Regret Able

 A new survey once again highlighted a consistent regret among American workers. 

According to the survey by American Century Investments, they wish they had saved more for retirement. 

Now, only about a third shared that regret—but it was more than twice the number that had regrets about career, personal relationships, not doing enough to enjoy life—not to mention “not being a better person overall.”[i]

Now, we all have regrets about certain life decisions. There are regrets about that “Reply All” email that was perhaps a little too honest, the hours spent at work at the expense of family, perhaps the cessation of piano lessons, and even a (too) sedentary lifestyle and bad diet. Some we regret immediately—while some come only after the passage of time. Some we learn from—and vow never to repeat. And some—unfortunately—come too late to do anything but live with the consequences. And then there are those regrets—that could be remedied—but aren’t. 

Regrets about retirement savings tend to be in the latter category. People often talk about the retirement crisis in this country, but like a tropical storm still well out to sea, there are widely varying assessments as to just how big it is, and—to (continue to) borrow some hurricane terminology—when it will make “landfall,” and with what force. Most of the predictions are dire, of course—and while they often rely on arguably unreliable measures like uninformed levels of confidence (or lack thereof), self-reported financials and savings averages—it’s hard to escape a pervasive sense that as a nation we’re in for some rough weather, particularly in view of the objective data we do have—things like coverage statistics and retirement readiness projections based on actual participant data.

As we’ve certainly experienced anew over the past 18 months, life is full of uncertainty, and events and circumstances, as often as not, happen with little if any warning. Even though hurricanes are something you can see coming a long way off, there’s always the chance that they will peter out sooner than expected, that landfall will result in a dramatic shift in course and/or intensity, or that, as with some (like Katrina)—the most devastating impact is what happens afterward. In theory, at least, that provides time to prepare—but, as the recent advent of COVID and the response—sometimes you don’t have as much time as you think you have, want or will need.

Doubtless—and as the recent survey findings suggest—a lot of retirement plan participants are going to look back at their working lives as they near the threshold of retirement with some regrets. They’ll perhaps remember the admonitions about (and their good intentions to) saving sooner, saving more, and the importance of regular, prudent reallocations of investment portfolios (they may even remember reading about surveys expressing those regrets). Thankfully—and surely because of the hard work of advisors and plan sponsors—many will have heeded those warnings in time. But others, just as surely—and particularly those without access to a retirement plan at work—may not.

The end of our working lives inevitably happens for different people at different times, in different ways, and to those in different states of readiness for that “event.” But we all know that it’s coming—and those who put off preparing for it are likely destined for a retirement full of regret. And that, not just for them, but for all of us, is… regrettable.

- Nevin E. Adams, JD

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[i] In fairness, it’s entirely possible that they’ve been more attentive and/or successful in those life avenues, and thus regrets weren’t required.

The "Magic" of Compounding

Some numbers were put in front of the Senate Finance Committee last week—numbers that even the chairman of that powerful body called “jaw-dropping.”

The numbers were 51 million and $6.2 trillion—the former the potential number of new retirement savers, the latter a separate projection of the potential new retirement savings (over a 10-year period) that could result if two pieces of existing retirement legislation were implemented, specifically the combination of some key provisions of the Automatic IRA Act and the Encouraging Americans to Save Act.

Those projections—presented in testimony by American Retirement Association CEO Brian Graff—were the work (and rework) of many late (and early) hours by a number of individuals over a period of months.

Key Assumptions 

Now, predicting the behavior of human beings decades into the future may seem like the stuff of science fiction, but it can be parameterized. However, the key to a projection that aligns with reality likes in the assumptions. Here the key provisions (and assumptions applied) were that:

• All employers with 10 or more workers that don’t currently offer a plan do so.
• All those new plans offer automatic enrollment (no employer contribution for a new plan).
• Those new automatic enrollment plans start deferrals at 6%, and auto-escalate to 10%. 

Oh—and with regard to those new participants, a 20% opt-out rate was assumed in the first year, similar (though actually somewhat less, because we assumed that the new Saver’s Match would dampen the rate of opt-outs) than that experienced by the state-run programs like OregonSaves. And yes, that’s higher (about double) the rate experienced by 401(k) plans in the private sector with automatic enrollment.  

As for the Enhanced Saver’s Credit (let’s call it the Saver’s Match for clarity), we simply assumed that everyone eligible would get it (except, of course, for those that opted out), in the amount(s) provided in the (then proposed) legislation. We even factored in self-employed and “gig” workers, a still small, but growing element in the economy.

Why it Matters

We’ve long highlighted the issue with access to a retirement plan at work—“coverage”—alongside data that supports the fact that even modest income ($30,000/year to $50,000/year) workers are 12-15 times more likely to save for retirement via a workplace plan than on their own. While a growing number of states have embraced the notion of a “mandate” on the part of employers to provide payroll deduction to a state-run plan, extending that concept on a national level is a real game-changer in terms of providing that opportunity. 

Doing so combined with automatic enrollment (also a provision of most of the current state-run plans) helps workers get off to a good start, and providing a Saver’s Match seems likely to encourage most to stay with it—and perhaps, particularly among smaller employers, without requiring the financial impact of an employer contribution. 

Moreover, not only do the expanded levels of eligibility for the enhanced Saver’s Match mean that more individuals will be eligible, making it refundable means that more will be able to claim it—and, with so many more having access to retirement accounts, they will now have a retirement-oriented place in which to put it.

In our business, we often talk about the “magic” of compounding, and when retirement savers see how that early contribution can grow and build on itself, it does truly seem magical. In fact, no less a personage than Albert Einstein is reputed to have said that “Compound interest is the eighth wonder of the world.”[i]

Indeed, taken together, the compounding impact of these two sweeping proposals look to produce a retirement result worthy of that accolade—if they can make it into law.

- Nevin E. Adams, JD

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[i] He went on to say: “He who understands it, earns it; he who doesn’t, pays it,” but that’s a story for another day.

"Certain" Circumstances

 My wife and I recently celebrated our wedding anniversary—it was a “big” one, one of those that almost takes your breath away thinking about how rich your life together has been.

If someone had asked on my wedding day if I thought I’d still be alive and married this many years hence, I’m sure that I would have expressed confidence, likely strong confidence, in both outcomes. However, if someone on that same day had asked me to guess then where I would be living now, what I would be doing for a living, or what my income would be (or need to be)—well, my responses would likely have been much less certain—and trust me, I would have been… wrong.

