A Season of Thanksgiving

 

While it’s the celebration following a successful harvest held by the Pilgrims and members of the Wampanoag tribe in 1621 that provides most of the imagery around the holiday, Thanksgiving didn’t become a national observance until much later.

Incredibly, it wasn’t marked as a national observance until 1863—right in the middle of the Civil War, and at a time when, arguably, there was little for which to be thankful. Indeed, President Abraham Lincoln, in his proclamation regarding the observance, called on all Americans to ask God to “commend to his tender care all those who have become widows, orphans, mourners or sufferers in the lamentable civil strife” and to “heal the wounds of the nation.” 

We could surely stand to have some of that today.   

Thanksgiving has been called a “uniquely American” holiday—and so, even in a year in which there has been what seems to be an unprecedented amount of disruption, frustration, stress, discomfort and loss—there remains so much for which to be thankful. And as we approach the holiday season, it seems appropriate to take a moment to reflect upon, and acknowledge—to give thanks, if you will.

I’m once again thankful that so many employers (still) voluntarily choose to offer a workplace retirement plan—and, particularly in these extraordinary times, that so many have remained committed to that promise. I’m hopeful that the encouragements of prospective legislation, if not the requirements of same, will continue to spur more to provide that opportunity.

I’m thankful that so many workers, given an opportunity to participate in these programs, (still) do.

I’m thankful that the vast majority of workers defaulted into retirement savings programs tend to remain there—and that there are mechanisms (automatic enrollment, contribution acceleration and qualified default investment alternatives) in place to help them save and invest better than they might otherwise.

I’m thankful for new and expanded contribution limits for these programs—and hopeful that that will encourage more workers to take full advantage of those opportunities.

I’m thankful for the Roth savings option that, for all the negative press and focus on the accounts of a few wealthy individuals, provides workers with a choice on how and when they’ll pay taxes on their retirement savings.

I continue to be thankful that participants, by and large, continue to hang in there with their commitment to retirement savings, despite lingering economic uncertainty, rising inflation, and competing financial priorities, such as rising health care costs and college debt—and that their employers continue to see—and support—the merit of such programs.

I’m thankful for the strong savings and investment behaviors (still) evident among younger workers—and for the innovations in plan design and employer support that foster them. I’m thankful that, as powerful as those mechanisms are in encouraging positive savings behavior, we continue to look for ways to improve and enhance their influence(s).

I’m thankful that our industry continues to explore and develop fresh alternatives to the challenge of decumulation—helping those who have been successful at accumulating retirement savings find prudent ways to effectively draw them down and provide a financially sustainable retirement.   

I’m thankful for qualified default investment alternatives that make it easy for participants to benefit from well diversified and regularly rebalanced investment portfolios—and for the thoughtful and ongoing review of those options by prudent plan fiduciaries. I’m hopeful (if somewhat skeptical) that the nuances of those glidepaths have been adequately explained to those who invest in them, and that those nearing retirement will be better served by those devices than many were a decade ago.

I’m thankful that the state-run IRAs for private sector workers are enjoying some success in closing the coverage gap, providing workers who ostensibly lacked access to a workplace retirement plan have that option. I’m even more thankful that the existence of those programs appears to be engendering a greater interest on the part of small business owners to provide access to a “real” retirement plan.

I’m thankful that figuring out ways to expand access to workplace retirement plans remains, even now, a bipartisan focus—even if the ways to address it aren’t always.

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

I’m thankful for the opportunity to acknowledge so many outstanding professionals in our industry through our Top Women Advisors, Top Young Retirement Plan Advisors (“Aces”), Top DC Wholesaler (Advisor Allies), and Top DC Advisor Team lists. I am thankful for the blue-ribbon panels of judges that volunteer their time, perspective and expertise to those evaluations.

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

I’m thankful to be part of a team that champions retirement savings—and to be a part of helping improve and enhance that system.

I’m thankful for those who have supported—and I trust benefited from—our various conferences, education programs and communications throughout the year—particularly at a time like this, when it remains difficult—and complicated—to undertake, and participate in, those activities. 

I’m thankful for the involvement, engagement, and commitment of our various member committees that magnify and enhance the quality and impact of our events, education, and advocacy efforts. 

I’m also thankful for the development of professional education and credentials that allow the professionals in our industry to expand and advance their knowledge, as well as the services they provide in support of Americans’ retirement. 

I’m thankful for the constant—and enthusiastic—support of our event sponsors and advertisers—again, particularly during a period when so many adjustments have had to be made.

I’m thankful for the warmth, engagement and encouragement with which readers and members, both old and new, continue to embrace the work we do here.

I’m thankful for the team here at NAPA, ASPPA, NTSA, ASEA, PSCA (and the American Retirement Association, generally), and for the strength, commitment and diversity of the membership. I’m thankful to be part of a growing organization in an important industry at a critical time. I’m thankful to be able, in some small way, to make a difference.

But most of all, I’m once again thankful for the unconditional love and patience of my family, the camaraderie of an expanding circle of dear friends and colleagues, the opportunity to write and share these thoughts—and for the ongoing support and appreciation of readers… like you.

Wishing you and yours a very happy Thanksgiving!

- Nevin E. Adams, JD

 

What's In a Name?

What’s the most used and least understood/appreciated acronym in the retirement plan industry?

Well, for my money, it’s “TPA”—short for “third-party administrator.” It’s a term that is widely bandied about, but I think misunderstood by many.

The origins are plain enough—“administrator” in the sense that a TPA deals with plan administration process and issues. The issues and process, it bears noting, that ERISA (not to mention the IRS and DOL) presumes are the responsibility of the plan fiduciary. We’re talking about things like ensuring that the terms of the plan document are adhered to, that non-discrimination tests are properly applied, and that contributions are timely deposited. 

