The Contingency 'Plan'

So, how much should the plaintiffs’ attorneys who wrangled a $12 million settlement receive for their time, effort and trouble?

Well, if you’ve been keeping up with such things, you’ll do some quick math and arrive at a figure of $4 million since, after all, these class action suits[i]—undertaken on a contingent fee basis—generally produce a pay day of somewhere between 25% and 30% of the settlement amount.[ii]

In this case, that’s the settlement amount requested by the law firm of Schlichter Bogard & Denton for their work in a suit involving Oracle Corp. and its 401(k) plan (over 6,300 hours—5,631.10 hours of attorney time & 696.5 hours of non-attorney time—according to the filing (Troudt v. Oracle Corp., D. Colo., No. 1:16-cv-00175, motion for attorneys’ fees 5/8/20). That’s aside from the requested reimbursement of what those same attorneys characterize as “reasonable out-of-pocket expenses of $410,501.60,[iii] and $25,000 for each of the named class representatives.”

The filing states that that fee “would not even provide the lodestar[iv] amount that the attorneys who handled this case would have generated on an hourly rate charge, and would provide no compensation or multiplier to Class Counsel for the substantial risk of nonpayment they undertook.” Specifically, those 6,327.60 hours add up to a combined lodestar of $4,316,867.00—only 92% of the hourly rate of the Schlichter lawyers and staff in working on this case.

Par for the course in such motions, the plaintiffs take pains to justify settlement in lieu of a full adjudication of the issues by pointing out the uncertainty of the result. Here they not only note that “even if Plaintiffs prevailed at trial the aggressive defense presented the possibility that Class Members would have to wait over a decade to receive any compensation pending multiple appeals,” explaining that both Tussey v. ABB, Inc. and Tibble v. Edison took more than a dozen years and involved multiple appeals.

The filing cites the “fact-intensive nature of the remaining imprudent investment claims,” the “adverse findings” in the case of Sacerdote v. New York Univ. “…on similar imprudent investment claims, including the court’s rejection of Plaintiffs’ expert, who was the same expert here.”

The petition makes two other obvious but seldom acknowledged points. First, that the named plaintiffs “…would not have been unable to pursue this litigation other than on a contingency fee basis and no competent plaintiffs’ lawyer or law firm would take on such risky representation for less than one-third of any monetary recovery.”

Second—and perhaps just as importantly—they acknowledge that “as a plaintiffs’ law firm that works solely on a contingency basis, the decision to pursue this class action and commit significant resources and potentially thousands of attorney hours to obtain a successful recovery impacts Class Counsel’s ability to handle other actions.”

And that, it seems fair to say, was always the contingency “plan.”

- Nevin E. Adams, JD

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[i]This settlement, as have several in this genre, notably those brought by the Schlichter law firm, are more than just monetary, of course. This one in particular imposes limitations on the recordkeeper (current and over the next three years) in terms of soliciting plan participants for non-retirement plan related services.

[ii]Indeed, according to the filing, when you take into account the benefit of the tax deferral on the settlement amount once its restored to the 401(k), the requested fee is 28% of the settlement’s full value.

[iii]According to the filing, the “vast majority of these fees were incurred for necessary experts and to conduct critical depositions.”

[iv]Basically, the lodestar method involves multiplying the number of hours reasonably devoted to the case by a reasonable hourly rate—the latter may, of course, vary based on the geographical area, the nature of the services provided, and the experience of the attorneys. And, of course, what’s deemed “reasonable.”

A Bad Example

You have to hand it to the Washington Post. At a time when millions of working Americans are finding a financial lifeline in their retirement savings, they managed to find in the questionable life choices of a half dozen individuals a condemnation of the nation’s private retirement system.

The piece, laboriously titled “Millions of baby boomers are getting caught in the country’s broken retirement system” is light (and selective) on data (they managed to get hold of a 2016 report by the Economic Policy Institute subtitled “How 401(k)s have failed most American workers,” some datapoints from the National Institute on Retirement Security (for those who have forgotten some of the issues with their database, see Data ‘Minding’” and a couple of quotes from none other than Teresa Ghilarducci). Indeed, the article isn’t really about factual data; rather it’s mostly reliant on the anecdotes of six individuals the author has somehow stumbled upon.

Weirdly, the article’s author (who is said to cover energy as his regular beat) does manage to find a kind of silver lining in these individuals’ predicaments, noting that “the coronavirus pandemic has scrambled the lives of these six boomers just as it has everyone else’s, though with no savings to worry about at least it hasn’t directly hurt them financially.”

And while the article claims that “none of these stories is an outlier,” well—judge for yourself.

One 70-year-old “had some good jobs over the years,” but her two divorces “involved lawyers, the need to set up new households, and a general drain on savings.” She admits that “I would rather be happy today than miserable 25 years from now. And so I made choices based on that rather than on the economics, which, you know, one could argue fairly successfully that I made some pretty stupid decisions.”

Another says he came down with non-Hodgkins lymphoma, figured he didn’t have long to live and was fed up anyway with life in “corporate America”—and so “retired”… at age 52. Thereafter he says he sold his house and cashed in his 401(k), which had about $100,000 in it, wound up stuck with back taxes, penalties and the like, but also bought a new car, gave some money to family members who needed it and, yes, went on a cruise because he thought he’d die soon. He admits, “I went through a lot of money very quickly.”

Other examples cited one individual who chose to pursue passion—and traded full-time employment for part-time—living in Manhattan. Another, a former truck driver, retired at 62—with $10,000 in his 401(k)—opting to retire now “because my body’s been beat up so bad after 40 years of driving.”

Not to demean or dismiss the financial hardships of the individuals chronicled in the article, but it was hard not to see in nearly all of these stories an abundance of personal choices that lead to their post-retirement “plight.” A point that the individuals featured make no bones about.

It’s not like dissing the retirement system or the 401(k) is a new “sport” for the media. And let's be honest - some will run short of money in retirement, and some—like the individuals featured in the article—may well be forced to make the tough decisions late in life that different decisions earlier could have forestalled.

It may not be the lifestyle they might choose, but many will nonetheless be able to replicate a respectable portion of their pre-retirement income levels, certainly if the support of Social Security is maintained at current levels. In fact, an analysis in 2014 by the non-partisan Employee Benefit Research Institute found that current levels of Social Security benefits, coupled with at least 30 years of 401(k) savings eligibility, could provide most workers—between 83% and 86% of them, in fact—with an annual income of at least 60% of their preretirement pay on an inflation-adjusted basis. Even at an 80% replacement rate, a full two-thirds (67%) of the lowest-income quartile would still meet that threshold—and that’s making no assumptions about the impact of plan design features like automatic enrollment and annual contribution acceleration.

It would be naïve to argue that the voluntary nature of the 401(k) design works for everyone, certainly not for those who don’t take advantage of the option, and it most assuredly won’t work for those who don’t have access to its benefits. That said, 401(k)s are working for far more people and in much more varied circumstances than the fear-mongering headlines acknowledge. It’s one thing, after all, to acquiesce to what has become a journalistic “creed”—that “if it bleeds, it leads”—and something else again to wield the knife.