Not that there haven’t been bumps along the road—life is a series of zig-zags, after all—and no matter how carefully you try to plan—well, life is what happens to you while you’re making other plans, right? There was the wedding limo with faulty air conditioning on the hottest July day in history, the flat tire in the middle of nowhere with a packed family van (not the best time or place to learn where the “new” jack was located), the emergency appendectomy of a child halfway across the world (not to mention that of another child several hundred miles away at college), the cross-country trip where the rental vehicle had been chosen with an eye toward the size of the family—without taking into account the luggage said family would require for that trip, the “discovery” while trying to rush for a late flight that (apparently) my son’s relatively common name had flagged him for special scrutiny by TSA—and the night spent sleeping in the family van near the Grand Canyon because—sometimes and someplaces you really can’t find a hotel room at the very last minute without a reservation.

As uncertain as life’s paths can be, there is at least some rational science to retirement planning, but even then there’s the unknown as to the “when” you’ll retire, the how much you’ll want—or need—not to mention the “what” you’ll need/want to be able to afford once you’ve crossed that threshold. Not that there aren’t those kind of decisions throughout one’s career—but once that post-work threshold has been crossed—what we still tend to think of as “retirement” (though some might have another word for it these days)—well, it feels like one’s options are fewer, even if they needn’t be.

“Disruptions” are the bane of a fixed income, of course. Just when you think you have it all balanced out, you have to spend (a lot) more for gasoline, pay a higher real estate tax bill, scrape up some money for a new prescription drug, deal with the financial consequences of an unexpected medical emergency. That—despite the experience of the past several months—this can happen at the same time that your investment portfolio is taking a sustained “hit,” or that you are told the house you are living in is worth a lot less than it was (on paper, anyway) a year ago—and all of a “sudden” inflation raises its ugly head—well, it all contributes to a sense of economic uncertainty.

Throw in the gyrations of a global pandemic that can impact not only your employment options, but your portfolio value, and your longevity… well, it’s an environment that can leave one feeling that the notion of living on a “fixed” income might not be up to the task over the next couple of decades—and with some justification.

It’s been said that the only sure things are death and taxes—but the lesson for those of us still drawing a paycheck—and planning for the time when we won’t—is the importance of preparing for that third “sure” thing: uncertainty.

- Nevin E. Adams, JD

Where’s Waldo? (and Mary…and Joe…and Pat)

Every plan has participants—and, sooner or later, will therefore have “ex” participants—and sometimes those participants go…missing. And that can be a real problem for retirement plan fiduciaries.

While most are likely aware of the fiduciary obligation to keep accurate records, many are less aware that there is also an obligation to take “appropriate steps” to ensure that the participants and beneficiaries are paid their full benefits when due. But what are the “appropriate steps”?

Why It Matters

This is a growing concern of regulators; in fact, (now former) Principal Deputy Assistant Secretary of Labor for the Employee Benefits Security Administration Jeanne Klinefelter Wilson has noted that, “In fiscal year 2020 alone, EBSA’s investigators helped missing and nonresponsive participants recover benefits with a present value in excess of $1.4 billion.”

The good news is, the Labor Department has published some guidance on the subject—in fact, it’s a triple dose of guidance related to helping retirement plan fiduciaries meet their obligations under the Employee Retirement Income Security Act (ERISA) to distribute retirement benefits to missing participants.

What You Can—and Should—Do

Plan fiduciaries will likely find most helpful the first document in the package. Titled “Missing Participants—Best Practices for Pension Plans,” the document outlines those key best practices that you will want to make sure are a part of your process in keeping up with those missing participants. Those best practices are outlined under four broad headings: 

• Maintaining accurate census information for the plan’s participant population. This includes contacting participants (current AND retired, as well as beneficiaries) on a periodic basis to confirm or update their contact information—including putting contact information change requests in plan communications—along with a reminder to advise the plan of any changes in contact information and flagging undeliverable mail/email and uncashed checks for follow-up.
   
• Implementing effective communication strategies. This includes things like using plain language and offering non-English language assistance when and where appropriate, and building steps into your onboarding, exit and enrollment processes to confirm or update contact information, confirm information needed to determine when benefits are due and to correctly calculate the amount of benefits owed, and to advise employees of the importance of ensuring that the plan has accurate contact information at all times.
   
• Documenting procedures and actions. Every good plan fiduciary knows and appreciates the importance of documentation—both as a record of actions taken and as a roadmap for future consideration. As with other plan procedures, when it comes to keeping up with missing participants, this not only means writing it down and keeping it current, but you will also want to be sure that your recordkeeping provider does their part—in maintaining plan records and participant communications and documenting those practices as well.
   
• Conducting missing participant searches. Despite your best efforts to maintain contact, participants often move and/or change names without communicating that information or even leaving a forwarding address.[i] This is where the rubber hits the road for most plan fiduciaries.  The beneficiary information can provide some solid leads, and the reality today is that if you can track down your grade school sweetheart on Facebook, there is a pretty good chance you can leverage social media to do some of the heavy lifting—and even broad-based search engines like Google can be a valuable resource, as well as paid services that can use credit searches and such. 

But the place you should probably start—and one cited in the Labor Department guidance—is the National Registry of Unclaimed Retirement Benefits. It is a free public service designed to help employers or plan fiduciaries and former employees locate each other so the former employees can claim their overlooked or abandoned retirement money.

What better way to not only find “Waldo,” but to ensure that your ex-participants are reunited with the benefits they have earned—to fulfill your responsibilities as a plan fiduciary—and to avoid potential issues with federal agencies down the road.

- Nevin E. Adams, JD 

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[i] And, of course, there are some other good tips here: https://www.penchecks.com/what-to-do-with-missing-participants-and-required-minimum-distributions/        

'Hacking" Stances

A couple of Saturdays back I discovered that one of my online accounts had been “hacked.” 

The good news is that I “discovered” this via transaction emails confirming what appeared to be purchases—a half dozen of them… for various, small-ish (though not small) amounts… all about 4:00 a.m. on a Saturday morning. And trust me, while the pandemic has certainly fueled my online purchases, both the number and the timing were not normal behaviors (nor was the Chinese text in those emails).

The even better news was that I was able to flag those transactions via the provider—and via my credit card company—almost immediately (apparently the foreign hackers and I were the only ones awake at that hour). Even though there was no damage done by this incursion (aside from some temporary heartburn), it brought home to me again the importance of protecting all of my online accounts.