Where things seem to get confused is the “third party” reference. At its simplest, it’s merely an acknowledgement that the entity performing those vital plan administration functions is someone other than the entity responsible under the law. They are, quite simply, a party external to that legal circle. They are legally an extension of the plan sponsor/administrator, and though it’s hard to imagine it these days, it harkens back to a time when the plan sponsor/employer actually did all that work in-house, often on 12-column pads and calculators. 

Over time the role of TPA has been diminished in the eyes of many. Sure, they deal with a lot of technical “minutiae”—we’re talking deep in the “weeds” here. The classic reference is you ask what time it is, and they (some, anyway) first want to explain to you how a watch is made. That said, the role of plan administrator—perhaps a better label would be compliance administrator—is essential—critical—to the smooth, effective and efficient running of a plan—and on aspects that, odds are, your recordkeeper (another critical role, but one often focused on other things) isn’t always.

Here’s a partial list—bearing in mind that every plan has to do these things, ask yourself—and your plan sponsor clients—who is making sure that:

1. All eligible workers are included in the plan—as required by law—and ineligible workers are not unduly credited with benefits?
2. 
   Compensation used as the basis for contributions and/or eligibility is accurate, in accordance with ERISA and IRS limits, both with regard to amount (how much) and individuals (who)?
3. The plan’s allocation of benefits meets legal requirements and the correct individuals receive the correct amount(s), thus preventing the need for corrective measures and penalties? 
4. The amount(s) allocated to individual participant accounts match the actual dollars deposited into the plan/trust. Additionally, to ensure that contribution deposits are made to the plan/trust in accordance with legal requirements, forestalling legal fines and penalties?
5. The appropriate plan notices are timely delivered to the applicable individuals in accordance with legal requirements, providing them with important plan information and instructions (and preventing the application of penalties for failing to do so)?
6. Employees are properly categorized as to their status as highly compensated employees (HCEs), key employees (for top-heavy testing) and spousal/familial relationships so that the allocation of benefits and eligibility is appropriate and consistent with legal requirements?
7. The tax filings related to the plan (Form 5500, 8955, 5330, etc.) are filed accurately and on time in order to comply with the legal requirements regarding the plan, and thus avoid fines and penalties?
8. The amounts distributed as loans or distributions are consistent with the vesting schedule of the plan, in accordance with plan parameters and legal limits—and that the needed authorizations are obtained?

And perhaps most critically, who is there to help ensure that problems with regard to plan operation—perhaps relating to any/all of the items above—are promptly and accurately corrected in accordance with government platforms and processes to minimize the pain, time—and financial penalties—involved?

These are questions to which prudent fiduciaries—and those who support them—should know the answer(s).

Trust me—the IRS and DOL expect that you do—and ERISA expects nothing less.

- Nevin E. Adams, JD

(A Little More) Room to Grow

 Several years ago, we had in mind that it would be fun to get an aquarium for our home, and (even) I got excited at the prospects of filling it with a variety of all kinds and sizes of exotic fish. 

Sadly, those hopes were dashed when I discovered that , despite the massive displays of what appeared to be whole schools of fish in similarly sized tanks at the pet store, our specific-sized tank would only support a handful of the fish I had hoped to display. Apparently, the more fish you want to have (that live), the bigger the tank you need. The reason: they need room to thrive and grow.

At long last the IRS last week announced the new contribution and benefit limits for 2022. Considering the run-up in inflation this year, expectations were similarly high for increases in those limits. And sure enough, among other things, the 401(k) limit was bumped $1,000 (to $20,500) and the defined benefit plan limit rose from $230,000 to $245,000, though the limit for catch-up contribution held level at $6,500. 

At the outset, it’s worth remembering that these adjustments only reflect increases in the cost of living—basically an acknowledgement that the costs of living in retirement change over time, that they increase due to inflation—and that they are timed in such a way that those increases must accumulate to a certain level before that acknowledgement in the form of increased levels kicks in.

But since industry surveys[i] suggest that “only” about 9%-12% currently contribute to those levels, does it matter? And why don’t more people max out on those contributions? Well, cynics might say it’s because only the wealthy can afford to set aside that much.[ii] But Vanguard’s data suggests that only about half (56%) of even those workers making more than $150,000 a year maxed out their contributions. If these limits and incentives work only to the advantage of the well-off, why aren’t more maxing out?

Limit ‘Ed’

Those who look only at the outside of the current tax incentives generally gloss over the reality that there are a whole series of benefit/contribution limits and nondiscrimination test requirements. These rules are, by their very design, intended to maintain a balance between the benefits that these programs provide between more highly compensated individuals and the rest of the plan participants (those rules also help to ensure a broad-based eligibility for these programs). Almost assuredly those limits are working to cap the contributions of individuals who would certainly like to put more aside, if the combination of laws and limits allowed.[iii]

But let’s think for a minute about a group that doesn’t get nearly enough attention: the group— millions of working Americans, in fact—who are not wealthy by any objective measure, but earn enough that Social Security won’t come close to replicating their pre-retirement income. These middle and upper-middle income individuals apparently aren’t the concern of those who want to do away with the 401(k)—but these are the individuals who in many, if not most, situations, not only make the decision to sponsor these plans in the first place—they make the ongoing financial commit to make an employer match.

If nothing else, allowing those contribution limits to keep pace with inflation—like the right-sized aquarium—provides us all not only with a little more room to grow our retirement savings—but reminds us (all) of the opportunity to do so.

- Nevin E. Adams, JD

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[i] According to Vanguard, during 2020, 12% of participants saved the statutory maximum dollar amount of $19,500 ($26,000 for participants age 50 or older). Fifty-six percent of participants with an income of more than $150,000 contributed the maximum allowed. 

[ii] Setting aside for a minute that $20,000/year likely won’t make much of a dent in the replacement rate for a wealthy individual.

[iii] For some additional validation of the impact of these limits, see “Upside” Potential.