It’s well past time to call out these reports—that “normalize” these “bad” examples—for what they really are: at best a naïve and misinformed parroting of surveys with questionable samplings and methodologies, and at worst serving as the agent of a long-standing and deliberately intentioned “plot” to kill the 401(k). They do so first by undermining its value, discounting and demeaning the modest tax deferrals that encourage most who have access to such programs to set aside their natural preferences for spending—and then discrediting as “rich”[i] those who do take advantage of the option and make thoughtful preparations for retirement (and who, ironically, may well wind up supporting those who didn’t via higher tax burdens because they actually have retirement income).

It’s been said that “a lie unchallenged becomes the truth.” If those of us who know better don’t start speaking up—and speaking out—you can bet that the drumbeat of coverage about the failure of the 401(k) will one day become a self-fulfilling prophecy.

- Nevin E. Adams, JD

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[i]You don’t have to be rich to do so—even among modest income workers ($30,000-$50,000/year), we’ve seen that workers are 12 times more likely to save via a workplace retirement plan than to open that individual IRA.

The Next Chapter

Life has many lessons to teach us, some more painful than others—and some we’d just as soon be spared. But for the graduates of 2020—well, theirs is surely a unique time. So, if you have a graduate—or if you ARE a graduate, here are some thoughts…   

My kids have passed those milestones—but I have two nieces that will graduate this year without an “official” ceremony to commemorate the occasion, no capstone to those years in pursuit of education, and preparation for the next of life’s stages, and—while social media, cell phones, TikTok and Zoom provide some solace—this is a class that will, for the moment anyway, be denied the hugs and warm embraces of classmates, friends and family alike.

That said, those next steps lie ahead—and if the when, where (and how) remains elusive—the if is surely only a matter of time. And as graduates everywhere look ahead to the next chapter in their lives, it seems a good time to reflect on some lessons learned along the way—most of which apply regardless of the times.

The world is made up of introverts and extroverts—learn and respect the difference(s).

You can “social distance” without being socially distant.

Because you’re young(er), people are going to assume you know things you don’t—and assume you don’t know things you do.

Nothing says a video conference has to include video.

There can be a “bad” time even for good ideas.

Emails can be a blunt instrument for (mis)communication.

Be who you are and say what you feel, because those who mind don’t matter and those who matter don’t mind. But not necessarily at work.

Paying the minimum due on your credit cards is dumb.

There actually are stupid questions.

A picture may be worth a thousand words, but sometimes it pays to read the fine print.

Never say you’ll never…

“Bad” people almost always get what’s coming to them. Eventually.

Always sleep on big decisions.

When it seems too good to be true, it’s generally neither good, nor true.

Never let your schooling stand in the way of your education.

Sometimes the grass on the other side looks greener because of the amount of fertilizer applied.

Never miss a chance to say, “thank you.”

Hug your parents—often.

If you wouldn’t want your mother to learn about it, don’t do it.

Bad news generally doesn’t age well.

Your work attitude often affects your career altitude.

Comments that begin “with all due respect” generally aren’t.

Sometimes the questions are complicated, but the answer isn’t.

That 401(k) match isn’t really “free” money—but it won’t cost you a thing.

And don’t forget that you’ll want to plan for your future now—because retirement, like graduation, seems a long way off—until it isn’t.

Congratulations to all the graduates out there. We’re proud of you!

- Nevin E. Adams, JD

Got some to add? Feel free to add in the comments.

Corona Conscious

Perhaps like many of you, I spent the last week watching a series of announcements regarding various school and business closings associated with the coronavirus—but I was also keeping an eye on my retirement savings.

I know—this is exactly the thing that most advisors counsel against, not only because it might be depressing (though there’s been plenty of inspiring moments), but because human beings are often inclined to react emotionally, not rationally in markets like these. And, seriously, have there ever  been markets like these?

Now many, perhaps most, participants and plan sponsors will embrace the counsel to not only avoid taking action, but to avoid paying any attention to the short-term volatility of what is, by its very nature, a long-term investment.

That said, some will undoubtedly want to do  something. And for those, I offer the following alternatives.

If you’re in a target-date fund or managed account:

Leave it alone. People have been told for years to not “leave your eggs in one basket,” to make sure that your retirement savings is diversified between investments in stocks, bond, and cash (or mutual funds that invest in those). But that target-date fund (or managed account) is already diversified, and even if it looks like a single investment, it’s not.

Target-date funds[i] 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.

If you’re not  invested in a target-date fund or managed account:

Check your account balance. While a lot of experts will tell you to avoid looking at your account right after a big drop in the markets, if you’re making individual fund choices, it’s probably worth checking out how your account is currently invested. If you haven’t checked in a while, you might find that it’s gotten “out of balance” from your original investment selections.

Indeed, that’s why—several days into the sharp declines following the recent record highs (yes, it’s hard to believe that a month ago we were sitting at all-time record highs), I logged onto my account(s). I wanted a rough assessment of just how much my asset allocations had been shifted—and took advantage of a couple of market dips to move some money into equities (although sadly, some of the dips kept dipping… but retirement is (still) a ways off…).

Get started on rebalancing. If you’re making your own investment decisions, while this may not be a great time to rebalance your entire account, you can start by changing the investment elections of new contributions, rather than transferring existing balances. It will take longer to realign the entire account, but at least you aren’t realizing those as-yet-unrealized losses.

Look into automated rebalancing. If you still make and maintain individual investment fund choices in your retirement account, it can be hard to pick the best time to make a change. (Hint: a period of extreme market volatility is almost never the best time.) However, the vast majority of providers now have in place mechanisms that will, at some preset frequency (e.g., monthly, quarterly, or annual), automatically rebalance those accounts in accordance with your established investment elections. It’s a good way to keep things in balance without having to worry (or remember) about it.

Consider investing in a target-date fund or managed account. When you sit down to make choices with your retirement plan investments, you are generally presented with a list of fund choices—and given an opportunity to choose those that will help your retirement savings grow. However, most of us are not investment experts—and even if you have the time, and get the help to make a good decision, you may well be too busy to keep an eye on those choices on a regular basis.

Regardless of whether you’re in a target-date fund or managed account or not:

Increase your current deferral rate. This is a biggie. When you think about just how much cheaper those retirement plan investments are compared with a few weeks ago, it’s hard to pass up that kind of bargain. More so if you aren’t yet saving at the maximum level of the match.

Think about getting some professional investment help. Odds are, even if you like keeping up with the markets, it’s not your day job. A good, trusted advisor is always a great option, but you might find it useful to look into a solution that is professionally managed all the time—such as a balanced fund, target-date fund or managed account option.

Remember that “stay the course” is only a viable strategy if you were on the right track to begin with.

- Nevin E. Adams, JD

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[i]Although target-date funds and managed accounts are not identical, both are “pre-mixed” investments that are diversified between stocks, bonds, and cash based on stated criteria, generally either a target retirement date, an established individual tolerance for investment risk, or some combination of those factors. For these purposes, references to target-date funds should also be considered to include managed accounts.

'Nothing' Doing

If you’ve been asked in the past two weeks what to do about the market (and who hasn’t), I’m sure your response has been something along the lines of . . . “Nothing.”