Like many, perhaps most, of you, I have long found managing the sheer volume of online passwords and varying criteria daunting. Oddly, the ever more complex (and varying) password requirements—different lengths, different combinations of caps, numbers and “special” characters, not to mention forced resetting of those passwords—has, if anything, tended to leave me being more casual than I should be regarding some of the practices I know are important. That said, and while I am far from a cybersecurity expert, I try to stay current on the latest advice from those who are—and trust me, it’s a moving target. 

As it turns out, the Labor Department recently issued a set of guidance on the issue of cybersecurity,[i] and while our more immediate focus here has been on the expectations of plan sponsor/fiduciaries, advisors and recordkeepers (particularly in view of the recent reports of Labor Department audits on these practices), my recent experience reminded me that it’s worth noting—and sharing here—the list of “online security tips” for participants included in that guidance. 

Use Strong And Unique Passwords

The most detailed of the tips is also perhaps the most important. The Labor Department recommends that you “use letters (both upper and lower case), numbers, and special characters”—which is increasingly mandated anyway—and to “use 14 or more characters.” We’re also advised not to use letters and numbers in sequence (like “1234” or “abc”), to change passwords every 120 days (or if there’s a security breach—p.s. you probably won’t hear about it until at least 30 days after it’s been detected), and—despite all these strictures—to not only not write it down, but not to “share, reuse, or repeat passwords.”

This is both the most obvious—and in my experience—most nettlesome of the recommendations. Of course, the more complicated the password, the less likely a hacker is to be able to “hack” it. And, unfortunately, the less likely you are to be able to remember it. I’ve seen suggestions on how best to manage this—most commonly these days (including from the Labor Department) the suggestion to use a password “manager.” 

But for those who find that process intimidating (or inconvenient), what I’ve found most useful is the idea of using phrases that are familiar or meaningful to you, but would amount to gibberish in a password field. Something like (for those who took typing classes in high school) “thequickbrownfoxjumped,” particularly if combined with some kind of numerical reference (perhaps “thequickbrownfoxjumpedh1.” You can also use a random combination of words like “fleetwoodChicago1978” (which happens to be when/where I saw Fleetwood Mac perform), or maybe a random combination of month and year (though avoid birthdates, anniversaries, and such)—perhaps something like “januarY2019” (I try to capitalize something other than the first letter). One other neat trick is to use spellings that may mean something to you, but aren’t in the dictionary—like dixshunary, or Septimber. 

The challenge, of course, will be remembering which (random) combination(s) you used for what. But if that leads you to write it down, keep that in a safe place—and don’t store it on your computer! 

Use Multi-Factor Authentication

The very first thing I did with the account that had been hacked (once I had reestablished control) was to set up multi-factor authentication. I have made a practice of doing this with all my accounts, and can only assume that years back, when I set up the account in question, they either didn’t have it available, or I considered it too much of a hassle to set up. No more.

Basically, this means that when you log on and/or initiate a transaction, the system requires the confirmation of a second credential. The most common set up would be to send you a code via text (to a phone number you’ve established on file) or to an email address. If you don’t have this set up yet on your online accounts—do it right away. It’s a life (and savings) saver. And always, always, always, be sure that you are set up to receive notifications any time your account or account information has been changed! Oh—and it bears noting here that the password to your email account is perhaps the most important—because if they hack your email account as well, they can intercept those confirmation emails, and delete them before you even know it has happened! 

Keep Personal Contact Information Current

Odds are the accounts you access with some frequency have current contact information. The problem is, retirement savings often don’t fall into the “with some frequency” category. Let’s face it, we’ve long been advised that we shouldn’t be constantly checking in on our retirement savings, but there’s nothing that says you can’t look without touching. Particularly if you have left some 401(k) balances “behind” with a prior employer.  

Close Or Delete Unused Accounts

It’s unfortunately not uncommon for folks to use the same password(s) for multiple accounts—but using those same passwords for accounts you don’t use (or perhaps don’t even remember using) and ones with current, and perhaps monetary implications, can leave you exposed. You may have gotten one of those (badly spelled) emails from individuals who claim to have accessed your webcam and/or planted some kind of “trojan horse” on your PC, and by way of proof—show you the password that they’ve stolen. While those kind of intrusions are certainly possible, odds are what they did instead was tap into your email—and password—from an old blogging account or such that you simply walked away from years ago. 

There are a couple of easy ways to check out your potential vulnerability—https://haveibeenpwned.com/ or https://monitor.firefox.com/. 

One the DOL ‘Missed’

Now, for all the value in the tips provided, there is some irony in one they missed—the importance of logging on to your 401(k) account(s) regularly. 

If you have an online account—and these days you may have more than one—and particularly following a change in recordkeepers (and with the recent wave of consolidation there’s been a lot of that[ii]), it is imperative to log on ASAP, and not only establish the unique password noted above, but also set up the multi-factor authentication, provide answers to key security questions, and make sure that you are set up for electronic notifications of any changes to your account. Did I say ASAP? I mean now. 

After all, if you don’t lay claim to that account—quickly—it’s all the easier for a hacker to do so.   

- Nevin E. Adams, JD

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[i] It’s worth acknowledging here that recently there have been numerous situations where plan fiduciaries have been sued for various account intrusions, including participant accounts at Abbott Laboratories (Split Decisions in 401(k) Theft Suit for Plan Sponsor, RK), Estee Lauder (Recordkeeper, Plan Sponsor Charged in 401(k) Account Theft), MandMarblestone Group (Court Backs TPA Counterclaim on Plan Sponsor in 401(k) Cyber Theft Case) and Boeing (Man Charged with Retirement Account Thefts).

[ii] As an additional note of caution, I have now had two of my 401(k) accounts converted (by and from different providers) without the beneficiary information. Now, sooner or later, should it become necessary, the paperwork I submitted once upon a time will surely suffice (and since my spouse is my beneficiary, it shouldn’t matter)—but it’s a good idea to double check such things while you are setting up that password, etc.

The 'End' in Mind

I was discussing the subject of retirement over the long holiday weekend with family. 