‘The 37-Year-Olds Are Afraid of the 23-Year-Olds Who Work for Them’

I recently stumbled across a provocative article in the New York Times with that intriguing headline.

Honestly, I laughed out loud (drawing my wife’s quizzical attention on an otherwise quiet Saturday morning) when I read it. I’m a (proud) Boomer, of course, and while Gen X basically slipped quietly into the workplace (much to their frustration), Millennials (to my experience) landed with a bang, upending traditional norms of business and meeting etiquette, demanding a voice that seemed well beyond their experience (and, yes, sometimes knowledge)—and, frustratingly (certainly for those of us who played by a different set of rules at their age), getting it. 

So the notion that they were now feeling the same kind of pressures from the next generation of workers (a.k.a. Gen Z) was somewhat humorous to me in a “so, how do you like it?” kind of way.  

Yes, having lived through the not-so-subtle eye-rolling of younger co-workers (and the more recent dismissive “OK, Boomer” commentary), I couldn’t help but find some small modicum of comfort in the notion that that generation was, essentially, being hoisted on its own generational “petard.” 

The problem—particularly for those of us who still want to be seen as “cool”[i]—is that those boundaries are fluid and moving. It’s hard to keep up when you’re not naturally immersed in the culture of the day—it takes effort and persistence, particularly in an era where you lack the opportunity of that interaction in a physical workplace. And, honestly, one’s own experience (and sometimes what we’d label “common sense”) sometimes dictates that those new “norms” are likely only a passing fad (and one that you’d look foolish embracing, regardless).

‘Kids These Days’

Comfortingly enough, the article goes on tell us that researchers call this the “kids these days” effect—and note it has been happening for millennia. Moreover, the author notes that this phenomenon means that “each new generation, christened by marketers and codified by workplace consultants selling tips on how to manage the mysterious youth, can strike the people who came just before them as uniquely self-focused.”[ii]

When I was new to this business, I would joke that nobody comes out of college with plans about retirement, much less thinking about working with retirement plans. And yet, if you’re reading this, odds are you find yourself in at least the latter category. 

That said—and while much is made of the need to communicate “differently” about retirement with younger workers (see “Is It Time to Retire Retirement?”)—it’s never been easy to garner the attention of the not-nearly-ready-for-retirement generation(s) to focus on the financial necessities of that day in the (distant?) future when they’ll need to live on… something. 

‘Different’ Perspectives

There’s little doubt that “retirement” will be different for the next generation—and that the preparations our industry has long espoused could stand some updating. After all, there’ll be no golden watch, almost certainly no pension (if they’ve toiled in the private sector), and as for Social Security? Well, who knows? On the other hand, odds are their labors won’t be stymied by physical limitations, limited by locale—or perhaps even a commute longer than the path from their bed to their couch. Indeed, their work may be such that it never has to—or perhaps gets to—end. And—not insignificantly—they’ll also likely have a longer lifespan over which to consider those alternatives.[iii]

Let’s face it: New generations have long been disruptive to the “status quo,” to the “normal” state of affairs, to the protocols to which we’ve all become accustomed and/or established. Inevitably, when it’s our turn in that cycle, the pace of change is annoyingly slow, the receptivity to new ideas mind-numbingly obtuse—and when our perspective is the status quo… well, we see things differently.   

And all that likely means that if there’s anything to “fear” about those newer to the workforce, it’s that they might make the same mistakes we did.

- Nevin E. Adams, JD

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[i] I’m sure that wanting to be seen as “cool” is probably no longer… 

[ii] And indeed, if there was ever a generation that was (once upon a time) dismissed by its elders as “uniquely self-focused,” it was mine.

[iii] They’ll also have some new tools to help—things like automatic enrollment, automatic escalation, target-date funds and managed accounts. 

Three ‘Scary’ Things That Give Plan Sponsors Chills

Halloween is the time of year when one’s thoughts turn to trick-or-treat, ghosts and goblins, and things that go bump in the night—and, for plan sponsors, and those who support them, a good time to think about the things that give us pause—that cause a chill to run down our spine… 

Things like…

Changing Providers

OK, they may not exactly be “scared” of changing providers, but it’s certainly not a process for the faint of heart—particularly with all of the competing focus priorities confronting plan sponsors on a daily basis. Industry surveys routinely point to a certain amount of regular provider “churn”—indeed, by some counts as many as 10% of the plans change providers in any given year. That said, industry surveys (and excessive fee litigation) are replete with indications that the vast majority of plans not only don’t change recordkeepers, but may not even undertake a formal review of services, fees and capabilities.

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

And that, of course, means that the transition, however badly needed or desired, will likely be rougher—and take longer—than anticipated or desired (see also 3 Things Plan Sponsors Should Know About Changing Providers). And who knows how many intentions to pursue a review have simply petered out on the altar of “not enough time” to do so?

ESG

In fairness, it’s probably not Environmental, Social & Governance (ESG) investing per se that seems to “scare” plan sponsors from offering these options, but rather concerns about their level of accountability for choosing to do so. Indeed, there’s plenty of survey data to suggest that workers, particularly younger ones, want these options. That said, workable, consistent definitions of ESG remain fluid, and perhaps as a result, the adoption rate among DC plans has been tepid—and the take-up rate among participants who have the option is even lower. Indeed, fewer than 3% of plan sponsor respondents included that option on their plan investment menu, according to the Plan Sponsor Council of America’s 63^rd Annual Survey of 401(k) and Profit Sharing Plans, and only about 0.1% of plan assets were invested in those options. Those looking for a counterpoint might note that ESG options were more common among the largest plans (those with more than 5,000 participants) and the smallest (fewer than 50 participants), where 4.2% and 4.4%, respectively, offered that option.