There are, of course, more eloquent ways to express that sentiment. And, let’s face it, when it seems that everyone is asking that question—it’s generally well past the time when it is prudent to try and do—well, anything.

Still, it seems that throughout my professional career, every time the market plunges (even when it stays down for an extended period), the pundits all seem to say the same thing; “the fundamentals are sound,” “we’re going through a period of short-term volatility,” or “we were due for a correction” (sometimes all of the above). Granted, this period seems unusual—there is a non-financial cause (the coronavirus outbreak) that is projected/anticipated to have a financial impact of unknown size and duration. That it has emerged at the outset of what is likely to be one of the more contentious election cycles in memory will, of course, only fan the flames of uncertainty—which is, at its core, the heart of all market volatility.

As for the admonitions to “stand pat,” while we’d all like to believe that we don’t need to do anything (and it’s generally too late anyway), there’s something to be said for a timely, comforting voice of reassurance. Better yet if that reassurance comes from someone knowledgeable in such matters—and better still when that reassurance comes from someone familiar with the particulars of our investment portfolio and financial needs/aspirations.

Plan sponsor fiduciaries are generally appreciative of those messages. They bear responsibility for the prudence of such investments, after all—and the reassurances of experts that prudence has been manifested in their decisions (or their non-decisions) is understandably welcome. Most are only too happy to pass along those reassurances to the retirement plan participants on whose behalf their decisions (or non-decisions) have been made.

Indeed, it’s a rare 401(k) enrollment meeting or education pamphlet that doesn’t remind us all that 401(k)s are long-term investments, that they continue to benefit from the on-going benefits of dollar-cost averaging, and perhaps increasingly that their investment in a diversified asset allocation “solution” like a target-date fund or managed account means that they needn’t concern themselves with those kind of interim swings.

Tough times can engender resentment and, in extreme cases, litigation, after all.

But they can also foster an appreciation for expert counsel, and that current reassurance that the inevitable “storm” has been anticipated—and that tough times can bring with them, opportunity.

- Nevin E. Adams, JD

Disclose 'Sure'

There are few things more annoying in my daily existence than those ubiquitous pop-up service agreement acknowledgements.

I say annoying because they are inevitably long and “lawyerly”; there’s no way that they can readily be read (much less absorbed) in the medium in which they are presented; and the alternative to not accepting the conditions presented would seem to be to forego the update that you’ve been encouraged to accept, and that, at some point in the future would seem to have its own dire consequences. And so, probably like many, if not most, if not all, of you, means that I accept the terms, and acknowledge the disclaimers basically sight unseen (or at least unread).

Last week the U.S. Supreme Court weighed in on a case involving participant disclosures, specifically the issue of whether certain plan disclosures were sufficient to establish a participant’s “actual knowledge” of the design of Intel’s custom target-date series, which had been built including an allocation to hedge funds and other alternative investments, including private equity. The participant-plaintiff here alleged that, despite “annual notices, quarterly Fund Fact Sheets, targeted emails, and two separate websites”—and tracking that indicated that he had actually visited the web sites “repeatedly”[i] during his employment, he did not “remember reviewing” the disclosures.

SOL ‘Stance’

The difference is one of timing, because of ERISA’s statute of limitations. Those injured by an ERISA breach have three-years to file suit from when the plaintiff had actual knowledge of the violation. Without that knowledge, an alternative 6-year statute of limitations applies, running from the date of the last action which constituted a part of the violation. The suit, filed in 2015, challenged actions that occurred between 2009 and 2014.

The Intel defendants argued—and the district court agreed—that the notices established knowledge well beyond the 6-year statute of limitations. However, the appellate court disagreed, explaining that if (as claimed) “Sulyma in fact never looked at the documents Intel provided, he cannot have had ‘actual knowledge of the breach.’”

The nation’s highest court—unanimously—agreed with the appellate court, commenting that while “…relevant information disclosed to the plaintiff is no doubt relevant in judging whether he gained knowledge of that information”… to meet the “actual knowledge” criteria imposed by the legislation, “…the plaintiff must in fact have become aware of that information.”

Now, as someone who appreciates a reliance upon the black letter of the law, the decision’s clarity is somewhat reassuring. If, on the other hand, you’ve spent time and money producing and distributing the plethora of disclosures mandated by the law, you could hardly be faulted for wondering… what’s the point?

Foreclosure ‘Notice’

Doubtless anticipating the clamor of plan fiduciary jaws slamming onto desktops across the nation, Justice Alito (who authored the court’s opinion) threw a (small) bone to what seems likely to be a rapidly expanding class of plan fiduciary litigants.

“Nothing in this opinion,” he cautions, “forecloses any of the ‘usual ways’ to prove actual knowledge at any stage in the litigation. … Plaintiffs who recall reading particular disclosures will of course be bound by oath to say so in their depositions. On top of that, actual knowledge can be proved through ‘inference from circumstantial evidence.’ … Evidence of disclosure would no doubt be relevant, as would electronic records showing that a plaintiff viewed the relevant disclosures and evidence suggesting that the plaintiff took action in response to the information contained in them…”. He also noted that, “Today’s opinion also does not preclude defendants from contending that evidence of ‘willful blindness’ supports a finding of ‘actual knowledge.’”

The Impact

There’s little question that the ruling will make it harder for plan fiduciaries to claim that effective notice has been provided by the series of disclosures, mandated and otherwise. Indeed, this particular plaintiff’s ability to basically disclaim awareness despite evidence that he had spent a lot  of time on the site(s) where the disclosures were housed was, to this observer, anyway, a bit of a head scratcher, to say the least.

In response, employers will almost certainly pursue technologies (or be counseled to do so) that provide a more specific acknowledgement by participants that they have seen—and read—specific plan information before proceeding to the information they really want to see (like account balance).

Now if only the lawyers (and regulators) would craft disclosures that, if not more memorable, were at least (more) readable.

- Nevin E. Adams, JD

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[i]In their filing with the Supreme Court, Intel noted that, “during his brief tenure with Intel, respondent regularly accessed the website for those materials,” clicking on more than 1,000 web pages within that site; it was undisputed that respondent “accessed some of th[e] information” that disclosed the disputed investment decisions “on the websites.”

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'Tacts' Treatment?

Roth 401(k)s are more prevalent—and popular—than ever. But is that good—or bad—for retirement?

A recent op-ed[i] in The Wall Street Journal explored the potential implications—“What ‘Rothifying’ 401(k)s Would Mean for Retirees”— (subscription required), though the focus is on tax policy as well.

You’ll remember that so-called “Rothification”—essentially the elimination of the pre-tax treatment currently accorded 401(k) contributions—was quite the controversial issue back in 2017 when the Republican-controlled House of Representatives was looking for ways to raise revenue to help pay for tax cuts.[ii] And while it’s not been an active focus of late, it seems likely to resurface as the nation’s budget deficit widens, and the field of 2020 presidential aspirants seem determined to find ways to spend more or, in the case of the incumbent, collect less in taxes.

