has hovered around five years for the past three decades. Indeed, according to the nonpartisan Employee Benefit Research Institute (EBRI), in recent years it has ticked up, to about 5.5 years, but that’s because women are staying in their jobs longer; job tenure for men has actually been dropping. What that means is that even workers who were “covered” by a pension plan in the private sector – particularly back in the time before there weren’t 401(k)s – were highly likely to walk away with… nothing.

While I get that a system which relies on workers to take action, to make decisions and, yes, even to set money aside from their pay to fund their retirement, might not work as well for those who don’t take advantage of it as a system that asked nothing of them other than to remain employed, the realities of American job tenure probably undermined those advantages – and then some.

The less educated may indeed be at something of a disadvantage in a voluntary savings system relative to those who are more inclined to take advantage of its opportunities – but that shouldn’t be equated with a presumption that they were better served by a system that depended on job tenure levels that never existed for most.

- Nevin E. Adams, JD

A Matter of Time

Preparing for retirement inevitably brings up questions of time: When will you retire? How long will your retirement last? How long do you have to prepare? Often we don’t take advantage of the time we have, and sometimes we don’t have the time we thought we would.

It was just five years ago this week that my wife and I, having just deposited my youngest off for his first semester of college, spent our drive home up the East Coast with Hurricane Irene (and the reports of her potential destruction and probable landfalls) close behind.

We arrived home, unloaded in record time, and went straight to the local hardware store to stock up for the coming storm. As you might imagine, we weren’t the only ones to do so. And what we had most hoped to acquire (a generator) was not to be found — there, or at that moment, apparently anywhere in the Nutmeg State.

What made that situation all the more infuriating was that, while the prospect of a hurricane landfall in Connecticut was relatively unique, we had, on several prior occasions, been without power, and for extended periods. After each I had told myself that we really needed to invest in a generator — but, as human beings are inclined to do, thinking that I had plenty of time to do so (and when it was more convenient), I simply (and repeatedly) postponed taking action.

That uncertainty came home in a very different way to me this past week, with word of the passing of a colleague, just 55. She had spoken of retiring “early” so as to be able to spend more time with her young daughter — hoping to catch up on some of the family time she had perhaps missed due to the obligations of a professional career, or maybe just doing some of the relaxing and travelling that always seem to fall prey to the pressures of everyday life. Tragically, while riding her bike, of all things, this dear lady — a two-time cancer survivor — was struck and killed by a car.

We never know how much time we’ll have — to work, to live, to save, to prepare for the time we have left, to say and do the things we always mean to say and do.

Ultimately, of course, what matters isn’t the time you have, it’s what you do with it.

- Nevin E. Adams, JD

How the Class of 2020’s Retirement Plans Will Be Different

Each year the good folks at Beloit College produce a “Mindset List” providing a look at the cultural touchstones that shape the lives of students about to enter college. So, in what ways will their retirement plans differ from those of their parents?

In the most recent list (they’ve been doing it since 1998), the Beloit Mindset List notes that for the class of 2020 (among other things):

• There has always been a digital swap meet called eBay.
• They never heard Harry Caray try to sing during the seventh inning at Wrigley Field.
• Vladimir Putin has always been calling the shots at the Kremlin.
• Elian Gonzalez, who would like to visit the U.S. again someday, has always been back in Cuba.
• The Ali/Frazier boxing match for their generation was between the daughters of Muhammad and Joe.
• NFL coaches have always had the opportunity to throw a red flag and question the ref.
• Snowboarding has always been an Olympic sport.
• John Elway and Wayne Gretzky have always been retired.

So, what about their retirement plans? Well, for the Class of 2020:

• There have always been 401(k)s.
• They’ve always had a Roth option available to them (401(k) or IRA).
• They’ve always worried that Social Security wouldn’t be available to pay benefits (in that, they’re much like their parents at their age).
• They’ve always had a call center to reach out to with questions about their retirement plan.
• They’ve never had to wait to be eligible to start saving in their 401(k) (their parents generally had to wait a year).
• They’ve never had to sign up for their 401(k) plan (their 401(k) automatically enrolls new hires).
• They’ve never had to make an investment choice in their 401(k) plan (their 401(k) has long had a QDIA default option).
• They’ve always had fee information available to them on their 401(k) statement (it remains to be seen if they’ll understand it any better than their parents).
• They’ve always known what their 401(k) balance would equal in monthly installment payments.
• They’ve always had an advisor available to answer their questions.

