Path(s) of Least Resistance

So, how many 401(k) accounts do you have?

At the moment, I have four—one from each of the employers in my career (including this one), all except the first one (that one went for law school and a house downpayment). Apparently I’m not alone. A recent survey of Plan Sponsor Council of America members found that only 18% of respondents had a single 401(k) account. Nearly as many (14.3%) had five. As it turns out, three was the most common response.

I joke that it’s just “market research”—after all, what better way to assess the quality of various retirement plan offerings than to have your own 401(k) supported by some of the best? Sure, there’s been institutional pricing at one that I’d hate to lose, access to a specific managed account platform that I value, and a really cool online platform at another—and then, in the back of my mind, is a concern that the taxability detail might get “jostled” in the process—in short, plenty of reasons to rationalize my leaving them where they are. But the truth of the matter is that moving your account remains a bit of a pain.

That has a number of implications, not the least of which is people can (and do) lose track of those “left behind” 401(k) accounts. That’s been an issue of some concern by both regulators and legislators alike—with potential remedies (or at least remedial efforts) like a “lost and found” directory. Perhaps just as significantly, the SECURE Act’s directive with regard to reporting projected retirement income numbers on participant statements won’t do anyone much good if it’s based on only one of the three or four account balances you actually have.[i]

There are other dangers[ii] in having multiple accounts—as they create multiple opportunities for hackers to access them. This is a particular concern when there’s been a change in recordkeepers (which is happening a lot these days), when you have a new account set up for you—but you don’t get around to promptly establishing a secure password (along with multi-factor authentication, personalized answers to key security questions, and electronic notifications of any changes to your account). After all, if you don’t lay claim to that account—quickly—it’s all the easier for a hacker to do so.  

Now, I’m guessing that the reality is that most people who leave their 401(k) accounts behind do so simply because it has become the easy no-action-required default (well, as long as your balance is over $5,000—if less than that, and certainly if less than $1,000, your “easy” default is likely a lump sum payment, taxed, and likely subject to premature withdrawal penalties as well. Indeed, the leakage that so many fret over—due to hardship withdrawals or loans—is fairly inconsequential. The exception, of course, is the loans that are outstanding when termination occurs—as well as the “forced” distributions at termination. A recent assessment by Alight notes that 80% of people who had an account of less than $1,000 cashed out at termination, while nearly two-thirds of those with balances between $1,000 and $5,000 did so.

Enter the Advancing Auto Portability Act of 2022, introduced by Sens. Tim Scott (R-SC) and Sherrod Brown (D-OH), provisions of which have been incorporated in the recently introduced Enhancing Americans’ Retirement Now (EARN) Act. The size of the leakage issue the legislation seeks to stem has been wildly exaggerated by some, but the Employee Benefit Research Institute credibly says auto-portability has the potential to preserve up to $1.5 trillion in retirement savings over a 40-year period. 

That’s right—just like automatic enrollment helps people get started doing the right thing, auto-portability is basically an infrastructure design that automatically helps participants—and most notably participants with small balances—and rolls those balances into an IRA, and then—if available and desirable—rolls that into their new employer’s retirement plan. But more than giving it structure, and legislative “legitimacy” (the Department of Labor lent some help in terms of a prohibited transaction exemption in 2019), the legislation provides a $500 tax credit for adopting small business employers to defray the costs of making the connections.     

Now, at the point of my job changes, it wouldn’t have taken much for me to decide to roll those balances into my new employer’s plan—but it took absolutely nothing at all for me to just leave them where they were—the path of least resistance. On the other hand, the default for those who have smaller balances—who are often just getting started doing the right thing by saving—is a default that requires that they “start over”—with a “forced” distribution, and one reduced by state and federal taxes, and likely a 10% penalty to boot. 

It's time we all had a path of least resistance that makes it easy for us to do the “right” thing. And now perhaps we do.