‘Out’ Comes 

As for the WSJ treatment, I’ll spare you the short read (longer if you actually check out the 36-page paper it was based upon), and summarize it thusly: later retirements (not by choice, but of necessity), less retirement income, and more wealth inequality. Though, at least in the short run, more tax revenue for Uncle Sam.[iii]

Now most of this comes from a key assumption; as the WSJ piece puts it, “Over their lifetimes, workers would accumulate one-third less in their 401(k)s under a Roth system. This is because, with no tax advantage from contributing to a 401(k), workers would save less and those lower contributions would earn less over the years.”

Said another way, without the tax break, the authors conclude that workers won’t save as much, and saving less means that they’ll have less invested, and that  means that they’ll have less retirement income. They also argue that, with Rothified savings, workers would tap into Social Security later—a year later, on average, they claim. They note that with their retirement savings already taxed, wealthier individuals would be inclined to defer taking Social Security (increasing their benefit), widening income inequality.[iv]

‘Less’ on Plan?

The concern about mandatory Rothification was always that workers would, in fact, save less—and this is a concern that employers have expressed, though this was in the context of the ability to save on a pre-tax basis being taken away. That, in turn, seems to be predicated on the notion that workers have a specific dollar amount in mind that they can afford to save, and that if some of that certain dollar amount goes to taxes, there is a dollar-for-dollar offset. Doubtless that’s true for some, particularly among lower-income workers. However, when I have seen savings data, what seems to be the norm is that individuals save a specific percentage of pay, one generally driven either by what’s necessary to earn the employer match, or perhaps that rate at which default contributions are set. In other words, people choose to save 3% of pay, not $50/paycheck.

Now, if that  perception is accurate (feel free to disagree in the comments below if you see things differently), then it seems to me that most individuals might actually save the same amount, regardless of whether it’s pre- or post-tax. And if they were to same at the same rate (and admittedly that’s a big “if”), their retirement outcome might actually be more  secure—because withdrawals (and taxation) wouldn’t be forced on them by RMD calculations, because they wouldn’t have to worry about those contributions—and the earnings that have accumulated on those contributions—being taxed, and, significantly, because the reduction in taxable income wouldn’t undermine (through “means testing”) Social Security benefits.

But key to the analysis is how participants would respond, and the study cited in the WSJ isn’t the only academic consideration on the subject; one in 2015 found no change in savings rates with a voluntary addition of a Roth feature, and in 2017, the non-partisan Employee Benefit Research Institute (EBRI) found that it might help—or hurt—retirement security—and this is key—depending on the response of participants.

It appears that more participants are being presented with that option. Nearly 70% of plans now provide a Roth 401(k) option, according to the most recent survey by the Plan Sponsor Council of America. Perhaps more significantly, that survey, reporting 2018 plan activity, finds that nearly a quarter of participants (23%) elected to contribute to a Roth when given the opportunity, up from 19.5% in 2017 and 18.1% in 2016—an increase of nearly 30% in just three years.

Academic studies notwithstanding, it’s worth remembering that retirement security isn’t just a matter of how much you have saved at  retirement; it’s how much you have available to spend throughout retirement.

- Nevin E. Adams, JD

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[i]The authors of the WSJ article, Olivia S. Mitchell and Raimond Maurer, previously authored a research paper upon which the WSJ piece was based (albeit with a slightly different title, “How Would 401(k) ‘Rothification’ Alter Saving, Retirement Security, and Inequality?”). 

[ii]They weren’t, however, the first to propose such a shift. President Obama did so in 2015.

[iii]However, the authors state that the taxes collected on withdrawals of that money exceed the amount of additional income taxes that would be collected during people’s working lives under Rothification.

[iv]As a side note, the authors in the WSJ article note that not only would this be bad for Social Security funding, but they also conclude that the taxes collected on withdrawals would exceed the amount of additional income taxes that would be collected during people’s working lives under Rothification—ostensibly because of their previous assumption that it would be a larger accumulation of money to be taxed. 

After the Fall

I’ve just passed the fifth anniversary of a small fall that took a big chunk out of my life.

It was one of those little things – carrying that last box of Christmas ornaments to the basement for storage – when, just three steps from the bottom, I missed one. All I could think about in the 2 seconds it took me to tumble to the ground was trying not to fall on the ornaments (it was the last box, but who knew what precious memories were in that one?) – though that focus completely disappeared once I hit the floor.

The ornaments, as it turned out, were safe. My left ankle, not so much.

The next several weeks were discouragingly inconvenient when it came to navigating stairs, opening doors (even the ones that are ostensibly designed to accommodate such things), and – worst of all – showering. But perhaps the most frustrating was my rehab stint. I would not have thought it was possible in the space of just 8 weeks to forget how to walk – and yet, I found myself struggling (mind you, I was in a boot). To this day, I don’t descend a flight of stairs without a shudder running up my spine.

The fall, as falls often are, was fast and unexpected – the recovery long and painful.

At a time when the markets continue to stake out new highs on weekly, it is perhaps unseemly to recall that they can, and do, move in the opposite direction. While participants, generally speaking, appear to ride out such storms, those who sell low and buy high inevitably seem to outnumber those who view the downturns as buying opportunities. That said, in 2019 the S&P 500 rose more than 28% – and the average 401(k) balance – buttressed not only by the markets, but by contributions – ended the year 44.9% higher for those workers aged 25-34 with less than 4 years of tenure, while workers with more than 20 years of tenure, aged 55-64, registered a 24.6% increase, according to estimates by the Employee Benefit Research Institute (EBRI).

Indeed, just last week I read that a major target-date fund provider was boosting the equity allocation in its glide paths… explicitly to help deliver improved outcomes. Nor is it the only one to have done so (see Missing the Target). Those moves, ostensibly informed by economic insights and research, are perhaps tempted by the long-running bull market (and doubtless aware that, despite all the cautions to the contrary, that investors – and plan fiduciaries – are often drawn by past performance like moths to a flame).

Now, our industry has long cautioned savers that you can’t invest your way out of a savings shortfall, though surely improving outcomes is a shared goal. Not that it isn’t a tempting recourse – certainly for those who are awakening to financial realities late in their working years. These days the trend is to embrace glidepaths that sail “through” the stated age of retirement (“through” rather than “to”[i]), though one can’t help but wonder if those defaulted onto those paths are cognizant of the difference. Or if, as was the case a bit more than a decade ago, those on the brink of retirement will discover that there can be a significant gap between a glidepath that is “more” conservative, and one that truly lives up to that description.

Because, after all, falls are often unexpected. The recovery slow and painful.

- Nevin E. Adams, JD

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[i] Though the 62^nd Annual Survey of Profit-Sharing and 401(k) Plans from the Plan Sponsor Council of America found a rough 50-50 split among respondents between those relying on target-date fund glidepaths that are “to” versus “through” retirement.

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The End in Mind

Could lifetime income disclosures undermine retirement savings?

Over the past several years, a growing amount of attention has been focused on the decumulations of defined contribution plan balances in retirement – and a sense that the emphasis on account growth, and account balances, glosses over the reality that at some point in the future those savings will need to be turned into a retirement paycheck.