Most importantly, they’ll have the advantage of time, a full career to save and build, to save at higher rates, and to invest more efficiently and effectively.

- Nevin E. Adams, JD

Boiling Points

One could hardly read the headlines this past week without experiencing a certain sense of déjà vu.

After all, it’s been not quite 10 years since the then relatively obscure St. Louis-based law firm of Schlichter, Bogard & Denton launched about a dozen of what have come to be referred to as “excessive fee” lawsuits.

Not that the recent batch of suits targeting multi-billion dollar university plans are a mere recounting of the charges leveled against their private sector counterparts. No, in the years since then the Schlichter law firm has sharpened their pencils, and their criticism. Those early suits focused on what, in comparison to the most recent waves, seem almost quaintly simplistic: allegedly undisclosed revenue-sharing practices, the use of non-institutional class shares by large 401(k) plans, the apparent lack of participant disclosure of hard-dollar fees (which even then were disclosed to regulators), and even the presentation of ostensibly passive funds as actively managed.

In the lawsuits that have been filed in recent months, it’s no longer enough to offer institutional class shares — one must now consider the (potentially) even less expensive alternatives of separately managed accounts and collective trusts. Actively managed fund options are routinely disparaged, while the only reasonable fee structure for recordkeeping fees is declared to be a per participant charge. The use of proprietary fund options, rather than being viewed as a testament to the organization’s confidence in its investment management acumen, is portrayed as a de facto fiduciary violation since the investment management fees associated with those options inure to the benefit of the firm sponsoring the plan.

The most recent suits targeting university plans add to the standard charges leveled against 401(k) plans some that are peculiar to that universe — notably providing a “dizzying” array of fund options that plaintiffs claim results not only in participant paralysis, but in the obfuscation of fees and the decision to employ multiple recordkeepers. The proof statement that these practices are inappropriate? Comparisons with the standards and averages of 401(k) plans.

Overlooked in the burst of headlines and allegations is that we know very little about these plans other than what the plaintiffs allege. We aren’t told anything about the employer match, for instance, not to mention participant rates, nor is the subject of outcomes mentioned. We know nothing of the services rendered for these fees, only that, of the investment funds on the menu, cheaper and ostensibly comparable alternatives were available. The plaintiffs’ argument seems to be, if there were cheaper alternatives available, the ones chosen were, by definition, unreasonable, regardless of the services provided.

One other thing overlooked in the burst of lawsuits is that precious few of these cases have actually made their way to trial, and that among those that have, on the issues of fund choices and fund pricing, the courts seemed inclined to give the plan fiduciaries the benefit of the doubt. The Schlichter firm’s own press releases now not only tout the 20 such complaints the firm had filed as of early August, but that in 2009 they “won the only full trial of an 401(k) excessive fee case.” A case in which the attorney fees turned out to be more than triple that of the recovery won by plaintiffs. But if the record at trial is more checkered than many appreciate, plan fiduciaries can’t ignore the fact that in the lawsuits it has brought, the Schlichter firm has succeeded in securing nine settlements.

A popular aphorism holds that if you put a frog in a pot of boiling water, it will immediately hop out, recognizing the peril that that water represents. But if you put the same frog in a pot of cold water and then slowly bring it to a boil, the frog will stay put, since the danger creeps up on it in a less noticeable fashion.

Perhaps that explains why, 10 years after the first claims were filed, so many multi-billion dollar retirement plans still remain vulnerable.

Though by now, that fiduciary pot is surely boiling — and has been for some time.

- Nevin E. Adams, JD

5 Ways Industry Surveys Can Be Misleading

As human beings, we’re drawn to perspectives, including surveys and studies that validate our sense of the world. This “confirmation bias,” as it’s called, is the tendency to search for, interpret, favor, and recall information in a way that confirms our preexisting beliefs or hypotheses. It also tends to make us discount findings that run afoul of our existing beliefs.