- Nevin E. Adams, JD

---

[i] In fairness, there are already concerns that the calculation proposed by the Labor Department in response to the SECURE Act’s directive already has shortcomings. Specifically, it would assume that the participant: (1) is retiring at age 67 (the Social Security full retirement age for many workers) or the participant's actual age, if older than 67); (2) uses an interest rate that is the 10-year constant maturity Treasuries (CMT) securities yield rate for the first business day of the last month of the period to which the benefit statement relates; (3) estimates life expectancy from a gender-neutral mortality table pursuant to IRC Sec. 417(e)(3)(B)—oh, and the biggie—(4) uses the current account value—assuming no further contributions.

[ii] Another “casualty” of multiple 401(k) accounts? When a provider publishes a list of “average” 401(k) balances (and 401(k) critics pounce on those as inadequate)—well, they might not have the whole picture. 

 

Conversation "Starters"

 This weekend is, of course, Father’s Day—but my dad’s decision to retire was driven more by time than timing. 

Like many of his generation, once he got to 65, it was time to “retire.” He didn’t have a pension (fortunately for him, my mother did), though he had Social Security, and savings in a 403(b) plan that he contributed to later in life—reluctantly—once he saw Mom’s modest savings in her 403(b) account grow.  

My dad was a man of (very) few words—at least spoken words. Conversations with him generally required… effort. Oh, he’d respond to direct questions, but his answers tended to be short and—well, direct. Again, like many of his generation, mostly he was content to let my mother be the conversationalist in family settings.   

So, when Dad turned to me one weekend afternoon for some input on his retirement planning—well, I was surprised. Not that it didn’t warrant a discussion, mind you—but it was not something we had ever discussed—and more’s the pity. That said, I dived into the financials, played through some spreadsheet projections, and—at the end of what I hoped was an educational and enlightening discussion of his options and trade-offs, their upsides and potential downsides—when I was sure that I had been able to unwind and demystify the maze and presented him with a straightforward presentation of alternatives, there was this long pause—and then, he turned to me and, as politely as he could, said, “I just want to know how much money I’ll have to live on every month.”

That, of course, was also the mindset of many in my dad’s generation—not how much we’ll need, but how much we’ll actually have. Ultimately, of course—certainly at the brink of retirement, that’s the reality of living in retirement. 

Now, the 32^nd annual Retirement Confidence Survey, published by the Employee Benefit Research Institute (EBRI) and Greenwald Research, finds that nearly three quarters (73%) of American workers feel confident in their ability to live comfortably in retirement—indeed, 28% feel very confident (though nearly 6 in 10 say that preparing for retirement makes them feel stressed). While that assessment predated the recent market tumult (and there has been some correlation between the markets and retirement confidence over the years), much less the sustained inflation “bite,”[i] Americans’ confidence in retirement has proven to be pretty resilient—and this despite the persistent finding that many haven’t taken the time to do even a single estimate of their projected needs[ii]—and, at least traditionally, that included measures as unscientific as “guessing.”

Now, as it turned out, my analysis of my dad’s situation (stripped of all the fancy “upside potential” possibilities) affirmed his retirement decision—or at least it didn’t put him off it. I’ve wondered from time to time since what he would have done if it hadn’t. My guess is that, like many Americans confronted with those same realities, he’d have “adjusted.” To this day, I feel really lucky that he didn’t have to (if mostly because my mom’s planning compensated for his lack thereof). 

If it’s a conversation you haven’t (yet) had with your parents—or kids—perhaps it’s time you did.

- Nevin E. Adams, JD

---

[i] Though, a third of workers and half of retirees who feel less confident cite inflation and the cost of living as the reason for their declining retirement confidence. 

[ii] However, and while it’s far from optimal, the most recent RCS did find that more than half (58 percent) ages 55 or older have tried to calculate how much money they will need to have saved so that they can live comfortably in retirement.

Social Insecurities

Last week the Treasury Department’s Social Security Board of Trustees released its annual report in a classic case of good news, bad news.