Enter the SECURE Act, which among its numerous retirement-related provisions added the new “lifetime income disclosure” requirements to ERISA’s benefit statement rules. It applies to individual account plan benefit statements and the lifetime income disclosure must be provided in one benefit statement during each 12-month period. Simply stated, the new law requires that the participant’s total accrued benefit be expressed as a “lifetime income stream” in the form of a single life annuity and a qualified joint and survivor annuity, assuming the participant has a spouse of equal age. The assumptions for these disclosures will be provided later by the DOL.

While it’s generally assumed (certainly that was what the authors of SECURE hoped) that this presentation will help participants attain a more realistic perspective on their retirement future (or at least the sufficiency of the financial resources they have amassed for that eventuality), there has been some concern that the reality, certainly in the absence of counsel on how to improve those prospects, will discourage, rather than motivate saving. Indeed, that was a concern expressed at a gathering of ERISA attorneys here in the nation’s capital.

That puzzled me a bit – I’ve currently got my accumulated 401(k) savings spread across the plans of four different providers, and three of them have been projecting my retirement income for several years now. Now, because those balances are in different places, those projections haven’t been especially useful (though I know how to add), but still… providing those type projections may still be on the horizon for some, but it’s hardly a big leap. And I’ve not heard or read about any big slumps in savings rates as a consequence.

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Though it’s likely drifted from the recollection of most, back in May 2013, the DOL’s Employee Benefits Security Administration (EBSA) published an advance notice of proposed rulemaking (ANPRM) focusing on lifetime income illustrations. Under that proposal, a participant’s pension benefit statement (including his or her 401(k) statement) would show his or her current account balance and an estimated lifetime income stream of payments based on that balance (sound familiar?). The question then, as now, was – what impact, if any, would that disclosure have on participant behaviors?

Well, the Employee Benefit Research Institute (EBRI) included a series of questions in the 2014 Retirement Confidence Survey that would provide monthly income illustrations similar in many respects to those proposed to be provided by the EBSA’s online Lifetime Income Calculator proposal, and ask workers for their reaction(s).

What impact did that have?

Now, while there are certainly going to be differences resulting from a personal engagement (and there were some  differences in the assumptions,[i]) EBRI asked about their current account balances, and assuming retirement at 65, presented them with a monthly income figure. As it turned out, more than half (58%) felt that the illustrated monthly income was in line with their expectations.[ii] Considering those results, it is perhaps not surprising that the vast majority (81%) of the respondents indicated that they would continue to contribute what they do now after hearing the projected monthly income amount, while 17% replied that hearing this information would lead them to increase the amount they are contributing.

It remains to be seen what difference(s), if any, guidance from the DOL following the SECURE Act’s admonitions might have on the projections some (most?) recordkeepers are already providing, and how individuals, once presented with those  projections actually respond.

That said, the evidence we do have – the EBRI study and the anecdotal sense from the examples already in the marketplace – suggests that that “end in mind” focus will, at worst, have no impact – and at best, might well be the positive influence its proponents have hoped.

- Nevin E. Adams, JD

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[i]Of course, any such projection is necessarily required to make a number of critical assumptions – including future contribution activity, future rates of return, future asset allocation, and future annuity purchase prices. Other changes in assumptions were:

• Rather than using normal retirement age for the calculation, they asked about their expected retirement age.
• Since the age of the spouse was not known for married respondents, only the single life annuity income illustration was used.
• Given that the information was being provided to the respondent during a phone interview, only the projected monthly income (based on the projected account balance given the respondents’ reporting of their current balances) was provided.

[ii]On the other hand, 8% of the defined contribution participants said the monthly amount was much less than expected, though another 19% said it was somewhat less than expected.

Question Err?

“Presumably, if workers earned income in a retirement account, it is safe to assume that they had a retirement account…”.

Ya think?

That somewhat self-evident statement is drawn from a recent Issue Brief by the non-partisan Employee Benefit Institute (EBRI). That it was necessary is a cautionary tale about the blind reliance on data, even from a credible source, that looks suspicious.

It relates to the Current Population Survey (CPS), Annual Social and Economic Supplement (fielded in March of each year) to the CPS, conducted by the U.S. Census Bureau – a report that had long been one of the most cited sources[i] of income data for those whose ages are associated with being retired.

‘Bold’ Move

The problem appears to have its roots in a well-intentioned attempt to provide a more accurate read on income from DC plans. Responding to research that indicated that the CPS misclassified and generally underreported income, particularly pension income, the Census Bureau in 2014 conducted a redesign of the CPS questionnaire that altered and added to questions on income in order to better capture income from pensions.

To do so, the authors of this survey added (IN BIG BOLD LETTERS) an instruction that respondents NOT INCLUDE DISTRIBUTIONS OR WITHDRAWALS FROM IRAS, 401(k)s, or SIMILAR ACCOUNTS. This “clarity” does, in fact, seem to have produced a more accurate read on that specific question. The reporting of pension income that year, and in subsequent iterations, has risen.

However, beginning with that version of the CPS, there was a commensurate sharp drop in both the overall percentage of workers participating in a retirement plan, a decline in the number of workers participating, and declines in participation among those most likely to participate. This result, by the way, was counter to other reputable data sources, including the upward trend in the number of active participants in private-sector plans according to tabulations of Form 5500 filings by the Employee Benefits Security Administration, findings on retirement plan participation from the Bureau of Labor Statistics’ National Compensation Survey (BLS-NCS).

Fall ‘Call’

How much did it drop? The EBRI report explains that for full-time, full-year wage and salary workers ages 21-64, the percentage participating in 2013 under the traditional questionnaire was 54.5% vs. 49.3% under the redesigned questionnaire. This number fell to 39.9% in 2018 despite a slight uptick to 41.4% in 2017. Moreover, the number of full-time, full-year wage and salary workers ages 21-64 estimated to be participating in an employment-based retirement plan decreased from 51.4 million in 2013 (under the traditional design) to 41.0 million in 2016. By the way, the number of active participants increased from 89.9 million in 2014 to 94.6 million in 2017 according to 5500 data.

So why did the question regarding pension income translate into such enormous declines in participation? Well, you have to engage in a bit of speculation, but the trend and the timing suggest that individuals responding to the CPS, told to exclude 401(k)s, 403(b)s, IRAs, etc. on the question regarding pension income basically applied that direction to questions regarding their participation in a plan.

Gap ‘Flap’?

The good news is that this aberrant result was caught almost immediately by EBRI, and later by groups such as the Investment Company Institute. And, when a subsequent version came out with the same aberrant results, those groups once again held that up to scrutiny. And yet, that CPS data was still “out there,” and for some constituted the “official” version of the state of retirement plan participation in the United States.

That said, the newest iteration of the CPS included a new question that might be a step along the way to a more accurate assessment. Specifically, EBRI researcher Craig Copeland notes that in the 2019 dataset, the CPS added variables relating to income earned in a retirement account – and that addition, coupled with the assumption that began this post, provides some hope for an accurate data read.

That additional question simply posits whether the respondent received interest income, and from what source(s) – including 401k, 403b, among other retirement accounts. Copeland has taken the number of workers who responded that they received income from one of the employment-based retirement accounts and added that to the number of workers who reported having a pension plan under the traditional questions (accounting for those responding yes to both) to provide an adjusted overall estimate of employment-based retirement plan participation.

What’s the Impact?