In its simplest terms then, when you see a headline that confirms your sense of the world, you’ll be naturally inclined to embrace and remember it as a validation of what you already perceive reality to be. Even if the grounds supporting that premise are shaky, sketchy, or (shudder) downright scurrilous.

Here are some things to look for – likely in the fine print – as you evaluate those findings.

There can be a difference between what people say they will (or might) do and what they actually will.

No matter how well targeted they are, surveys (and studies that incorporate the outcome of surveys) must rely on what individuals tell us they will do in specific circumstances, particularly in circumstances where the decision is hypothetical. When you’re dealing with something that hasn’t actually occurred, there’s not much help for that, but there’s plenty of evidence to suggest that, once given an opportunity to act on the actual choice(s), people act differently than their response to a survey might suggest.

For example, people tend to be less prone to action in reality than they indicate they will be – inertia being one of the most powerful forces in human nature, apparently. Also, sometimes survey respondents indicate a preference for what they think is the “right” answer, or what they think the individual conducting the survey expects, rather than what they actually think. That, of course, is why the positioning and framing of the question can be so important (as a side note, whenever possible, it helps to see the actual questions asked, and the responses available).

The bottom line is that when what people tell you they will do, or even what kind of product they would like to buy, if you later find that they don’t, just remember that there may be more powerful forces at work.

There can be a difference between what people think they have and reality.

Since, particularly with retirement plans, there are so few good sources of data at the participant level, much of what gets picked up in academic research is based on information that is “self-reported,” which is to say, it’s what people tell the people taking the survey. The most prevalent is, perhaps, the Survey of Consumer Finance (SCF), conducted by the Federal Reserve every three years.

The source is certainly credible, but the basis is phone interviews with individuals about a variety of aspects of their financial status, including a few questions on their retirement savings, expectations about pensions, etc. In that sense, it tells you what the individuals surveyed have (or perhaps wish they had), but not necessarily what they actually have.

Perhaps more significantly, the SCF surveys different people every three years, so be wary of the trendlines that are drawn from its findings – such as increases or decreases in retirement savings. Those who do are comparing apples and oranges – more precisely the savings of one group of individuals to a completely different group of people… three years later.

The survey sample size and composition matter.

Especially when people position their findings as representative of a particular group, you want to make sure that that group is, in fact, adequately represented. Perhaps needless to say, the smaller the sampling size – or the larger the statistical error – the less reliable the results.

Case in point: Several months ago, I stumbled across a survey that purported to capture a big shift in advisors’ response to the Labor Department’s fiduciary regulation. Except that between the two points in time when they assessed the shift in sentiment, they wound up talking to two completely different types of advisors. So, while the surveying firm – and the instrument – were ostensibly the same, the conclusions drawn as a shift in sentiment could have been nothing more than a difference in perspective between two completely different groups of people.

Consider the source.

Human beings have certain biases – and so do the organizations that conduct and pay to surveys and studies conducted. Not that sponsored research can’t provide valuable insights. But approach with caution the conclusions drawn by those that tell you that everybody wants to buy the type of product offered by the firm(s) that have underwritten the survey.

When you ask may matter as much as what you ask.

Objective surveys can be complicated instruments to create, and identifying and garnering responses from the “right” audiences can be an even more challenging undertaking. That said, people’s perspectives on certain issues are often influenced by events around them – and a question asked in January can generate an entirely different response even a month later, much less a year after the fact.

For example, a 2015 survey of plan sponsor sentiment on a topic like 401(k) fee litigation is unlikely to produce identical results to one conducted in the past 30 days, nor would an advisor survey about the fiduciary regulation prior to the publication of the final rule as to its impact. Down in those footnotes about sample size/composition, you’ll likely find an indication as to when the survey was conducted. There’s nothing wrong with recycling survey results, properly disclosed. But things do change, and you need to be careful about any conclusions drawn from old data.

Not to mention the conclusions you might be otherwise inclined to draw from conclusions about old data.

- Nevin E. Adams, JD

See also:

• EBRI Report Calls Out Pew, CRR on Retirement Conclusions
• 4 Things That Make Me Go ‘Huh?’
• Could Fees Cost Millennials $590,000 in Retirement Savings?
• A Preference on ‘Preferences’?
• 3 (More) Pervasive Retirement Myths — an Academic Perspective

A Pension Protection Perspective

It’s hard to believe, but the Pension Protection Act of 2006 will be a decade old next month. And it’s probably done more good for the nation’s retirement security than most realize.