There was a lot of talk about Social Security (or the looming lack thereof), the impact(s) of inflation, and how the markets (stock and housing) had boosted prospects, but ultimately decided we weren’t sure when that would happen, we weren’t even positive that it would happen (the so-called “great resignation” notwithstanding), or if it might consist of a gradual slowdown/pullback. Moreover, we really didn’t know what “it” would be like if and when it did happen, or where we might be living even if and when. Finally—it had been a pretty hectic week, after all—I somewhat playfully suggested that the best definition of retirement would be the absence of time-critical deadlines and Zoom meetings. Ah, now that’s something to look forward to!

However, and as those who are already ensconced there can attest, retirement has its own set of pressures, and they go well beyond bucket list “bingo.” But the “difficulty” that my family discussion had in actually describing what we would “do” is a real problem in retirement planning. After all, if you don’t know what you are going to “do” (or from where you will be doing it), it’s really hard to develop a plan, certainly not an effective one. Let’s face it, the things we are accustomed to saving for—a car, a house, the kids’ college tuition, a vacation trip—generally are not only things we can envision, they have a very specific price tag—and sometimes a specific deadline.

Now, of course, retirement—more precisely, living in retirement—also has a price tag, if not a specific deadline (though the latter can certainly influence the former). Anyone who has an interest in knowing what that is can turn to any number of readily available calculators capable of revealing that number, or at least a range of numbers. Unfortunately, those disembodied figures don’t shed much light on defining what we’ll get for our money—and even then they tend to be so large that the normal reaction is, “Isn’t there a cheaper model?” (or perhaps a higher assumed return).

The sad reality is that too few take the time to make that calculation before making that decision. In fact, according to the Employee Benefit Research Institute/Greenwald & Associates’ 2020 Retirement Confidence Survey, just over 4 in 10 (44%) have (ever) estimated[i] how much income they and your spouses would need each month in retirement—a pretty consistent finding from the RCS, which began asking that question way back in 1993. 

Doubtless some of the reluctance is the sheer complexity of the “ask” (not to mention the variables), the press of more immediate concerns, perhaps even a fear of what the answer will be. For years now, a number of providers have produced an estimate of how much monthly income one’s current account would yield on participant statements, a feature (somewhat) codified in the SECURE Act. That said, and with its many assumptive flaws, I’ve never found that focus particularly useful, though it’s an improvement over the traditional lump sum “need” that most calculators provide, and certainly better than a mere account balance. Personally, I think we’d do a better job of paying that retirement “bill” if participants set an annual target—a budget for retirement, just like we have for the mortgage or the car payment. That would give them a shorter-term target that could still be part of the larger, often apparently unassailable goal. Too often, retirement savings is a function of what is left over after everything else is paid. And that means that, too often, particularly when things like health care costs, groceries, and filling the tank cost more than we had planned, we not only don’t pay that retirement “bill,” we don’t even see it as overdue. 

Retirement planning needs to start with the “end” in mind, of course—but to be effective it also needs a constructive road map to help chart the way there. 

- Nevin E. Adams, JD

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[i] Worse—and this data point was not in the 2020 RCS—when you ask how people had made some kind of assessment of their retirement income needs, a jaw-droppingly large percentage indicated they… guessed.

History’s Lessons for Plan Fiduciaries

 

The study of history is a passion of mine, and while it seems a bit trite, the old adage that those who don’t remember the past are doomed to repeat it seems more apropos by the day. Regardless, I never cease to be touched by the experience of walking the grounds where famous individuals or great historic events took place. 

A few years back I had the opportunity to be in Philadelphia for a few days beyond the customary speaking event “fly-by,” and was thrilled to be able to tour Independence Hall where, in 1776, the Continental Congress crafted what we will shortly celebrate as the Declaration of Independence. Those who think that partisan divides, cynical self-interest, and political acrimony are recent “innovations” in government would perhaps be shocked to learn that regional tensions have always been part-and-parcel of our republic… even before it was a republic. 

The room was smaller than I had imagined—and I couldn’t imagine what it must have felt like on a July day with no air conditioning. The chairs (though doubtless replicas) looked… uncomfortable, to say the least. The idea that the debates—and ultimately the consensus (of sorts) that was wrested from this group of disparate individuals with varied (and competing) objectives in that room was—to me, anyway, nothing short of extraordinary. To this day the reality that our nation was born from—and has survived—those contradictions is a testament to the power of the ideals expressed on that July day in 1776, even if some would require the passage of time (and a Civil War) to achieve. 

But, as we commemorate this Independence Day holiday, there are, I think, lessons to be learned from that experience that can be applied to our work with retirement plans, particularly those who serve those plans as fiduciaries. 

Inertia is a powerful force.

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 in Philadelphia still held out hope for some kind of peaceful reconciliation. 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 take on the world’s most accomplished military force.

As human beings we are largely predisposed to leave 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, generally speaking, and in the absence of a compelling reason for change, inclined to rationalize staying put.

Little wonder that we often see new fund options added, while old and unsatisfactory funds linger on the plan menu, a general hesitation to undertake an evaluation of long-standing providers in the absence of severe service issues, and reluctance to adopt potentially disruptive (and, admittedly, often expensive) 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 are bound by a higher obligation—that their 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 delegates selected by processes ranging from extralegal conventions, ad hoc committees, to elected assemblies –with varying degrees of voting authority granted to them, to boot. Needless to say, that made reaching consensus even more complicated than under “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, certainly in the case of ERISA fiduciaries, if those individuals lack the requisite knowledge on a particular issue, they need to access that expertise from individuals who do.

Know that there are risks.

Those that gathered in Philadelphia that summer of 1776 came from all walks of life, but it seems fair to say that most had something to lose by signing on to a declaration of independence. True, many were merchants (some wealthy, including President of Congress John Hancock), and perhaps they could see a day when their actions would accrue to their economic benefit. Still, they could hardly have undertaken that declaration without a very real concern that in so doing they might well have signed their death warrants. As Ben Franklin is said to have commented just before signing the Declaration, “We must, indeed, all hang together, or most assuredly we shall all hang separately.”

Despite the threat of litigation, it is not quite that serious for ERISA plan fiduciaries. However, there is the matter of personal liability—not only for your actions, but for those of your fellow fiduciaries—and thus, you might be required to restore any losses to the plan or to restore any profits gained through improper use of plan assets. So, it’s a good idea not only to know who your co-fiduciaries are—but to keep an eye on what they do, and are permitted to 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.