Recall for a moment the data on fulltime, full-year wage and salary workers ages 21-64, that had indicated a 54.5% participation in 2013, only to drop below 40% in 2018 with the new questionnaire. However, taking into account the information from the new question, Copeland finds that the adjusted percentage participating jumps to 59.0% for this group in 2018. Similar, positive results are found for the other categories as well – results, it should be noted, that are much more in line with other data sources.

Now, despite those positive results, Copeland cautions since this is just one year of data, “a trend is obviously indeterminable.”

That said, I can’t help but be reminded about that old story about the optimistic child who awakens on Christmas morning and finds a heap of horse manure under the tree, rather than the anticipated – and still responds, “With all this manure, there must be a pony somewhere!”

Seems as though Dr. Copeland has found a pony in this data, after all.

- Nevin E. Adams, JD

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[i]See Data ‘Minding. Compounding the issues, for participation data, the NIRS draws on the Current Population Survey (CPS), even though the report’s own footnotes acknowledge that “the 2014 redesign of CPS produced much lower participation rates for working Americans in years after 2014 (participation in 2014 was at 40.1% but at 31.7% in 2017), which has not been fully explained.” They aren’t the only ones to take note of this aberration (see CPS Needs a New GPS and Commonly Cited Participation Gauge Misses the Mark, Study Says), but decide, for reasons not fully explained, to rely on the data there anyway. Indeed, a June 2018 report on the impact of the changes in the CPS by the nonpartisan Employee Benefits Research Institute (EBRI) cautions that “the estimates from the most recent surveys could easily be misconstrued as erosions in coverage, as opposed to an issue with the design of the survey.”

Will your portfolio be fortified by a 49ers win – or get chipped by the Chiefs?

That’s what adherents of the so-called Super Bowl Theory would likely conclude. 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, and 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 40 of the 53 Super Bowls, in fact.

Not that it hasn’t had its shortcomings. One need look back no further than last year’s win by the AFC’s New England Patriots over the NFC champion Los Angeles Rams to find an exception – the S&P 500 was up more than 30% in 2019. And then it was just the year before that a win by the NFC champion Philadelphia Eagles against the AFC Champion Patriots (who once were the AFL’s Boston Patriots) also turned out to be a loser, marketwise, with the S&P 500 down more than 6% (though for most of the year it was quite a different story). Ditto the year before when the epic comeback by those same AFC Champion Patriots against the then-NFC champion
Atlanta Falcons didn’t forestall a 2017 market surge.

Nor is it always the Patriots who play Super Bowl Theory spoilers – the year before that the AFC’s (and original AFL) Broncos’ 24-10 victory over the Carolina Panthers, who represented the NFC, also proved to be an “exception.”

Market Makings

That string, however, was an unusual break in the streak that was sustained in 2015 following Super Bowl XLIX, when the AFC’s New England Patriots bested the Seattle Seahawks 28-24 to earn their fourth Super Bowl title. It also “worked” in 2014, when the Seahawks bumped off the legacy AFL Denver Broncos, and in 2013, when a dramatic fourth-quarter comeback rescued a victory by the Baltimore Ravens (over the San Francisco 49ers, it should be noted) – who, though representing the AFC, are technically a legacy NFL team via their Cleveland Browns roots.

Admittedly, the fact 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 teams.

However, consider that in 2012 a team from the old NFL (the New York Giants) took on – and took down – one from the old AFL (the New England Patriots – yes, those New England Patriots). And, in fact, 2012 was a pretty good year for stocks.

Steel ‘Curtains’?

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. According to the Super Bowl Theory, 2011 should have been a good year for stocks (because, regardless of who won, a legacy NFL team would prevail).

But as you may recall, while the Dow gained ground for the year, the S&P 500 was, well, flat.
And then there was the string of Super Bowls where the contests were all between legacy NFL teams (thus, no matter who won, the markets should have risen):

• 2006, when the Steelers bested the Seattle Seahawks;
• 2007, when the Indianapolis Colts beat the Chicago Bears 29-17;
• 2009, when the Pittsburgh Steelers took on the Arizona Cardinals (who had once been the NFL’s St. Louis Cardinals); and
• 2010, when the New Orleans Saints bested the Indianapolis Colts, who had roots back to the NFL legacy Baltimore Colts.

Sure enough, 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 hopes of the AFL-legacy Patriots (yes, those  Patriots) 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” (well, until this past year – oh, and the year before that  – and the year before…).

Patriot Gains

Times were better for Patriots fans in 2005, when they bested the NFC’s Philadelphia Eagles 24-21. Indeed, according to the Super Bowl Theory, the markets should have been down that year – but the S&P 500 rose 2.55%.

Of course, Super Bowl Theory proponents would tell you that the 2002 win by the 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 (the one that probably nobody except Patriots fans and disappointed Panthers advocates remember because it was overshadowed by Janet Jackson’s infamous “wardrobe malfunction”) 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 (couldn’t resist).

Bronco ‘Busters’

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 (that have now returned to the City of Angels) 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 (though “purists” still dispute how to interpret Tampa Bay’s 2003 victory, 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 (see below). And, not having entered the league until 1976, regardless of when 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, the 49ers have been here before – this is their seventh appearance, having won 5 (and being the first team to do so), but having fallen short their last time. If they do prevail, that sixth Lombardi trophy will tie them with the Patriots and Steelers in the all-time list. As for the Chiefs, well, it’s been a half-century drought for them in the Super Bowl, though the last time they appeared (January 11, 1970 – Super Bowl IV) they were victorious (over the heavily favored Minnesota Vikings). Only the New York Jets (51 years) have endured a longer stretch in between titles. The Chiefs did appear in what was subsequently dubbed Super Bowl I (but at the time more simply the AFL-NFL Championship Game).

Trivial “Pursuits’

Super Bowl LIV will be played at Hard Rock Stadium in Miami Gardens, Florida. While it’s the sixth Super Bowl to take place at the stadium, it’s had a different name for almost every championship -- Sun Life Stadium (XLIV, 2010), Dolphin Stadium (XLI, 2007), Pro Player Stadium (XXXIII, 1999), Joe Robbie Stadium (XXIX, 1995).

This happens to be the first time a Super Bowl will feature two teams with red as a primary uniform color, although it’s the “home” town Chiefs who will be in their traditional home red jerseys with white pants for the game. That said, dating back to 2005 with the Patriots in Super Bowl XXXIX, the team wearing white jerseys has won 12 times.

All in all, it looks like it should be a good game.

And that – whether you are a proponent of the Super Bowl Theory or not – would be one in which regardless of which team wins, we all do!

- Nevin E. Adams, JD

Note: 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.

BTW, in case you were wondering, the Super Bowl is measured in Roman numerals because a football season runs over two calendar years.

The 'Cutting' Edge?

Are employers necessary for a successful retirement system? A new proposal suggests that their role be “jettisoned.”