The PPA drew its name from the portions targeted at shoring up defined benefit plans (and PBGC funding, I suppose), though at the time I remember most people thinking it was an ironic name, in that it may have been intended to secure the pensions that were already in existence, but might well accelerate the demise of some on the cusp, and in any event was unlikely to help spur any new growth in that area. Some went so far as to call it the Pension Destruction Act.

Indeed, at a recent panel session featuring the perspectives of a number of the Hill staffers who shepherded the at times controversial legislation through its passage, the emphasis was largely on the DB aspects that, though well-intentioned, had been overwhelmed (if not undermined) by the onset of the 2008 financial crisis and the “historically low” interest rate environment that continues to pressure pension funding to this day.

DC Developments

In contrast, the aftermath of the PPA on the defined contribution side has been nothing short of extraordinary. Sure it was all voluntary – the use of carrots like safe harbors for automatic enrollment, rather than the sticks that accompanied the DB provisions. And yet, seemingly overnight, and without a government mandate or regulatory imperative, the decades-old concept of “negative election” (now “rebranded” as automatic enrollment) became part of every credible retirement plan advisor’s toolkit.

Without relying on a mandate to impose its will, nearly overnight the paradigm on automatic enrollment shifted. Sure, it’s still far more common among larger employers than those downstream – and yet, those larger plans are where most participants are. And if the adoption of contribution acceleration has lagged behind automatic enrollment, it is nonetheless far more advanced than it would have been in the absence of the PPA.

For my money, the biggest long-term positive impact of all may have been the rapid expansion of the qualified default investment alternative (QDIA) as the plan default investment option. One need look no further than the millions of dollars in retirement savings that have been channeled into a range of professionally managed asset allocation solutions to appreciate the impact that change has had. All have significantly and positively moved the needle in helping enhance the ultimate financial security of thousands, if not millions, of American workers.

‘Staying’ Power

However, perhaps the most-overlooked, if not underappreciated, aspect of the PPA was that it made permanent the retirement savings incentives enacted under the Economic Growth And Tax Relief Reconciliation Act of 2001 (EGTRRA), including annual contribution limits for IRAs, Roth 401(k) plans, enhanced portability of retirement benefits, and reduced administrative burdens on plan sponsors. Without that support, all the gains made on those provisions would have fallen back. The PPA also made the Saver’s Credit permanent, as well as resolving legal uncertainty surrounding cash balance plans, and requiring DC plans to permit employees to diversify out of investments in employer securities if the securities are publicly traded.

The work is not done, of course. Innovative retirement income offerings continue to be introduced, but can’t seem to find traction, the focus on outcomes (these days generally under the banner of financial wellness) is still nascent, and the challenges of compliance with the DOL’s new fiduciary regulation lie ahead.

With so much progress made – and yet so much yet to be achieved – it may seem naïve in this exceedingly unusual election year to hold out hope that the nation’s legislative bodies could put their heads together and work together as constructively as they did just a decade ago.

But one can (still) hope.

- Nevin E. Adams, JD 

3 Things Retirement Savers Can Learn from Pokémon Go

If you’re a Millennial (or know one), you’ve surely heard about (or seen in action) the recent outbreak of Pokémon Go.

It’s not even a week old, but it’s quickly dominating social media. If you’ve managed to avoid the media barrage, it’s a new (free) interactive online game that builds on the basics of the Pokémon card and video games past – catching Pokémon, battling at Gyms, using items, evolving your creatures. These creatures (151 unique ones at present) have even been spotted hanging out with a certain renowned ERISA attorney (see below)!

The object of the game is to find these Pokémon (they’re fictional animals – the name is said to be from a contracted Romanization of the Japanese Poketto Monsuta, a.k.a. “pocket monsters”), and then catch them, by throwing a sphere called a Pokéball in their general direction, after which they can grow via battles with other Pokémon in Gyms, and then do battles with still yet more Pokémon in Gyms, etc. All of which is to the benefit of their trainer – you. With Pokémon Go, players can download the free app, then head outdoors using a GPS map in search of Pokémon, using their camera to view creatures “in the wild” and capture them.