Plan fiduciaries are sometimes cautioned (often by legal counsel) about committing to writing certain decisions, notably an investment policy statement. In fairness, the law does not require one, though ERISA basically anticipates that plan fiduciaries will conduct themselves as though they had one in place. And, generally speaking, plan sponsors (and the advisors they work with) find it easier to conduct the plan’s investment business in accordance with a set of established, prudent standards if those standards are in writing—rather than being crafted at a point in time when you are desperately trying to make sense of the markets. That said, and in the defense of caution, if there’s something worse than not having an IPS, it’s having an IPS that isn’t followed.

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. 

Those might not serve to inspire future generations—but they 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.

Actions can speak louder than words.

As dramatic and inspiring as the words of the Declaration of Independence surely were (and are), if they never got beyond the document in which they appeared, it’s unlikely we’d be talking about them today. Indeed, it’s likely that, without the actions committed to in that Declaration, their signatures on the document would have only ensured that they wound up on the gallows.

Anyone who has ever had a grand idea shackled to the deliberations of a moribund 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 this week.

Yes, Independence Day is a great opportunity to reflect and remember that our actions have consequence(s)—and that while plan committee meetings and deliberations may sometimes seem like little more than obligatory (and tedious) reviews of arcane information, it’s worth remembering that those decisions affect people’s lives—and, ultimately, their financial independence. 

- Nevin E. Adams, JD

Does Financial Wellness (Still) Need an ROI?

The ROI for financial wellness has always been elusive—but a new survey suggests that it might not matter.

Asked “Why are you creating or expanding your financial wellbeing program?”, respondents to Alight’s 17th edition of Hot Topics in Retirement & Financial Wellbeing said that not only was financial wellness their top priority, more than half (56%) said that the importance of financial wellbeing has increased at their organization over the last two years, and none said the focused has decreased. 

But—asked why they were creating or expanding their financial wellbeing program, the respondents largely ignored the traditional ROI metrics. The most common answer was nothing more concrete than to “enhance the overall employee experience (85%), and right behind that was the simple proposition that “we believe it is the right thing to do (84%). Even HR’s traditional favorite—“increase employee engagement”—at 72%—was well behind those arguably subjective gauges. 

“Engagement” isn’t exactly a new measure—but even that requires equating employee utilization with a return of value to the organization’s bottom line. It’s not that it doesn’t have value, but it’s darned hard to quantify. Indeed, some experts argue that we shouldn’t even try.

Goals Posts

Well down the list for these plan sponsors were common goals such as improved retirement statistics (e.g., improved adequacy, decreased leakage, higher participation rate), cited by fewer than half (49%), or the traditional “to increase attractiveness and/or differentiate ourselves as an employer,” which was identified by just 47%. The goals that many early advocates of financial wellness had touted—to “decrease employee time spent addressing financial issues (either on the job or through absenteeism)” was mentioned by just 43%, and as for “decreased medical costs”—a mere 14% indicated that was a rationale. Nor was it a matter of responding to worker interest—just 38% cited employees asking for these types of benefits as a factor.

Don’t get me wrong—it’s not as though there haven’t been attempts made to quantify the return on the time and monetary investment in these programs, certainly by the firms that promote these services—but getting to those results generally involves adopting not just the methodologies, but the calculus employed in assigning value to those results. 

Measure ‘Meants’

Despite the well-intentioned efforts of many, financial wellness remains one of those concepts that is still, largely anyway, (just) a concept—one with varied definitions, inconsistent applications, and disparate providers—and thus one that is notoriously frustrating to assign a dollar value[i] to—other than the cost of such programs, which when, done properly, we’re assured, costs money.

In fact, asked how they intended to measure the results of their financial wellbeing program, far and away the most common response—cited by 85%—was employee usage of benefits. As metrics go, it’s certainly an important one—because if the program isn’t being used, there can be no real impact. That said, the kinds of impact that have been more commonly associated with a quantifiable ROI—improvements in retirement statistics (55%), medical costs (e.g., health care, disability, workers compensation) (12%) and reductions in absenteeism (5%)—followed distantly. Even employee engagement—as noted earlier, a notoriously difficult aspect to quantify—was cited by only about half (52%) of plan sponsors—and 6% admitted that they did not intend to measure the results of their program.

Now, these survey results are drawn from a relatively small group of relatively large plan sponsors: 116 of them, albeit with a median employee base of 19,300 (average of 47,000). On the other hand, the patterns at evidence among larger employers have long been seen as a something of a precursor for what will eventually take hold “downmarket.” 

What remains to be seen is whether the apparent diminution of focus on traditional ROI measures among these plan sponsors suggests that those contributions to the bottom line were always illusory—or perhaps that they weren’t a necessary affirmation of the pursuit of financial wellness after all. 

- Nevin E. Adams, JD

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[i] That said, a couple of years back (see Building a Bottom Line for Financial Wellness), I was able to cobble together a formula of sorts, that looked something like “Projected reduction in turnover times current turnover rate times the estimated cost of replacing a worker times the number of employees.” That said, while it’s a calculation with discernable variables, those are still fraught with “fill in the blank” assumptions. 

Things You Don't Learn in School

Life has many lessons to teach us, some more painful than others—and some we’d just as soon be spared. But the graduates of 2021—well, they’ve been through a lot, arguably more than most—but with any luck at all, the days and years ahead will be brighter. 

Regardless, if you have a graduate—or if you are a graduate, here are some insights I’ve picked up along the way…   

ASAP is never as soon as people think.

Even those who work for themselves have bosses (they’re called “clients”).

Emails (generally) don’t have to be answered right this minute.

Bad news doesn’t improve with age.

Your first job can be like your first love—it will either bring a smile for years to come—or it can break your heart. And sometimes both.  

Don’t expect your job to respect personal boundaries without some “help.”

Don’t be afraid to pick up the phone.

If the only time your boss hears from you is when there’s trouble, don’t be surprised if they don’t look forward to your visits. 

Book some quiet time in your day.

Most meetings really could be replaced with an email.

You’re either early—or you’re late.

There is an inverse relationship between the number of people in a meeting and its productive output.

Everything you’ve heard about your elders isn’t true. But some of it is.

Generalizations are (almost) never accurate.

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

Just 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.

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

Never say you’ll never…

Always sleep on big decisions.

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 an opportunity to say, “thank you.”

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

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 most of all, 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

p.s.: Got any advice to add to this list? Share it in the comment section below!

Second Opinion(s) on Health Cost ‘Coverage’

 

As if retirement savers didn’t have enough to worry about, last week a report reminded us how much money they’re going to need in retirement… just for health care.