The good news, of a sort, was that the date through which Social Security will be able to pay scheduled benefits was projected to be 2034—and while that’s not very far away, it was a year later than the prior year’s report had indicated. The bad news, of course, is that without some kind of adjustment the program won’t be able to pay those scheduled benefits beyond 2034.[i]

Now, that’s not the same as “going broke” or running out of money—but, as things stand now—assuming no adjustment is made—a possible outcome would be that the scheduled benefits paid would only be about three-fourths of “scheduled.”[ii]

What’s weird is that it’s hard to find anybody who seems to think the problem won’t get fixed at some point—though the definitions of “fixed” vary—and nobody is willing to hazard a guess on who’s going to step up, much less when or how. 

The ‘How’

Of course, the how is relatively straightforward. Years back, when the future crisis was no less real, but somewhat less large, I had the opportunity to hear former Federal Reserve Chairman Alan Greenspan speak on the subject of “fixing” Social Security. Greenspan, who had led a commission in the early 1980s charged with solving what was then a much more immediate crisis of the program (believe it or not), outlined the two core elements of any serious attempt to resolve the funding shortfall:

1. increasing funding (generally either by raising the withholding rates or the compensation level to which they are applied, or both); and
2. reducing benefits, either by raising the claiming age —or what’s euphemistically referred to as “means testing,” which effectively reduces the benefits to higher income recipients. 

So, the answer to the problem is, as the actuaries remind us, “just math,” and we needn’t choose one solution or the other; rather, some combination—as it was in 1983—is the approach that seems the most likely outcome. That said, if there’s any aspect of this that is as widely known as the fact that there is a looming financial shortfall, it’s that the longer we put off taking steps to do so, the more difficult—the more expensive—it will be.

Whatever that system’s historic successes, and the dependence of the nation’s retirees on its benefits, I think most in my generation—and certainly those in my children’s—have doubts as to its long-term financial sustainability. Adjustments have been made over time to address those potential shortfalls—the retirement age has been lifted, the taxes withheld from current pay to fund that system have been increased, the benefits paid from that system have been subjected to taxation (effectively reducing benefits, particularly since those limits weren’t adjusted for inflation)—and most honest folk (even politicians) will admit that those same kinds of changes will be required again to avert the future funding crisis.

To get a sense for just how endemic Social Security is to retirement planning, just try finding a retirement income needs projection that doesn’t have as a foundational baseline Social Security benefits. Or consider that an emerging strategy to compensate for retirement savings shortfalls is to use those savings to postpone Social Security claiming in order to maximize those benefits. Indeed, considering how many Americans rely on Social Security as their sole—or at least a primary—source of retirement income, you’d think addressing the looming shortfall would be a matter of high priority for policy makers. But for the most part it seems to be left to “someone else, some other time.” 

Without a doubt, Social Security is most certainly the biggest retirement assumption—by individuals, retirement planners and legislators alike. At a time when we’re working to broaden coverage, to expand the impact of automatic plan design features, and the reach of state-run IRA programs, we know that as valuable, even essential, as those steps might be in broadening and deepening the success of the private retirement system—they won’t be “enough” if we don’t shore up the baseline foundation upon which the nation’s retirement security is currently predicated.

The “math” in the trustees’ report suggests we just picked up an “extra” year to solve the problem. Let’s not waste it.

- Nevin E. Adams, JD

---

[i] Lest we forget, the Medicare program is in (even) worse shape. But that’s a post for another day.

[ii] Not that the potential beneficiaries have a solid grasp on how the program works even under the best of circumstances—see Many Near-Retirees in the Dark About How Social Security Works.

Middle "Grounds"

A new report entitled “The Missing Middle” by the National Institute on Retirement Security (NIRS) treads some all-too-familiar ground, myopically focusing on one element of the nation’s private retirement system.

The articulated concern is, of course, the “middle”—an income grouping for which Social Security’s progressive structure doesn’t reach high enough to provide an adequate replacement income, but that lacks the more expansive financial wherewithal of those at the upper end of the income strata.