Now that we’ve gotten you up to speed on the basics, here are some things that will help you in Pokémon Go and saving for retirement.

Your odds improve if you take action.

Though video games have long been criticized for keeping young players indoors, Pokémon Go draws players out into the real world. You can find “wild” Pokémon by physically walking around your area, and looking near what are called “PokéStops,” which tend to be tourist spots, malls or even churches. If you’re looking to hatch some Pokémon eggs, you have to walk to do that as well! You can play it without going outside, but you won’t do nearly as well.

Pokémon character (left) and human ERISA attorney (right)

Lots of workplace retirement plans still rely on voluntary enrollment, which is to say you have to fill out a form to join the plan. Unfortunately, in those plans, if you don’t sign up, you don’t participate.

A growing number of plans do provide for automatic enrollment, which means that you get signed up for the plan unless you fill out a form to opt out. That’s a good thing for folks who are busy, lazy, or are simply befuddled by the choices that you have to make with a voluntary plan (how much to save, how to invest it, who you’d like your beneficiary to be). However, there is a catch: Most of the automatic enrollment plans assume that a 3% contribution from your pay. And, regardless of your pay level or age, that’s almost certainly not going to be “enough” to provide a financially secure retirement.

Said another way, it’s not very “evolved” thinking…

Contributing more can get you to the finish line faster.

Pokémon Go is free – and you don’t need to spend a cent to pick up Pokémon, battle them, accumulate points, and even hatch the new ones. That said, we lead busy lives (yes, even those who find time to play Pokémon Go), and for those who want to get “there” faster, there are ways to do so by spending a little money.

There is, as you might expect, a shop where you can purchase all manner of coin bundles for real-world cash, which can then be traded for Pokémon-luring Incense, more Pokéballs and a few other things. If you’re in a hurry to “catch ‘em all!” And would rather spend money than time.

Saving for retirement doesn’t have to be a big financial commitment (depending on how much you need, and how long you have to save), though it can be if you put it off, or don’t establish a goal that suitable for the amount you need and the time you have to set it aside. Those who would like to get to that point sooner can, of course, “spend” more on retirement by setting aside larger contributions, sooner.

Every so often you need to look where you’re going.

Apparently one of the dangers of the new Pokémon Go is that game players have been spotted looking at nothing but their smartphone screens while they walk around looking for new Pokémons. This even when they are crossing highways, walking over bridges, travelling near bodies of water or – in at least one case – frequently empty parking lots where individuals looking to separate them from their money have been lurking. The bottom line – players are advised to be aware of their surroundings as they search for Pokémon.

When it comes to saving for retirement, whether you’re in an automatic enrollment plan (where the initial investment decision is likely made for you, and directed to a target-date fund), or a voluntary enrollment plan (where you may have made the initial decision, perhaps with some help, but probably haven’t looked at it in a while), those initial investment decisions – however ably made – should be revisited from time to time, at least once a year. The markets are always moving, after all – and that perfect choice of investments has likely shifted over time.

More importantly, you need to keep an eye on how your total savings is adding up to your retirement savings goals, and perhaps make adjustments to the amount you are saving.

After all, even if you get off to a good start, if you don’t look where you’re going, it’s easy to wander off the path and find yourself in trouble.

- Nevin E. Adams, JD

4 Things Plan Fiduciaries Have in Common With the 2nd Continental Congress

Anyone who has ever found their grand idea shackled to the deliberations of a committee, or who has had to kowtow to the sensibilities of a recalcitrant compliance department, can empathize with the process that produced the Declaration of Independence we’ll commemorate on the Fourth.

That said, I think there are things that today’s investment/plan committee share with, and can learn from, the experience of those forefathers who crafted and signed the document declaring our nation’s independence.

It’s hard to break with the status quo.

By the time the Second Continental Congress convened, the “shot heard round the world” had already been fired at Lexington, but many of the representatives there still held out hope for some kind of peaceful reconciliation, even as they authorized an army and put George Washington at its helm. Little wonder that, even in the midst of hostilities, there was a strong inclination on the part of several key individuals to put things back the way they had been, to patch them over, rather than to break things off, and take on the world’s most accomplished military force.