In fact, Fidelity Investments’ 20th annual Retiree Health Care Cost Estimate claims that a 65-year-old, opposite-gender couple[i] retiring this year can expect to spend a whopping $300,000 in health care and medical expenses throughout retirement—an 88% increase since 2002. 

This year’s estimate is a new high, and even if it’s up just 1.7% from 2020 ($295,000), it’s 30% higher than 10 years ago when the amount was $230,000.

What Are the Odds?

Now, if you’re finding all that a bit depressing, you might turn instead to the work that the Employee Benefit Research Institute (EBRI) did a year ago, when the group examined those needs. However, they found that the overall projected savings needed to have a 90% chance of having enough money to pay for premiums, Part B deductibles and out-of-pocket drug expenses for retirement at age 65 in 2020 for a couple with drug expenses at the 90th percentile was then estimated at $325,000—that said, it was down from $363,000 in 2019 and $399,000 in 2018.[ii]

Not feeling any better? 

The ‘Spread’

Well, consider that for a typical 65-year-old woman, a Mercer-Vanguard model predicts an annual health care expense of (just) $5,200 in 2018. And then there is that interesting report from 2019 (aptly titled “A New Way to Calculate Retirement Health Care Costs”) by T. Rowe Price’s Sudipto Banerjee who suggested then (and presumably would again today) that it may be more practical to look at health care as an annual expense incurred over the 20-30 years you’ll actually incur those expenses, rather than as a lump sum. 

More recently, Banerjee points out another aspect of these large lump sum totals that is easy to overlook—and that’s the impact of “health care shocks”—those really high health care cost increases (say in excess of $25,000) that many worry about, but that don’t usually affect younger retirees.[iii]

Confused?

Well, even if you aren’t, you can surely understand why your “average” retirement saver might be. Worse, my guess is that the only takeaway most would get from all this is the first headline[iv]—that they’re going to need more for health care expenses in retirement alone than many have accumulated for the totality of their retirement expenses.

Ultimately, these types of projections serve to remind us that health care costs need to be contemplated as a part of retirement expenses—and that, at the extremes, those costs can quickly wipe out funds set aside for living expenses. Little wonder that concerns about the costs of health care in retirement dominate the concerns of those not yet across that threshold. 

But as you’re sharing these headlines with savers—doubtless hoping they’ll take it as a wake-up call, an incentive and an encouragement to plan, and perhaps to save more—we should keep in mind that those attention-grabbing lump sum numbers are, at best, an estimate that attempts to put a framework around a very specific aspect of retirement spending—one that for the vast majority won’t come due all at once, but over decades, one that may well not emerge until much later in retirement, one that may never ever arise in that projected magnitude. 

Bear in mind as well that, however eye-opening or jaw-dropping the headline, presented out of context it might have the opposite effect—discouraging and even disincentivizing the very behaviors we hope to inspire.

- Nevin E. Adams, JD

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[i] For single retirees, the 2021 estimate is $157,000 for women and $143,000 for men.

[ii] Fidelity’s estimates above assume both members of the couple are enrolled in traditional Medicare (which between Medicare Part A and Part B covers expenses such as hospital stays, doctor visits and services, physical therapy, lab tests and more), and in Medicare Part D, which covers prescription drugs. Neither includes the potential impact of long-term care costs, though EBRI routinely does in it modelling of retirement savings needs.

[iii] Indeed, not only does he write that they are more prevalent among those who reach their 80s and 90s, but that—even then—it’s (only) a very small percentage of people (3.6% of those ages 80-89, and 8.4% for those ages 90-99—however, overall, even for those between ages 90 and 99, less than one-third experienced an increase of more than $2,000, he notes).

[iv] To their credit, having gotten your attention with that headline, the press release accompanying it does offer a perspective on how that financial need could be satisfied taking advantage of a health savings account. Ahh, the magic of compounding!

Guidance 'Counseling'

 When the Labor Department issued last month what it called “new guidance” that it further described as “the first time the department’s Employee Benefits Security Administration has issued cybersecurity guidance”—well, I, for one, was expecting… guidance. 

However, rather than an advisory opinion, information letter or even a field assistance bulletin, it turned out instead to be three documents outlining what were termed “best practices for maintaining cybersecurity.”

The issue of cybersecurity has, of course, loomed large in recent months, reportedly emerging as a focus in Labor Department audits and as a point of contention[i] in participant lawsuits. In fact, even the preamble to the final e-delivery regulations stated a year ago that “…the Department expects that many plan administrators, or their service or investment providers, already have secure systems in place to protect covered individuals’ personal information.” 

Now, in fairness, the Labor Department press release did state that it was guidance on those best practices—not that there wasn’t guidance on cybersecurity to be found in those documents. 

Consider that in the component labelled “Cybersecurity Program Best Practices,” none other than the Labor Department itself says, in no uncertain terms, “Plans’ service providers should…” and then proceeds to enumerate 12 precise and distinct elements. The first of these is no less than to “have a formal, well documented cybersecurity program,” followed immediately by “conduct prudent annual risk assessments.” 

Doubtless there are some who would prefer to have a more detailed expectation as to the particulars of those practices, some specific sense as to exactly what constitutes a “cybersecurity program,” the criteria for “strong access control procedures” and what is required in order to “appropriately respond” to past cybersecurity incidents. 

Make no mistake: Plan fiduciaries that aren’t attentive to the issue, much less the best practice guidance and its detailed outlines as to what would constitute “best” practices—well, perhaps the high-level admonitions leave too wide open the determination as to how those mesh with ERISA’s fiduciary standard. That said, and even if the Labor Department has yet to turn a sharp eye upon such things, the plaintiffs’ bar soon surely will.

The elements outlined, while broad, seem to offer at least a basic structure and specifics sufficient to validate an existing program, or—should one not yet be in place—begin its construction. And so, even if there are some specific criteria not yet detailed, plan fiduciaries can know, it seems to me—regardless of this particular guidance—for a certainty that the standards of considering, hiring and monitoring the processes and practices of those who provide support to their plan and its participants require—as they always have—a standard of care and loyalty that has been described as “the highest known to the law.” 

And surely that includes pursuing best practices in protecting both the information and account balances to which they are entrusted. 