The hesitancy likely comes (at least in part) from confusion about how the Labor Department views these options, or more precisely the prudence of including them as a participant investment option. For a long time there had “only” been Interpretive Bulletins (IBs) (in 1994, 2008 and 2016) and, more recently, a 2018 Field Assistance Bulletin (FAB) on this subject. And while the 2016 IB was read as encouraging consideration of ESG factors (or at least not discouraging it), the 2018 FAB was widely viewed as pulling back on that stance, in the process establishing what had been called the “all things equal” standard, which meant that so long as two otherwise identical investments met all the requisite prudence standards, a fiduciary could (prudently) pick the one that (also) had ESG attributes. 

And then, roughly a year ago, the Trump administration weighed in with a proposed rule that was harshly critical of ESG (unless a “pecuniary”—that is, financial—rationale was evident)– and ultimately a final one that moved off that stance a bit, but still left room for caution. 

After first announcing that it had no intention of enforcing that rule, the Biden administration’s DOL has recently provided a (new) proposed rule that—arguably—puts these options in a more positive light. Indeed, in its current form it actually seems more supportive than the “all things equal” standard put forth by the Obama administration, though it remains a proposed rule, with comments being taken for consideration in shaping a final version.    

All of which arguably (still) leaves plan sponsors contemplating a shift to ESG with a lingering uncertainty. They may not be “scared,” but one can certainly understand a bit of as-yet-unresolved apprehension.

Lifetime Income Options

Speaking of apprehension, while DC plan fiduciaries aren’t exactly scared of retirement income, DC plans have long eschewed providing those options. That despite the unquestioned reality that participants need help structuring their income in retirement—and little doubt that a lifetime income option could help.

There are in-plan options available in the marketplace now, of course, and thus, logically, there are plan sponsors who have either derived the requisite assurances (or don’t find them necessary) or feel that the benefits and/or participant need for such options makes it worth the additional considerations. On the other hand, those industry surveys notwithstanding, for the most part participants don’t seem to be asking for the option (from anyone other than industry survey takers)—and when they do have access, mostly don’t take advantage. Let’s face it, even when DB pension plan participants have a choice, they opt for the lump sum. 

It’s ironic that programs designed to provide retirement income pay so little attention to the realization of that objective; only about half of DC plans currently provide an option for participants to establish a systematic series of periodic payments, much less an annuity or other in-plan retirement income option, and that’s despite the 2008 Safe Harbor regulation from the Labor Department regarding the selection of annuity providers under DC plans (which was designed to alleviate, though it did not eliminate, those concerns), not to mention a further attempt to close that comfort gap in 2015 (FAB 2015-02).

Proponents are even more hopeful that the SECURE Act’s provisions regarding lifetime income disclosures (though many recordkeepers already provide some version of this), enhanced portability (a serious logistical challenge if you ever want to move from a recordkeeper that provides the service to one that doesn’t, though solutions are emerging that claim to have made progress on this front) and, perhaps most importantly, an expanded fiduciary safe harbor for selection of lifetime income providers, will—finally—put those “fears” to rest. We’ll see.

The Standard

Don’t get me wrong—there are plenty of things for ERISA fiduciaries—who are, after all, personally liable not only for their actions, but those of their co-fiduciaries—to be worried about. The standards with which their conduct must comply are (as one court has put it) “the highest known to law,” and with good reason. Prudence is often associated with caution, and fiduciaries generally find more comfort in the middle of the trend “pack” than on its fringes.

That said, the standard is to act (solely) in the best interests of plan participants and beneficiaries—and even though it may be “scary” from time to time… the alternative is surely worse…

- Nevin E. Adams, JD

Are We Ready for Retirement Income?

 It’s ironic that programs designed to provide retirement income pay so little attention to the realization of that objective.

That’s right—for the vast majority of participants today, creating that “paycheck for the rest of your life” remains a DIY undertaking. To this day only about half of defined contribution plans currently provide an option for participants to establish a systematic series of periodic payments, much less an annuity or other in-plan retirement income option. 

However, the need for that solution is widely acknowledged—and there are some new, if somewhat familiar, solutions emerging. 

Earlier this month, BlackRock garnered some headlines with news that not only was it building annuity contracts into a target-date fund series, but also that it had already lined up five large plan sponsors (with some $7.5 billion in assets) to implement the option as a default. 

That followed by a few months the March announcement of a consortium of providers (American Century Investments, Lincoln Financial Group, Nationwide, Prime Capital Investment Advisors, SS&C Technologies, Wilmington Trust, N.A. and Wilshire) that had collaborated on a new in-plan target-date fund series with guaranteed income for life baked in. One that is also purportedly “portable among major recordkeepers where Income America 5ForLife is available”).

SECURE ‘Acts’

Those announcements, of course, came in the wake of the SECURE Act, which included three specific provisions designed to overcome the reluctance of plan fiduciaries (and participants?) to embrace these options:

• Portability—generally, it permits special distributions of a “lifetime income investment” when the investment is no longer authorized to be held under the plan, which makes it possible for a participant to keep the investment even if the plan sponsor changes recordkeepers or decides to eliminate the investment from the plan lineup. 
• Disclosures—requires plans to give participants projections of their current account balance as a monthly benefit using assumptions prescribed by the Secretary of Labor, a provision designed to help participants better understand what their projected retirement savings will produce in terms of monthly income in retirement. Or, said another way, to help get them oriented to thinking about turning that retirement savings balance into that proverbial paycheck for life.
• Fiduciary Safe Harbor—which, in essence, provides that a DC plan fiduciary that selects a “guaranteed lifetime income contract” to be offered under its plan, he/she will be deemed to have acted prudently if it follows a series of steps outlined in the law. That means that the fiduciary will not be liable if the insurance company later defaults on its obligation to participants who invest in the contract.

It remains to be seen if all this will actually move the needle—but they do seem to directly confront—and, at least potentially—resolve the issues that have long been put forth as objections to the embrace of lifetime income options on a retirement plan menu. Indeed, both offerings also deal with the more traditional objection to annuity products—their cost—if they actually work.