However, even those who were ready to declare independence weren’t of a single mind on how it should be done, or how those intentions expressed. Committee work is the art of compromise – and had those varying voices not been accommodated, the status quo would likely have prevailed.

As human beings we are largely predisposed to leaving things the way they are, rather than making abrupt and dramatic change. Whether this “inertia” comes from a fear of the unknown, a certain laziness about the extra work that might be required, or a sense that advocating change suggests an admission that there was something “wrong” before, it seems fair to say that plan sponsors are, in the absence of a compelling reason for change, inclined to rationalize staying put.

As a consequence, you see new fund options added, while old and unsatisfactory funds linger on the plan menu, a general reluctance to undertake an evaluation of long-standing providers in the absence of severe service issues, and an overall inertia when it comes to adopting potentially disruptive plan features like automatic enrollment or deferral acceleration.

While many of the delegates to the Constitutional Convention were restricted by the entities that appointed them in terms of how they could vote on the issues presented, plan fiduciaries don’t have that option. Their decisions are bound to an obligation that those decisions be made solely in the best interests of plan participants and their beneficiaries – regardless of any other organizational or personal obligations they may have outside their committee role.

Selection of committee members is crucial.

The Second Continental Congress was comprised of representatives from what amounted to 13 different governments, with everything from extralegal conventions, ad hoc committees, and elected assemblies relied upon to name the delegates. Delegates who, despite the variety of assemblages that chose them, were in several key circumstances, bound in their voting by the instructions given to them. Needless to say, that made reaching consensus on the issues even more complicated than it might have been in “ordinary” circumstances.

Today the process of putting together an investment or plan committee runs the gamut – everything from simply extrapolating roles from an organization chart to a random assortment of individuals to a thoughtful consideration of individuals and their qualifications to act as a plan fiduciary. But if you want a good result, you need to have the right individuals – and if those individuals lack the requisite knowledge on a particular issue, they need to access that expertise from individuals who do.

It’s important to put it in writing.

While the Declaration of Independence technically had no legal effect, with the possible exception of the Gettysburg Address (which was heavily inspired by the former), its impact not only on the establishment of the United States, but as a social and political inspiration for many throughout the world is unquestioned, and perhaps unprecedented. Putting that declaration – and the sentiments expressed – in writing gave it a force and influence far beyond its original purpose.

As for plan fiduciaries, there is an old ERISA adage that says, “prudence is process.” However, an updated version of that adage might be “prudence is process – but only if you can prove it.” To that end, a written record of the activities of plan committee(s) is an essential ingredient in validating not only the results, but also the thought process behind those deliberations. More significantly, those minutes can provide committee members – both past and future – with a sense of the environment at the time decisions were made, the alternatives presented and the rationale offered for each, as well as what those decisions were.

They also can be an invaluable tool in reassessing those decisions at the appropriate time(s) in the future and making adjustments as warranted – properly documented, of course.

Committee members should understand their obligations – and the risks.

The men that gathered in Philadelphia that summer of 1776 to bring together a new nation came from all walks of life, but it seems fair to say that most had something to lose. True, many were merchants (some wealthy, including President of Congress John Hancock) already chafing under the tax burdens imposed by British rule, and perhaps they could see a day when their actions would accrue to their economic benefit. Still, they could hardly have undertaken that declaration of independence without a very real concern that in so doing they might well have signed their death warrants.

It’s not quite that serious for plan fiduciaries. However, as ERISA fiduciaries, they are personally liable, and may be required to restore any losses to the plan or to restore any profits gained through improper use of plan assets. And 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.

Indeed, plan fiduciaries would be well advised to bear in mind something that Ben Franklin is said to have remarked during the deliberations in Philadelphia: “We must, indeed, all hang together or, most assuredly, we shall all hang separately.”

- Nevin E. Adams, JD

Your Plan Might Be an Excessive Fee Litigation Target If…

Last week another of the so-called excessive fee lawsuits was settled – not adjudicated, mind you. Here are some factors that the targets of these lawsuits seem to have in common.

Now, in fairness, most of these cases haven’t actually gone to court – and, by my count, most of the ones that actually get to court are won by the employers/plan sponsors. Even the Tibble case, which drew so much attention when it made it to the Supreme Court, eventually came out in favor of the plan sponsors (though they “lost” the Supreme Court decision).