- Nevin E. Adams, JD

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[i] Other recent cases have involved participant accounts at Abbott Laboratories (Split Decisions in 401(k) Theft Suit for Plan Sponsor, RK), Estee Lauder (Recordkeeper, Plan Sponsor Charged in 401(k) Account Theft), MandMarblestone Group (Court Backs TPA Counterclaim on Plan Sponsor in 401(k) Cyber Theft Case) and Boeing (Man Charged with Retirement Account Thefts).

The Problem(s) with Financial ‘Literacy’

April is, of course, National Financial Literacy Month—and for as long as I can remember, the retirement industry has been talking about the need for some kind of personal finance education in public schools—there’s just one problem.

First off, there actually are such programs already in existence at the moment. Half the country (25 states) now requires high school students to take a course in economics, and 21 states now require high school students to take a course in personal finance. Granted, they may still be too well dispersed to show up on your normal “radar”—but they’re growing in number and dispersion. 

Those efforts[i] notwithstanding—and while there’s some anecdotal evidence that this has helped (some) with regard to better decisions with regard to college financing—I’ve little sense that it’s moved the needle much with regard to participant knowledge or financial decision making (feel free to disagree in the comments below, if you’ve had a different experience—or if you haven’t).

In fact, a 2014 paper by from three professors reviewed 168 different papers[ii] covering some 200 studies on the topic of financial literacy and financial education—and found that what they termed “interventions to improve financial literacy” accounted for “only about 0.1 percent of the variance in the financial behaviors studied.” 

Or said another way, “not much.” 

A more recent paper titled “High School Curriculum and Financial Outcomes: The Impact of Mandated Personal Finance and Mathematics Courses” echoes those findings, concluding, “there is little evidence that education intended to improve financial decision-making is successful.” These authors pose the question “Can good financial behavior be taught in high school?”, only to conclude that, “It can, though not via traditional personal finance courses, which we find have no effect on financial outcomes.”

While the findings in those two studies have some limitations—not the least of which is their determination of the outcomes measured, and the aggregation of a wide variety of scholarly work (and assumptions) - as someone who has long been one of those voices advocating for greater financial literacy—this has been a bit of an eye-opener. With this broadening exposure to personal finance in school, why aren’t[iii] these programs—why isn’t financial literacy—taking root in a meaningful way?

Turns out there might actually be a reason.

The researchers who had examined those 200+ studies did offer a perspective: “like other education, financial education decays over time; even large interventions with many hours of instruction have negligible effects on behavior 20 months or more from the time of intervention,” they write.

In fairness, there are a number of classes I took in high school (and college) that I quickly dismissed as soon as the final exam was concluded—because I didn’t much like the subject (or the teacher), but often because I just didn’t get the point (beyond passing the exam, and ensuring that I would never again have to consider the subject—particularly among the classes I was required to take. Might that be the case with these personal finance offerings? It seems reasonable. 

So, what can we do? 

Well, considering that the time gap between that high school personal finance class (if there is one, and I’m not sensing any movement to require such things on college campuses) and employment is frequently longer than 20 months, it’s little wonder that the needle hasn’t moved much, certainly not as much as one who is trying to engage with these individuals in financial planning might wish. Rather, as the researchers note, “There must be some immediate opportunity to enact and put to use knowledge or it will decay. Moreover, without a ready expected use in the near future, motivation to learn and to elaborate may suffer.” 

Said another way, you have to “use it or lose it.”

The paper offers some possible remedies. Specifically, they suggest that future education might be more productively focused on teaching “soft skills like propensity to plan, confidence to be proactive, and willingness to take investment risks more than content knowledge about compound interest, bonds, etc.” They note that in their meta-analysis, “measured knowledge of financial facts had a weak relation to financial behavior….” Which, I have to say, seems to validate my sense of the inadequacy of current financial “literacy” measures. 

They also suggest that content knowledge “may be better conveyed via ‘just-in-time’ financial education tied to a particular decision, enhancing perceived relevance and minimizing forgetting.” They acknowledge that it “may be difficult to retrieve and apply knowledge from education to later personal decisions… particularly decisions coming years after the education.” The authors of the second paper cited suggest additional mathematics training, which they found “leads to greater financial market participation, investment income, and better credit management, including fewer foreclosures.”

All of this seems to suggest that our industry needs to quit holding out as some panacea the notion that financial education programs in school will “solve” the 401(k) education problem.[iv] However, that doesn’t mean we should abandon those efforts, certainly not in core areas like budgeting, debt management and saving. 

The “problem” with financial literacy may well be that many still lack that exposure—but more significantly that even for those who get that exposure, there’s been little opportunity for applying that personal finance knowledge in high school and college, though arguably it shouldn’t be.

In sum, true financial “literacy” is perhaps not so much whether you can talk the talk—but being given both the knowledge—and the opportunity - to walk that walk.

- Nevin E. Adams, JD

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[i] Another problem in evaluating the impact is defining what constitutes “financial literacy” in the first place. Noted academics have boiled that complicated concept down to three fairly fundamental questions—though personally I don’t see how knowing the answers to those particular questions would help anybody make a financial decision in the real world, much less a decision about saving or investing in a 401(k) plan. Which brings to mind questions not only what the personal finance curriculum covers, but what kind of contribution it is making to financial “literacy.”

[ii] The reference list alone runs 26 pages! And there are more to go with the multiple appendices.

[iii] At this point, I’ll align my opinion with that of the authors of the second paper: “Our findings do not necessarily imply that financial literacy does not matter, or that financial education is never effective.”

[iv] Not that it wouldn’t help to slip in some basic understandings of the markets and investing alongside those math problems about two trains heading toward each other at variable speeds.

Does Health Care Need a Behavioral Finance ‘Fix’?

An important decision, made in minutes.

No, that’s not retirement plan savings—though various consumer surveys have suggested that many spend more time mapping out their annual vacations than how they’ll fund their retirement needs. 

Rather, that’s how a new whitepaper by Voya’s Thought Leadership Council and SAVVI Financial LLC characterizes the 17 minutes that the average employee spends enrolling in benefits—including health plan selection, voluntary benefits and more. 

Now, in fairness, health care plan choices are, in my experience, less complicated that those associated with retirement. Not that they aren’t complicated, mind you—and there’s certainly concern associated with that choice (and “do overs” are hard to come by). But I suspect for most they are really “only” choosing between two, or at most three, different options—essentially packages carefully constructed by their HR groups (likely with the assistance of a benefits broker). 