There’s no question that participants need help structuring their income in retirement—and little doubt that a lifetime income option could help (certainly with some help from a trusted advisor). Wrapping a complicated product (and lifetime income is complicated) in a relatively simple product is certainly one way to ease acceptance. Moreover, doing so with a product in which contributions are defaulted should certainly improve the rate of adoption by participants—if plan sponsors are inclined to make it available on that basis. 

And if advisors are willing to help. 

- Nevin E. Adams, JD

Resource Full?

A great resource to help you grow and expand your business could be right under your nose…

Are you spending time you don’t have trying to work out problems you didn’t create? Let’s face it—good service, or the lack thereof, is widely cited as the most common reason that plan sponsors change providers—and that can affect your relationship as well. Sometimes you chose those providers, other times you inherit them. 

Regardless, every plan has someone in charge of administration and compliance—a third party, if you will, so called because they perform functions that plan sponsors are expected to ensure are performed (and once upon a simpler time many did so themselves). Whether you engaged those services, or find yourself tasked with overseeing them, you know they can be the difference between a smooth-running plan and one that constantly teeters on the brink of blowing up. Wouldn’t it be nice if you could partner with this “third party” administrator to take some of the burden off your shoulders and give you the time you need to spend elsewhere?

Not that the solution is unknown—roughly a year ago, we surveyed NAPA advisors, and found that nearly all (96%) partner with specific third-party administrators; just over half (55%) focus on one to three firms, while a quarter limit it to just one. Not surprisingly, service was cited as the primary consideration in choosing a TPA partner (56%), while fewer than half as many (26%) cited an ability to help with plan innovation. However, nearly half (45%) of the survey respondents said that less than a quarter of their new business is sold with a TPA.  

The reality is, of course, that like advisors, all TPAs are not created equal—they have different strengths and skillsets, and wildly different ideas as to their responsibilities and services. That makes it hard to obtain an apples-to-apples comparison. Indeed, the fact that each recordkeeper has a different process for just about everything makes it easy for things to fall by the wayside if you don’t have a clear assignment of responsibilities with every party.

Do you prefer the simplicity of a bundled solution? Well, they’re also a TPA, though again many define their process and services differently. Ultimately, the value a good TPA can (and arguably should) add to your practice are things like:

• Free up time. With price compression, find ways to leverage partners to provide services so you don’t have to. They’re a—if not the—point of contact for administrative questions, solving the day-to-day problems, things like that. 
• Help you win business. By partnering with you to craft customized solutions, where appropriate, for your customers—and prospects. They can/should be your right hand technical expert both in attracting and retaining good clients.
• Ensure that your client’s plan remains in compliance. At times it seems as though 1,000 different things can go wrong on any given day—and there’s clearly value both in administering the plan competently so that problems are avoided, and knowing how best to remedy the situation when those problems inevitably do arise. They not only bring specialized knowledge, but also the opportunity of providing a single point of contact for technical issues involving plan administration and testing. 

Bundled or unbundled, a good TPA can be a plan advisor’s best friend. Ultimately, the choice to use a TPA—or which TPA is chosen—may depend on the size of a plan or the plan sponsor’s particular needs. As with everything in life, the relationship and cultural fit is paramount. 

In (too) many situations recordkeeper/TPAs seem to be viewed not merely as a third party, but as a third wheel—someone who at best is a necessary evil —and at worst, destructive to its smooth operation. 

That said, a deliberate, thoughtful—dare I say “prudent”—partnership with these “third” parties, one that specifies assignments, roles and responsibilities—in that review meeting, and on an on-going basis can not only free up your time, but provide better service, higher client retention, more sales opportunities, and improved legal and operating compliance for the plan sponsors you serve.

Let’s face it—if they’re not an active, engaged member of your team, they should be.  

- Nevin E. Adams, JD

‘Might’ Makes… Wrong?

 Sometimes the motivations of those attacking the 401(k) are pretty obvious.

The most recent was an article by a Maurie Backman at the Motley Fool titled, “Why a 401(k) isn’t the wonderful savings tool you think it is.” I tried to ignore it when it first (to my eyes) appeared on Forbes (which seems to have a pretty low threshold for contributions these days), and I was no more inclined to read it when it showed up a couple of days later on Fox News. But then folks started sharing it on both LinkedIn and Twitter—some ostensibly to hold it up for ridicule,[i] others as an affirmation—and, with some reluctance, I finally clicked on the article. 

Oddly, considering the title (and, in fairness, editors have been known to tweak headlines such that they bear little resemblance to the article they are attached to), the article spent almost as much space outlining the virtues of the 401(k)—specifically that they are “easier to sign up for” than an IRA, and that they have (much) higher annual contribution limits, even for catch-up contributions.

So, what’s their beef(s)? Backman makes three points:

1. That investment choices in a 401(k) can be limited (specifically that you generally can’t buy individual stocks).
2. That fees in a 401(k) can be high (the issue here seems to be the inclusion of actively managed funds alongside index offerings—and an assertion that “401(k)s plan come with administrative fees that generally are not negotiable. The administrative fees you'll pay with an IRA are typically much lower”—an assertion that doesn’t align with my experience, but is offered without data).
3. That a Roth option isn’t guaranteed (this factual assertion despite the fact that the most recent data from the Plan Sponsor Council of America that more than two-thirds of 401(k)s do currently provide the option).

To sum up: According to the article that claims the 401(k) isn’t a wonderful savings tool, the suboptimal aspects of a 401(k) are: (1) the options might not include individual stocks; (2) the fees can be high; and (3) you aren’t guaranteed to have the ability to save for retirement on a Roth basis—even though, by the author’s own admission, 401(k)s have much higher contribution limits and are easier to access, and thus are much more likely to be used (recall that data indicates individuals are 12-15 times more likely to save in a 401(k) than in an IRA on their own). Oh—and there’s only a passing reference to the employer match, which arguably also isn’t “guaranteed,” but is certainly more likely to be found in a 401(k) than in a stand-alone IRA.  