Not one to simply “bash” the 401(k), and to his credit, Morningstar’s John Rekenthaler, who recently opined that the 401(k) had outlived its usefulness,[i] now offers an alternative that he considers to be a superior alternative, something he titles “the New American Retirement Plan.” Despite the shortfalls his previous column attributed to the 401(k), this proposal in most of its elements seems relatively modest, at least structurally. It’s (basically – in 25 words or less), a national DC plan for all employers, probably with mandatory employee contributions, no requirement for employer contributions, and tighter restrictions on withdrawals.[ii]
Make no mistake, though – the devil, and there’s mischief aplenty here – lies in the details.

Rekenthaler’s basic premise – one that he describes not only as “the first,” but the “most important” step – is to “jettison the employer’s responsibilities,” noting that “expecting companies to sponsor retirement plans is like demanding that a dog dance; it may comply, but neither well nor happily. Companies run businesses. That is what they are created to do.”

I get it. How much simpler would business be if you, as an employer, didn’t have to worry about the cost, aggravation, and yes – liability – associated with providing benefits? But let’s set aside for a moment the impact that benefits clearly have, in terms of not only job choice, but job retention.[iii] Let’s turn our attention to a program already in existence that, as Rekenthaler suggests, “jettisons” the employer’s responsibilities. Specifically, let’s consider for a moment the OregonSaves program – the longest running, and arguably quite successful – state-run programs for private sector workers. Two years in, and admittedly absorbing a part of the workforce – smaller businesses – that is perhaps lower paid, and less tenured – that program has a participation rate of approximately 70%, and an average deferral of 5.5%. 

Now, that’s 70% better than the participation rate of those individuals previously, and that 5.5% saved is almost certainly an improvement from the 0% these workers were likely setting aside from retirement before the advent of the program. Those results, however, pale in comparison with those reported in the 62^nd annual Plan Sponsor Council of America (PSCA) 401(k) survey. We’re talking record high contribution rates of 12.2% (5.2% of that from employers, by the way) and opt-out rates of generally less than 5%, compared to the 27% or so in the state-run program. 

And yet while Rekenthaler’s initial premise regarding the 401(k)’s “expiration” claims the current system has failed to deliver on its promise, here there’s not even an attempt to quantify what this “new” approach would produce in terms of retirement income adequacy, nor any notion of what level of mandatory employee contributions might be required to offset the loss of employer contributions. Could an unmandated employee contribution-only account produce “enough?”
Rekenthaler leaves open for “discussion” whether employee participation should, in fact, be mandatory, or mandatory only up to a certain level, and whether there should be a voluntary employer match or not. But adequacy of retirement funding isn’t even mentioned.

Despite the concerns raised (and acknowledged in a subsequent post) regarding the adequacy of the current system, he seems content to put forth a program he considers to be superior in design, apparently assuming it would also produce superior, if not sufficient, results – leaving it to the rest of us to work out – and presumably live with – the details.

Indeed, with as many opportunities for misuse, abuse, and underuse as the current voluntary system contains, it’s nothing short of amazing just how successful it has been in helping provide, in conjunction with Social Security and personal savings, the prospects for a financially secure retirement, nurtured by select tax incentives and bounded in by nondiscrimination rules and eligibility tests.

Sure, there’s still room for improvements in the current system – but mostly it seems to me that the problem with the current system seems to be that there’s not “enough” of it. As for the wisdom of cutting the support of employers from the current system – well, that seems to me like cutting off your nose to spite your face…

- Nevin E. Adams, JD

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[i]His columns are generally thoughtful and thought-provoking, his perspectives rational and well-reasoned, his commentary nearly always not only interesting, but entertaining. But on this one – well, let’s just say we disagree.

[ii]As for leakage – well, Rekenthaler’s solution there is a simple one: “Forget tax penalties; they do not sufficiently deter foolishness. Instead, ban early withdrawals outright. After all, retirement-plan investors receive a benefit from the government for deferring taxes. It is only fair that they give something back.” Only consider for a moment – if you knew as a matter of course when the money was being automatically deducted from your paycheck that you would never again be able to access it for anything pre-retirement – how might that affect your  opt-out decision? (My guess is you’d hold back some, if not all.)

[iii]Not to mention the widespread availability and applicability of Social Security, which, though technically an insurance, not an account-based program, ostensibly already has many of the attributes Rekenthaler prizes, while drawing 12.4% of all wages up through $137.700/year.

Has the 401(k) Passed its ‘Expiration Date’?

That’s the premise behind a recent column by Morningstar’s John Rekenthaler, who writes that “the plans are as good as they can be under the current framework – and that's not good enough.”

I had the pleasure of meeting John a number of years back – and I’ve been keeping up with his writing ever since. His columns are thoughtful and thought-provoking, his perspectives rational and well-reasoned, his commentary nearly always not only interesting, but entertaining. But on this one – well, let’s just say we disagree.

John acknowledges that his views on the 401(k) have “evolved,” and that while he has long been in the camp that called for improvements in the current system, a “defender” of the 401(k) – but now, apparently, he’s calling for an “overhaul.”

‘Leaky’ Assumptions

He doesn’t fault the current system for its perceived shortcomings; he notes that the 401(k) wasn’t designed to be a solution for the general public’s retirement, saw the growth in the 1980s and 1990s as “modest,” and while he apparently saw the advent of automated design solutions as “solving half the country’s problems,” that confidence seems to have been shaken by a couple of academic studies. And that’s where things begin to get shaky.

“Whether auto-enrolled or not, leakage from 401(k) accounts, caused by early withdrawals, is substantial,” he writes, going on to cite one paper that “shows for households under the age of 55, average 401(k) outflows equal 40% of the inflows. Another study, by Laibson's co-researcher Beshears, estimates that, within the first four years, 25% of the benefits of automated-enrollment programs are consumed by early withdrawals.”


Now, John’s not the first to have logic waylaid by respected academics. One of these “studies” got picked up in the Wall Street Journal back in 2018. I encourage you to revisit my analysis of that survey at your leisure, but here’s the salient part(s): this study is based on activity at a single firm. One. Granted, it’s described as a large (approximately 7,500-participant), Fortune 500 financial services firm – but it’s one that even the researchers concede has high turnover. It’s also, based on the salary information provided, one with relatively modest income workers. However, even with those impediments, automatic enrollment did “work” – transforming the plan’s participation rate from 62% to 98%.

That said, you can imagine what happened when the employer in question adopted automatic enrollment in a plan of modest income workers; you get more, albeit arguably smaller, account balances (also their contribution default was just 2%). And with a workforce that has high turnover – those smaller balances are more likely to be cashed out – and then create “leakage.” And apparently in this isolated circumstance, with contribution rates (and amounts) so low and turnover so high you can actually get a result that allows you to conclude with a straight face that the withdrawals add up to 40% of the inflows. A conclusion that might well be transformed by the casual reader into an assumption that the result could rationally be imputed to the 401(k) system at large  And then (with a similarly straight face) hold that  out as though that is in any way representative of the 401(k) system overall.

All in all, Rekenthaler’s issues with the 401(k) appear to be two-fold: the aforementioned issue with leakage[i] – and coverage. The former he apparently wants to rectify by “replacing early withdrawal tax penalties with a stronger deterrent.” However, since he appears to want to preserve a participant’s right to “opt out” of this new design, it seems fair to worry that restricting access to those funds will almost certainly diminish the amount(s) that workers are willing to set aside in those accounts. In other words, there may be less coming out – but then, there might well be (much?) less going in.  