However, a lot of litigation has been filed over the past decade, and millions of dollars spent — reminding me of an old mentor’s admonition that you can spend a lot of money in court being “right.” That so many employers have decided that it is “cheaper” to settle for millions of dollars gives you some idea of the magnitude of these challenges.

So, with that in mind – and with apologies to Jeff (“you might be a redneck…”) Foxworthy: Your plan might be an excessive fee litigation target if…

It’s a multi-billion dollar plan.

Nearly all of the excessive fee lawsuits filed since 2006 (when the St. Louis-based law firm of Schlichter, Bogard & Denton launched the first batch) have been against plans that had close to, or in most cases in excess of, $1 billion in assets. There’s no real mystery here. Willie Sutton robbed banks for the same reason: that’s where the money is. And if you’re a class action litigator, that also happens to be where a large number of similarly situated individuals can be found.

Harder to figure out is why plans of that size, and the expertise/resources that such employers can ostensibly bring to plan administration, have been so vulnerable.

Your multi-billion dollar plan has retail class mutual funds.

Granted, even at the largest employers, individuals frequently find themselves assigned the responsibility for being a plan fiduciary with little or no training or background. Still, in this day and age, it’s remarkable that so many of these targets were either so ignorant of the concept of share classes or so poor at negotiating with their providers that they included options in their multi-billion dollar plan menus funds that were, in some cases, no more competitive in price than what the individual plan participants could have acquired in their IRA.

You have proprietary funds on your menu.

As a financial services provider, there are any number of valid business reasons to include your own funds on the menu you offer to your workers. It’s a testament to your willingness to “eat your own cooking,” a statement of confidence in the skill and acumen of your investment management staff.

However, this access can be used to prop up funds with steady cash flow that aren’t deserving of that confidence, and can provide at least the temptation on the part of committee members to favor internal offerings to the exclusion of external choices. Moreover, since it can be difficult politically to “fire” an internal service provider, the plan might find itself paying “retail” prices, not only for funds, but for administrative services – an issue that has been made in several of these lawsuits.

The bottom line: However outstanding your internal options are, the current litigation environment seems to favor a “Caesar’s wife” approach – your actions need to be above (and beyond) suspicion.

You can’t remember the last time you benchmarked your plan/investments.

Let’s face it, even changing a single fund on an existing menu can be complicated, much less a full blown consideration of changing record keepers and fund menus. And plan sponsors, even plan sponsors at multi-billion dollar plans, juggle myriad responsibilities and are constantly pulled in multiple directions. “If it ain’t broke, don’t fix it” is a mantra born of practicality, if not necessity, for most. If the current process and services are working, that is often “enough.”

But if you haven’t been through some kind of competitive bidding/review process in recent memory – well, “it seems to be working” isn’t necessarily in keeping with the legal admonition to ensure that the services rendered and fees paid for those services are “reasonable” and in the best interests of plan participants and their beneficiaries.

And even if it is in the eyes of a judge, a motivated plaintiff’s bar can likely make an issue of it.

You are still paying asset-based record keeping charges, rather than a per-participant fee.

Okay, this is a new one. I don’t recall seeing this being an issue until this year – and though it has been alleged, and incorporated in a couple of the most recent settlements, to my recollection, no court has ever ruled on this.

That said, the current and apparently emerging argument is based on the notion that there is little correlation between record keeping services and the dollar value of that account. And the most recent litigation puts forth some fairly specific notions of what that reasonable per-participant charge should be. And did I mention that this has even been raised in some very recent litigation involving a $10 million plan?

You haven’t hired a qualified retirement plan advisor to help.

It’s possible that advisors have been involved in these plans, but to date I can only recall one situation where an advisor was involved/named (though not as a party to the litigation), and that more an investment consultant than an advisor, per se.

That said, when you look at the issues like share class selection, and the lack of regular review (not to mention documentation of that review) in many of these cases, you can’t help but think, “Where was the advisor?” The answer seems to be that these plans hadn’t engaged those services.

And then you can’t help but wonder what difference their involvement might have made.

- Nevin E. Adams, JD