Perhaps it should come as no surprise that an article penned by the Motley Fool—a platform that purports to help individuals make stock picks—thinks that you’d be better off utilizing a retirement savings plan[ii] that would more readily accommodate their services. 

Yes, sometimes the motivations of those attacking the 401(k) are pretty obvious. The motivations of those choosing to publish such silliness? Not so much.

- Nevin E. Adams, JD

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[i] Memo to those who did—clicking on the article is the whole point; sharing it only exacerbates the problem.  

[ii] To add to the irony, the article sums up its advice thusly: “What you should do in that case is contribute just enough money to your 401(k) to snag your full employer match, if one is offered, but then put the rest of your savings into an IRA. Doing so could help you invest more appropriately, avoid high fees, and enjoy the perks of a Roth saving option.” 

5 Plan Committee Missteps

There is frequently a difference between doing what the law requires and doing everything that you could do as a plan fiduciary. That said, there are things that plan fiduciaries must do—and things that, while not required, can keep the plan, and plan fiduciaries out of trouble.

Let’s get started.

1. Not having a plan/plan investment committee

ERISA only requires that the named fiduciary (and there must be one of those) make decisions regarding the plan that are in the best interests of plan participants and beneficiaries, and that are the types of decisions that a prudent expert would make about such matters. ERISA does not require that you make those decisions by yourself—and, in fact, requires that, if you lack the requisite expertise, you enlist the support of those who do have it. 

You may well possess the requisite expertise to make those decisions—and then again, you may not. But even if you do, why forego the assistance of other perspectives?

However, having a committee for having a committee’s sake can not only hinder your decisions— it can result in bad decisions. Make sure your committee members add value to the process. (Hint: Once they discover that ERISA has a personal liability clause, casual participants generally drop out quickly.)

2. Not HAVING committee meetings

Having a committee and not having committee meetings is potentially worse than not having a committee at all. In the latter case, at least you ostensibly know who is supposed to be making the decisions. But if there is a group charged with overseeing the activities of the plan, and that group doesn’t convene, then one might well assume that the plan is not being properly managed, or that the plan’s activities and providers are not prudently managed and monitored, as the law requires.

3. Not keeping minutes of committee meetings

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 your plan committee(s) is an essential ingredient in validating not only the results, but also the thought process behind those deliberations. 

More significantly, those minutes can provide committee members—both past and future—with a sense of the environment at the time decisions were made, the alternatives presented, and the rationale offered for each, as well as what those decisions were. They also can be an invaluable tool in reassessing those decisions at the appropriate time and making adjustments as warranted—properly documented, of course.

4. Not having an investment policy statement

While plan advisers and consultants routinely counsel on the need for, and importance of, an investment policy statement, the reality is that the law does not require one, and thus, many plan sponsors—sometimes at direction of legal counsel—choose not to put one in place. Of course, if the law does not specifically require a written investment policy statement (IPS)—think of it as investment guidelines for the plan—ERISA nonetheless basically anticipates that plan fiduciaries will conduct themselves as though they had one in place. And, generally speaking, you should 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, and not crafted at a point in time when you are desperately trying to make sense of the markets. In sum, you want an IPS in place before you need an IPS in place. 

It is worth noting that, though it is not legally required, Labor Department auditors routinely ask for a copy of the plan’s IPS as one of their first requests. And therein lies the rationale behind the counsel of some in the legal profession to forgo having a formal IPS; because if there is one thing worse than not having an investment policy statement, it is having an investment policy statement—in writing—that is not followed.

5. Not removing ‘bad’ funds from your plan menu

Whether or not you have an official IPS, you are expected to conduct a review of the plan’s investment options as though you do. Sooner or later, that review will turn up a fund (or two) that no longer meets the criteria established for the plan. That’s when you will find the true “mettle” of your investment policy; do you have the discipline to do the right thing and drop the fund(s), or will you succumb to the very human temptation to leave it on the menu (though perhaps discouraging or even preventing future investment)? Oh, and make no mistake—there will be someone with a balance in that fund. Still, how can leaving an inappropriate fund on your menu—and allowing participants to invest in it—be a good thing?

Being a plan fiduciary is a tough job—and one that, it’s probably fair to say—is underappreciated, if not undercompensated. Despite that, in my experience, most who find themselves in that role I think do an admirable job of living up to the spirit, if not the letter, of their responsibilities.

If you’re taking the time to read this, odds are you are probably doing a better-than-average job as a plan fiduciary (or at least the person who shared it with you is). I hope you find this list informative, and that you draw insight and comfort from its contents, as well as a reminder of the awesome responsibilities of an ERISA plan fiduciary.

- Nevin E. Adams, JD

Never Forget

 While the past 18 months have often felt like we’re living through an episode of The Twilight Zone—never more so that to realize that this week marks the 20^th anniversary of the September 11 attacks. 

It’s hard to believe that there are today people in college—and in the workforce –that weren’t even alive on that most horrific of days. In fact, it’s been labeled a defining event for Millennials—a date marker between those who were alive on that date and those (Generation Z) who weren’t. That said, the passage of time has surely dimmed the memory for many who did live through it. More’s the pity.

Early on that bright Tuesday morning in 2001, I was in the middle of a cross-country flight, literally running from one terminal to another in Dallas, when my cellphone rang. I was annoyed—the hour was early, my flight in had been late, and the bugger between that and the next uncomfortably short—particularly for a flight that was in another terminal.  

It was my wife—I assumed she was simply checking to see if I had landed safely—and she was, though not for the reasons I thought. I had been on an American Airlines flight heading for L.A., after all—and at that time, not much else was known about the first plane that struck the World Trade Center on that fateful day. I thought she had to be misunderstanding what she claimed to have seen on TV. 