When it comes to that individual decision—that choice between packages—anecdotally, at least, it seems often driven by a couple of key considerations: coverage of one’s physician(s) of choice—and cost. With regard to the latter, it is often focused on one particular aspect—premiums—though, as we’ll see in a minute, co-pays and deductibles can also factor in. Regardless, the choice is almost inevitably a “here and now” decision—one that has financial consequence, to be sure—but one that requires only that one look out no further than the year ahead. 

Or does it? That’s ultimately the premise behind that new whitepaper, “Retirement at Risk: The Relationship Between Overspending on Health Care and Retirement Readiness.” The whitepaper’s authors point out that it is a (short-term) decision with long-term consequences—and one that, with the growing consensus of the important links between health and wealth, bears consideration.

The paper basically presents the mathematical consequences of spending (too much) on health care versus how those savings could add up if instead invested for retirement. The math is—well, math. You could apply those financial choices to just about any individual financial decision and the trade-offs represented. 

But where things get interesting is the apparent rationale behind those choices—which, based on spending data, would appear to be somewhat “irrational.”

Simplistically, behavioral finance—something that has been employed so successfully in retirement plans to provide better outcomes—has yet to be applied to health care decisions. For example, the paper notes that when plans were branded to include the phrase “high deductible,” almost two-thirds of study participants chose the PPO plan, despite the fact that the high-deductible plan used in the study scenario was the more optimal financial choice. Strip out that label, and participants were just as likely to pick the plan formally known as high-deductible as the traditional Preferred Provider Option (PPO) plan (47% versus 53%)—because, after all, who wants a “high” deductible? 

The other challenge, of course, is that these HDHPs are (still) the “new” option. And here, as with retirement savings, inertia proves to be a powerful force. In fact, the paper cites a study that found that 89% of study participants… just chose the same plan they had in the previous year.[i]

In fact, while health care (and health insurance) costs have surely been rising, the paper echoes not only the conclusions, but the causations highlighted in “What’s Holding Back HSAs?”, a whitepaper the Plan Sponsor Council of America published in 2019. 

Now, in a perfect, rational world, folks would sit down and ponder the likelihood of filing a medical claim during the coming year—and perhaps think about the out-of-pocket costs if they did. They’d be aware that in 2018, nearly 60% of employees had less than $2,000 in claims—and, according to the Voya whitepaper, approximately 16% had no claims at all. They might even know that, according to a study published in the Quarterly Journal of Economics, the majority of employees at a Fortune 100 company who chose the plan with the lowest deductible—despite the premium costs—ended up spending 24% more on health insurance than they “needed” to. 

That, of course, is not the world we live in—and, helpful as the data presented in the Voya report is—well, health needs and health insurance costs tend to loom large(r) as a here-and-now concern that frequently trumps the (relatively) distant obligations of retirement. The Voya report should serve as a reminder that health care and health care costs are, and should be, an integral part of planning for retirement—and one that can, and should, be part of our current planning as well.

And for those for whom it isn’t yet, a reminder that applying some structural changes a la behavioral finance could help us all make better decisions about health—and retirement—and health care costs in retirement.

- Nevin E. Adams, JD

See also: 5 Ways to a Better HSA.

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[i] Indeed, a recent study by the Employee Benefit Research Institute (EBRI) and Greenwald Research found that 32% of those with a traditional health plan did not know whether they were offered an HDHP.

Could the Super Bowl Batter or Burnish Your 401(k)?

Will your 401(k) be bumped up by a Buccaneers victory—or chipped by the Chiefs?

That’s what adherents of the so-called Super Bowl Theory would likely conclude, after all. The theory is 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 54 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 Kansas City Chiefs (yes, these Kansas City Chiefs) over the NFC Champion San Francisco 49ers to refute the applicability (or did your 401(k) miss that 18.4% rise in the S&P 500?). Or how about the year before that when the AFC’s New England Patriots (who once were the AFL’s Boston Patriots) bested the NFC champion Los Angeles Rams (the S&P 500 was up more than 30% in 2019).

Or, looking the other way, the year before that a win by the NFC champion Philadelphia Eagles against the AFC Champion Patriots 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 failed to forestall a 2017 market surge. 

Now, one might think that the real “spoiler” to this market “theory” is the New England Patriots—but 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

You might well wonder why, in view of that consistent string of “exceptions” that we’re still talking about this “theory”—but, as it turns out, that’s been an unusual (albeit consistent) break in the streak that was sustained in 2015 following Super Bowl XLIX, when the AFC’s New England Patriots (yes, they show up a lot) 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– who, though representing the AFC, are technically a legacy NFL team via their Cleveland Browns roots (yes, they moved to Baltimore in 1995—though the NFL still views them as an expansion team—filling the hole left by the Colts’ 1984 “dead of night” move to Indianapolis. The Browns, sadly, are still waiting for a Super Bowl trip[i]). 

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 some 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 (those old Baltimore 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, as we’ve already noted, had roots dating 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 since returned to the City of Angels) and the Baltimore Ravens (those former “Browns”) 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.[ii] 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 Buccaneers have been here before—but while it’s been a while for the team, QB Tom Brady certainly knows his way around a Super Bowl (playing in nine of them—and with this one, regardless of outcome, he’ll be the oldest player to suit up for that game)—and they’re not only the home team, they’re actually the first home team in Super Bowl history to actually play in their home stadium. Just to confuse matters a bit, they have exercised their prerogative as the home team to choose their jersey—and they have elected to wear their white “away” jerseys (and pewter pants). That happens to be the jersey they have won throughout the playoffs, having played all of their games to this point “on the road”—the first wild card team to make it to the Super Bowl since the 2010-11 Green Bay Packers. 

The Chiefs have been here before as well—as recently as a year ago (though before that, not since Super Bowl IV), and they’ll be wearing the same red “home” jerseys (and white pants) they wore in Super Bowl 54. In case you’re wondering why that matters, dating back to 2005 with the Patriots in Super Bowl XXXIX, the team wearing white jerseys has won 12 times. Though not last year, of course.

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

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[i] Four current NFL teams have never appeared in a Super Bowl, including franchises that have relocated or been renamed: the Cleveland Browns, Detroit Lions, Jacksonville Jaguars, and Houston Texans, though both the Browns (1950, 1954, 1955, 1964) and Lions (1935, 1952, 1953, 1957) had won NFL Championship Games prior to the advent of the Super Bowl.

[ii] 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.