Access Able?

As for coverage, Rekenthaler apparently wants to solve with some kind of program such that “Every worker at every company, in every state, in every industry, will have access to a New Retirement Plan.” Apparently he’s not referring to Social Security, though of course, it already extends that far.

However, when it comes to coverage, I share Rekentaler’s concern. As we’ve commented before, with all of its success, and expansion, with all the trillions of dollars now set aside for retirement, coverage remains an issue. We’ve estimated that nearly 5 million employers nationwide do not provide a retirement plan to employees, and as a result some 28,280,000 full-time employees still do not have access to an employer provided retirement plan.

Now, Rekenthaler’s hinted at a solution (he promises to unveil it today) – that involves “removing the employer from the system.”
And that’s where I think he makes a (really) big mistake.

There’s no doubt that a system that relies both on voluntary action on the part employers and an active response by workers will inevitably miss some – and indeed there’s no getting around the reality that, 40 years on, retirement plan coverage has, basically, “flat-lined”.

That said, there’s already a version of “removing the employer from the system” in place, of course – it’s the state-run programs for private sector workers in Oregon, and more recently in California. Proponents tout the contribution and participation rates of those programs as a success and – relative to their non-participation outside those programs–,that’s a fair assessment.

Of course, those contribution (5.5%) and participation (approximately 70%) rates pale in comparison to private sector plan experience, where participation rates in automatic enrollment plans typically exceed 90% and where the 62^nd annual Plan Sponsor Council of America (PSCA) 401(k) survey recently found a combined employer/employee contribution rate of 12.2%.

The involvement of the employer is even more compelling when you consider that even workers of relatively modest means (those earning $30,000-$50,000/year) are 12 times as likely to save for retirement ina tax-advantaged account if they have access to a plan at work.

There’s something to be said for making it easier to transport those accounts from one employer to another, for making it easier to roll them over into an IRA than to simply take the distribution in cash. That said, the problem seems not to be the 401(k) plan, but the lack of 401(k) plans – plans that thrive because of the support and encouragement of employers – not just in enrollment and education, but in the matching contributions which often accompany such undertakings. 

It’s been said that there’s no use crying over spilled milk. But it seems to me that discarding the 401(k) as “expired” would be like throwing out milk weeks ahead of its “best if served by” date.

- Nevin E. Adams, JD

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[i]With regard to leakage, while it’s an issue of some concern, none other than the non-partisan Employee Benefit Research Institute (EBRI) has previously considered the issue, and found that cashouts at job change 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, and though thanks to recent legislation, that should be less of an issue going forward. How much more? Well, cashouts at termination were approximately two-thirds of the leakage impact. 

‘Still’ Standing: 6 Key Industry Trends to Watch

The Plan Sponsor Council of America recently released its 62nd Annual Survey of Profit-Sharing and 401(k) Plans, documenting a record high rate of savings, alongside an uptick in Roth contributions and other trends. However, sometimes the things that don’t change can be just as telling…

Target-date trends (still) dominate, but… 

Let’s face it – target-date funds are one of the most common items on a plan investment menu today (the PSCA survey noted that it’s the option in which assets are most frequently invested) and – in no small part due to their prevalence as a default investment alternative – continue to garner a lion’s share of new contribution dollars, if older savers (perhaps more precisely, longer-tenured savers) haven’t embraced (or more accurately, been defaulted into) the option with as much enthusiasm. That said, while more than two-thirds (68.6%) of respondents offer a target-date fund option, that’s actually down 5% in the past two years.

Interestingly enough, the PSCA survey found a rough 50-50 split among respondents between those relying on target-date fund glidepaths that are “to” versus “through” retirement. Additionally, actively managed TDFs outnumber passive by more than two-to-one among plans with fewer than 5,000 participants. That is reversed among plans with more than 5,000 participants.

Robo-advice (still) isn’t making much headway.

Just 1 in 10 (10.9%) of plan sponsor respondents provide participants with access to a robo-advisor, and if that’s somewhat higher (approximately 15%) among larger programs, the vast majority do not.

However, it may be worth noting that 15.6% who don’t currently say they are considering the option, particularly among smaller programs – though in last year’s survey, that was 17.2%.

Automatic enrollment (remains) a large-plan feature.

Fewer than a third (30.5%) of the smallest programs offer the feature, and only about half (56%) of plans with 50-199 participants, compared with roughly three-quarters among larger programs. On the other hand, roughly a decade ago – when the Pension Protection Act of 2006 was new – only about a third (35.6%) of respondents to the PSCA survey offered automatic enrollment. But then, it’s now been a decade… 

Not that it’s not been considered – but asked why those that didn’t offer the feature had made that choice, the predominant reason given was satisfaction with participation rates.

However, among the largest (> 5,000 participants), the most cited rationale was… cost.

Once participants are enrolled, they (still) tend to “stick.”

The percentage of participants who opt out of automatic enrollment programs in private sector retirement plans has always been relatively small, generally 5-10%, and in this year’s PSCA survey some 70% say that the opt-out rate remains 5% – or lower.

That stands in some contrast with the data we have seen with the early state-run plan options, where the opt-out rate has been in the 25% and higher range, though those programs lack an employer match and the nurturing that employment-based plans typically provide. And, arguably, the 75% who “stick” there are better off than with no plan at all.

Financial wellness is (still) largely a large plan feature. 

While nearly half (45.8%) of the largest (5,000 or more participant) programs claim to have a “comprehensive financial wellness program,” only about a quarter (27.1%) of those with 1,000-4,999 participants do, as do only 22% of those with between 200-999 participants.

For all the coverage that the subject engenders – and it’s considerable in this space – it’s not unusual to find awareness and interest gaps among plan sponsors, with perspectives ranging from ignorance to ambivalence to downright skepticism, even among large plan sponsors. The data here (and in other surveys of plan sponsors) suggest that the concept/focus is far from universal.

Traditional success measures (still) dominate.

Participation rates remain the dominant success measure of plans of all size: 87.6% overall, and more than 95% of the largest programs, cite that benchmark. Deferral rates rank second – 75.8% overall, but higher among larger plans, with average account balances a distant, but (to my eyes, anyway) a remarkably robust third.

For all the talk about an expanding focus on outcomes, income replacement ratios are a distant fourth, although 42% of the largest programs (those are the ones with the financial wellness programs, after all) do track this benchmark. Of course, particularly with a voluntary approach to retirement saving, employers may well be hesitant to establish as a benchmark of success the attainment of a goal that is not only unique to each individual, but generally outside of their ability to control or influence.

Though we can hope that participants – who do have some control over that outcome – are paying attention.
Industry surveys, particularly those with a broad range of plan types and providers and the perspective of decades that PSCA’s survey spans, provide an invaluable sense and appreciation of not only where things stand, but also how far we’ve come.

And sometimes, even when the trend is more or less status quo, and perhaps even more so, their real value lies in helping us see where we need to be.

- Nevin E. Adams, JD
 
More information about the Plan Sponsor Council of America’s 62^nd Annual Survey of Profit Sharing and 401(k) Plans is available at www.psca.org.