According to the paper, the tax incentives that arguably existed at the birth of the 401(k) have been muted due to lower marginal tax rates and the expansion of the standard deduction—both of which serve to mitigate the tax burden on lower-income individuals—but in the process also arguably lessen the financial incentive for deferring taxes. And if that were not enough, the authors also argue that the “…tax benefits relating to investment returns may be less in a market with lower returns.”

Of course, the focus of the authors here is the tax incentives for retirement savings[i]—and, unsurprisingly, the premise is that those with lower incomes—and thus less tax liability—get less from the current tax deferrals afforded 401(k) contributions than do those at higher incomes (who pay more in taxes). And, if you look only at that aspect—and that’s where most such critiques stop—it’s a fair point.

Before going into the shortcomings in that analysis, I’ll admit that there are certain legitimate economic realities that the paper highlights—that higher-income (and by this we don’t necessarily mean wealthy) individuals are more likely to have access to a retirement plan through work, that there are racial aspects that correlate to wealth inequities and access in the workplace, that the Saver’s Credit as currently designed (requiring a long-form tax filing to claim and being non-refundable) aren’t available to many who would otherwise be eligible, and that Social Security, though an underlying foundation of private requirement as a whole, and particularly for lower-income individuals, has funding issues of its own to fulfill the current benefit promises.[ii]

‘Missing’ Interactions

Unfortunately, as noted above, these types of analyses always gloss over the interrelationships between the tax incentives and the creation of these plans in the first place. It is assumed (generally implicitly) that employers that want to be considered an “employer of choice” will be forced to offer these plans regardless of the tax preferences to do so. Let’s face it, the tax preferences—though modest at an individual level—do provide an incentive to not only offer the plan, but—in most cases—to provide a matching contribution. A matching contribution that these type critiques always seem to gloss over (it does make their math simpler). And let’s face it, there’s no question that having access to a plan matters—even this NIRS paper acknowledges that those with access are 15 times more likely to save. 

What’s also glossed over is the impact of non-discrimination tests and legal contribution limits—limits that work, and work as designed, to keep an effective balance between the benefits of higher-paid and other workers. In fact, data from the Employee Benefit Research Institute has proven that while higher-income individuals do have higher account balances, those balances are in rough proportion to their incomes. 

In calling for a “recalibration” of what they see as a “fundamentally inequitable system,” the well-intentioned authors are missing the mark. By focusing exclusively on the individual tax preferences, while at the same time ignoring the impact of tax preferences on the decision to offer a plan in the first place, as well as the influence of non-discrimination testing in encouraging an employer match (not to mention the financial impact that has on the retirement prospects of non-highly compensated workers), they—and their purported solutions—turn out to be missing the point—and the very “middle” they claim the current system overlooks. 

- Nevin E. Adams, JD

---

[i] Once again, the trade-off for deciding to defer taking pay now, and depositing it in a trust subject to various restrictions and pre-withdrawal penalties is that you don’t pay taxes on compensation you haven’t gotten access to.

[ii] To address the perceived shortcomings identified, the authors have several solutions. Specifically, they want to boost and expand Social Security, federalize the state-run IRAs, target the Saver’s Credit to participants in those programs, and perhaps introduce a state version of the refundable government credit in place of tax incentives, which would equalize the credit. 

Vested "Interests"

 The latest academic “dig” against 401(k) plans? Vesting schedules.

More specifically, firms with a combination of high turnover and vesting schedules, which means that workers are leaving behind employer contributions. Or, in the parlance of these new critics, being “robbed.” 

I stumbled across this “scandal” in an op-ed provocatively titled, “This giant pension scandal is hiding in plain sight,” which, in turn, drew from the points made in an academic paper titled, “Megacompany Employee Churn Meets 401(k) Vesting Schedules: A Sabotage on Workers’ Retirement Wealth.” The “scandal” is the legal vesting schedules under ERISA, notably the three-year variety in place at certain large, high-turnover employers.

The MarketWatch article[i]—and, more significantly, the academic paper[ii] upon which it is based, see the vesting schedule as part of some orchestrated conspiracy deliberately crafted to “rob”[iii] individuals of benefits/compensation to which they are entitled—ostensibly because they are incapable, and arguably in some cases, unable, to hold on to a job for a full three years.