Would that she had…

My first thought was to try and get on a flight back home—fortunately my travel agent’s first thought was to get me a hotel room. Sure enough, on that most awful of days—I wound up stranded hundreds of insurmountable miles away from family and friends. It was, without a doubt, the longest day—and loneliest night—of my life. 

In fact, I was to spend the next several days at that Dallas hotel. There were no planes flying, no rental cars to be had—nowhere to go for what turned out to be three interminably long days. As that long week drew to a close, I was finally able to get a rental car and begin a long two-day journey home. It was a long, lonely drive, but one that gave me a lot of time to think, though most of that drive was a blur, just mile after endless mile of open road with nothing but AM talk radio to fill the void.

And then, somewhere in a remote section of Arkansas, I spotted something approaching in my rearview mirror. Not surprisingly, there wasn’t much traffic out—and it had been a couple of hours since I had seen anyone at all, so the movement caught my eye. Coming up fast behind me was a group of bikers—at least a couple of dozen of them, spread out across the highway—led by a particularly “scruffy” looking guy with a long beard and lots of menacing tattoos on a big bike. Out in the middle of nowhere, all alone on this deserted highway—well, I was nervous to say the least as they pulled alongside. 

And then, as the lead cyclist pulled past me—I saw unfurled behind him on that big bike—an enormous American flag. 

At that moment, for the first time in 72 hours, I felt a sense of peace—the comfort you feel inside when you know you are going… home.

I’ve thought back on that day—and that feeling—many times since then. Without question this year and change has been one of extraordinary pain and suffering; one full of tensions, grief and anger that seems at times destined to pull our nation apart at the seams. But two decades on, I not only can still feel that ache of being kept apart from those I love as if it were yesterday—but also the calm I felt when I saw that biker gang drive by me flying our nation’s flag. 

On not a few mornings since that awful September day, I’ve thought about how many went to work, how many boarded a plane, not realizing that they would not get to come home again. How many on that day sacrificed their lives so that others could go home. How many still put their lives on the line every day, here and abroad, like those 13 souls in Afghanistan, to help keep us and our loved ones safe.

We take a lot for granted in this life, nothing more cavalierly than that there will be a tomorrow to set the record straight, to right wrongs inflicted, to tell our loved ones just how precious they are. The reality is, we don’t know—and if nothing else these past 18 months should remind us that we shouldn’t depend upon it. 

So, this weekend, as we remember that most awful of days, and the loss of those no longer with us, let’s all take a moment—together—to treasure what we have—and those we have to share it with still.

Peace.

- Nevin E. Adams, JD

Limiting Fiduciary Liability (Costs)

A recent survey of insurers highlights the criteria that a number of the nation’s leading fiduciary liability insurers identified as the biggest sources of fiduciary risk—within the control of plan fiduciaries. 

Now, arguably, the report—titled “What Drives Fiduciary Liability?”—might have been more accurately titled “What Drives Fiduciary Liability Insurance Costs?”—or even more precisely “What Drives Fiduciary Liability Insurance Costs That You Can Do Something About?” Indeed, the report’s authors note that it was specifically focused on sources of risk that are within the control of fiduciaries. That’s key, because there are things that attract litigation (such as plan size or even stock price) that aren’t. 

Moreover, the survey respondents (there were 8 of the 12 that Aon said account for 85% of the total gross written premium placed by the firms in 2020) were asked only to evaluate pricing criteria as having a significant, small or nonexistent impact—though one might want to find something between significant and small, at least.

The survey’s authors identified five key takeaways—and while there are more elements discussed in the report, that seems a good place to start:

1. Fees are very important.

Well, to quote Homer Simpson, “doh.” Indeed, the only surprises here are that (only) 88% of the respondents identified periodic fee benchmarking reviews by the investment committee as a “significant” driver of insurance premiums; (just) 75% said it was significant if the plan uses revenue-sharing or Sub-TA type revenues; and (a mere) 63% said that using retail mutual fund share classes would fall in that category. Granted, with only 8 respondents (albeit with big market share), we’re talking small numbers.

Moreover, note that these points aren’t about what the fees are, and certainly not what they are relative to the services provided (the true measure of “reasonable”), but about fee structures and process. It is, in other words, about what might be seen as the “appearance” of impropriety. Indeed, as has been borne out in litigation, there’s no legal issue with any of the foregoing—but all of these practices (or, in the case of the review, non-practices) have been challenged as if they were themselves a violation, or at least an indicator, of a fiduciary breach. 

Suffice it to say that if the plan is currently doing (or not doing, in the case of a review) these things, you should be sure to have prudently considered the reasons—and to have documented that consideration—but can likely expect to pay more in insurance premiums, regardless. 

2. Committee minutes are important, but it matters less who takes them.

Only a third of the survey respondents said that taking formal minutes was a “significant” factor (the rest said the impact was “small”—bearing in mind that the only other option was “nonexistent”), so I have a feeling that the Aon report authors exercised a little editorial “discretion” in positioning that as important. In fact, that seemed very low to me, certainly in view of the impact in persuading a judge (much less a DOL auditor) that you do, in fact, have a prudent process in place. Perhaps it reflects what still seems to be a consistent caution from the legal community: that such things can be a “smoking gun” in litigation. On the other hand, I’ve seen committee minutes be effective shields in having cases dismissed at the pleading stage, so…

The report does indicate that there is no particular advantage in having an advisor or legal counsel act as scribe, though the latter might well limit the “smoking gun” risk.

3. Investment advisors are viewed as a moderate influencer of premiums.

This one was a bit of a head-scratcher as well—perhaps reflecting the varying quality and expertise of the investment advisors whose expertise might be tapped. The Aon report said the responses were split almost evenly among the impact of an advisor being deemed as significant, small or nonexistent, and even when going on to qualify that statement (with the quality of the advisor), only a quarter (that’s two firms) said it would have a significant impact on pricing. (Half described the impact as “small.”) 