Indeed, Amazon draws most of the criticism here—not only for its three-year vesting schedule, but for the emphasis CEO Jeff Bezos has apparently placed on encouraging high turnover as a means of keeping perspectives “fresh.” That might work for Amazon’s business model (I suspect it matters more about the “who” than the “how often”), but in my experience, most employers find turnover to be costly, requiring the expense of finding replacements, training them, and then waiting for them to come up to speed. 

That said, a plan’s vesting schedule wouldn’t exactly seem to be “hidden.”[iv] Indeed, I have long found it to be an element that warrants a reasonable amount of discussion and specific focus during enrollment meetings, and for the very reason it exists: as an incentive to reward/retain/encourage longer-term workers (or at least it did before the shift in emphasis to automatic enrollment). I say longer term because the notion of long-term workers has shifted considerably since ERISA was passed in 1974, when the 10-year cliff vesting that was common among pension plans at the time reigned. Of course, the Tax Reform Act of 1986 established new, shorter minimum thresholds for vesting. Indeed, by the “norms” that were in place when the 401(k) came to prominence, 100% vesting within three years is “lightning fast.” 

So, what’s the beef? The argument put forward is that these vesting schedules create a “bait and switch” of sorts—the promise of an employer match kept just out of reach by a vesting schedule purposefully selected to kick in outside of the average worker’s tenure. And if that seems a tad too Machiavellian, there’s the overt actions that have been taken (particularly during COVID) by employers to reduce the workforce. 

That said, the paper speaks to some issues that are worth considering: the financial vulnerability of lower income workers, not to mention the financial literacy gaps there, and the retirement wealth gaps between men and women, as well as racial wealth gaps. We know these are real, but we also know that they are often remedied with access to a plan at work, assisted by plan design features like automatic enrollment and qualified default investment alternatives like target-date funds. 

Indeed, with regard to the latter, one of the two main recommendations of the paper (albeit with some editorializing) is to is to “collect data so we can truly assess the monster we are dealing with.”

However, the other main recommendation is problematic, if not unnecessary—specifically that we “prohibit megacompanies from using vesting schedules.” That, despite the fact that the paper itself cites data both from Vanguard and the Plan Sponsor Council of America which says that roughly half of the nation’s largest employers already provide immediate 100% vesting. 

Does a vesting schedule provide an incentive to “stick around”? Arguably it does (though it’s probably not going to trump job criteria like location), but in the words of the paper’s author, “…using vesting schedules to reduce turnover only works if employees understand the vesting policies.”

Ultimately, I’d argue that the issue to address isn’t vesting. After all, those who have access to a retirement plan, regardless of vesting, have a real edge on those who don’t. And let’s not kid ourselves—there are plenty of valid reasons, particularly amid today’s so-called “Great Resignation,” to leverage benefit programs to attract and retain talent. 

Certainly, the company match can—and should—be a factor in that arsenal, and I’d argue that the employer has a “vested” interest in that outcome—and that workers, properly informed and educated to appreciate that benefit, do as well. 

- Nevin E. Adams, JD

---

[i] In a nutshell: Some of America’s biggest companies run their shop floors so that low-paid front-line staff “churn,” or leave within a couple of years. This includes retailers, internet companies, leisure and hospitality companies and others. Some do it deliberately. Others do it by default, by treating such workers as disposable.

[ii] Authored by Samantha Prince, associate professor of law at Penn State Dickinson Law.

[iii] Yes, “robbed” is the word they use: “That employee is robbed of their compensation and that same $100 then goes into the pot to be allocated to other employees. When there is no immediate vesting, the company pays into the plan on one employee’s behalf but then can use that same money on behalf of another employee. This could be said to be akin to robbing Peter to pay Paul. And it is currently permissible. High turnover companies are reducing compensation costs by using the 401(k) vesting schedules.”