There were some qualifiers here—the impact was seen as small by one “unless related party in which case significant impact” (and I’m assuming a negative one), another stated that an “experienced advisor is expected,” and still another cautioned that while this was a factor, “…outside vendors are not foolproof and the insured retains fiduciary liability with respect to them.” 

4. Employer stock in DC plans remains a top concern for insurers.

This one appears to matter—a lot. Then again, it wasn’t unanimous—88% rated it as a significant factor, though that figure dropped to 50% when there is a limit on the size of the investment, which is increasingly common. Indeed, so-called “stock drop” suits seem to (still) crop up every time there is a disappointing earnings announcement or some piece of bad PR that drives down the stock price. 

That said, it’s one thing to bring suit—and yet, it remains a hard suit to win based on recent case history. 

Not mentioned: the inclusion of proprietary funds. It’s seldom a standalone rationale for bringing suit, but—well, it’s increasingly common, at least among organizations that have that capability.

5. Environmental, social and governance (ESG) options in DC plans play a minor role in pricing fiduciary liability insurance.

The inclusion of this particular item was a bit of a head-scratcher, though the results—62% said it had no impact on the premium pricing—were not. In fairness, and as noted by the survey’s authors, the survey was fielded after the Biden administration’s announcement that it was not going to enforce the rule put in place by the Trump administration, but my guess (and theirs) is that it simply reflects the relatively small take-up rate by plans and the tepid adoption by participants. Indeed, one of the survey respondents commented that the impact “depends on the % of plan assets or # of investment options offered. As well as if the plan were to attempt to force a requirement to its participants.” 

Ultimately, and as one of the survey respondents noted, “While we look at a number of items that are in the survey, the problem is that there is pressure to settle, in some cases because the cost to defend would be greater than the settlement value. Defense costs and settlement amounts in the so-called fee cases are incredibly high, even where the client has robust fiduciary processes.”

Still, forewarned is forearmed. Like vaccines, addressing those issues might not completely forestall litigation—but it would surely make for a less painful set of “symptoms.”

- Nevin E. Adams, JD

Attention Getters

I was recently taken to task for last week’s column about retirement savings regrets.

More precisely, my column about the regrets expressed in a recent American Century survey drew the attention of Faith Teope in a LinkedIn post titled, “Dear Finance Experts: We Would Listen, But We Don't Care.” In fairness, it wasn’t so much my column (“boring but true”), or even the American Century survey’s findings that came in for criticism, but more the head-scratching that the survey set off among financial professionals (including, I suppose this one) as to why people aren’t paying more attention to things like… saving for retirement. Her premise—that we’re using language that doesn’t resonate with those we hope to motivate—is, frankly, unassailable. 

In fact, it’s a topic I broached (at least at a high level) earlier this year in a post titled, “Is it Time to Retire Retirement?” As I noted then, for all but the most financially astute, trading off a here-and-now need (or want) for some obscure future notion like “retirement” is a hard sell. And, let’s face it, the further you are from that future event, the harder it is to “sell.” 

But arguably the problem runs deeper than the label(s) we affix to the concept of the ultimate goal. Let’s face it, financial freedom is a laudable, evergreen objective—but for most of us it’s not a short-term goal—and without a “how” to go with the “what,” it might not matter. 

In her post, Faith states that our current messaging is “…not working because that’s not how humans are wired. We are wired to survive and that drives the urges for happiness, the desire to live, to buy, to bucket-list, to binge-watch, to prime-delivery. We are not wired to plan for an unknown future with an unknown time frame and no magic 8-ball to what will even happen tomorrow much less 25+ years from now.”

To her credit, she put forth some suggestions, conversation starters of a sort—something that ostensibly might motivate people to “care”—things like:

• The Life You Want—Top 5 questions to help you take control of your life
• 3 Ways to Legally Pay Less in Taxes
• The One Debt That Pays YOU interest—401k loans and a few perfect reasons to tap into them

Now, as someone who spends a good part of his day crafting (what he thinks are) compelling headlines and (obsessively) tracking clicks, that approach has some allure. (I mean, who wouldn’t want to know how to legally pay less in taxes?) That said, it’s not clear to me how much of this kind of thing is already out there, though I imagine in a world increasingly reliant on TikTok, Instagram, Twitter and YouTube to communicate complex (and sometimes farcical) messages, it’s a burgeoning field—or should be. 

Indeed, the more I considered the subject, the more it occurred to me that the essence of some pretty compelling messages are already imbedded (obscured?) in most of today’s benefit communications. Wouldn’t you be intrigued by the following topics?

• How to get the free money you’re missing out on
• Turn $5 a month into $50,000
• You can get a pay increase without asking for it

There are some potential shortfalls, of course—there’s often a fine line between making complex things simpler and making them overly simplistic. But when all is said and done, to me, it’s not so much about simplifying our messages (though there’s that), but about getting people’s attention. But as I look at the bullets above, they strike me as short, near-term in focus, snappy, and ultimately action-oriented. Clickbait? Sure—but if you can get people’s attention, even for a minute, that’s an opportunity, a door-opener… a start… 

Of course, “starts” notwithstanding,[i] what matters isn’t just getting people’s attention, but motivating action—anything from a quick readiness assessment to taking steps to automatically increase their rate of contribution, or to make sure they are contributing at a rate sufficient to receive the full company match.

In sum, it’s one thing to get people’s attention—but then we have to keep it. 

- Nevin E. Adams, JD

[i] And thanks to automatic enrollment and qualified default investment alternatives (like target-date funds), millions of American workers have gotten a good start at saving and investing for retirement even if they don’t always appreciate it.

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/