Mothers' Day

As kids, we often struggle with our parents’ attempts to help us make good choices—and, at least in my family, Mom caught the brunt of all that (at least from me). 

We were probably like most families at the time in that we never really talked about money or finance. Doubtless that was in no small part because neither of those were in abundance in our household. But mostly, I suspect, it was because that was just one of “those” topics that were deemed to be private.

In our house Mom was definitely our family’s CFO. See, like many in his generation, my dad wanted to hold the checkbook, but it was Mom who always made sure that there was money in the account. She’s the one who started setting aside money from her paycheck in her 403(b) plan at work—and continued to do so, even when my father was convinced they couldn’t afford it—and made no secret of that opinion. Or did until he got a glimpse of the statement that showed Mom’s retirement account growth—and then, inspired by that example, he began setting money aside for retirement as well. They did so relatively late in life—preachers and teachers don’t have a lot of “extra” income, after all (especially not with four kids)—and yet, with careful planning—and diligent saving—they managed. My mother—now nearly 92—is (still) living on her own and financially independent.  

Of course, women tend to live longer (and thus are likely to have longer retirements to fund), tend to have less saved for retirement (a result of lower incomes, as well as more workforce interruptions, both when children are young, and as their parents age), and in addition to longer retirements, those longer lives mean that they are also more likely to have to fund what can be the catastrophic financial burden of long-term care expenses. Among the unexpected expenses in retirement—as parents all know, are those related to your kids—because, even after they leave home and have kids (and expenses) of their own—they’re still your kids.

Sadly, because we know how much difference it can make in retirement savings, women are also less likely to work for an employer that offers a retirement plan at work—and more likely to be part-time workers, and thus less likely to be eligible to participate in those plans even when they do have access. Oh, and like my mother, they tend to outlive their spouses—often by far more than the variance in average life expectancy tables suggest.

And yet, more than a quarter century “in” to her retirement, Mom’s sacrifices over the years (which continue to this day) have allowed her to have one that is, while certainly not luxurious, comfortable. Oh, like many in her generation, she’s constantly worried about being a “burden” to her family, though—because of her preparations—there’s not much chance of that.

Not surprisingly, Mom was the one who encouraged me to start saving in my workplace retirement plan as soon as I was eligible—and while I wasn’t always smart enough to take Mom’s advice in every situation, I’m happy to say that on this I did. 

Yes, mothers give us a lot, not the least of which is life itself. And on this particular Mother’s Day, I’m thankful that I’m going to be able to thank her… in person. 

- Nevin E. Adams, JD

"Broken" Premises

 Perhaps because of the recent full moon, the nation’s 401(k) “haters” were out in force.

Yes, last week we were “treated” to a Bloomberg op-ed with ideas on how to “fix” America’s broken retirement savings system, a back-handed compliment (of sorts) on SECURE 2.0 in Forbes from Teresa Ghilarducci, and the trifecta was completed with an academics op-ed in the Washington Post alleging that the current retirement system is “built for the rich.” 

Most of the criticism was focused on the same old myopic view on taxes and tax preferences—all flavored through the prism of a highly biased preference for the involvement of the federal government in such matters, rather than the private sector.

Key Points

So, let me take a couple of minutes to make a few points that always seem to be glossed over:

1. Tax deferral is not tax avoidance. Those contributions and earnings will be taxed (though generally outside the 10-year budget scoring window Congress uses).
2. The ability to save for retirement on a pre-tax basis is a powerful incentive—even, and perhaps especially, for those that academics argue have no rational reason to do so (because, on a net basis, they have no federal income tax liability). 
3. Tax preferences encourage not only plan participation (though it does that), but also the creation/existence of retirement plans—in which lower income workers are 12-15 times more likely to save than on their own. 
4. Non-discrimination tests and legal contribution limits work (as designed) to keep an effective balance between the benefits of higher-paid and other workers. In fact, actual data proves that while higher-income individuals have higher account balances, those balances are in rough proportion to their incomes. They are not “upside down.” 

Now, with those elements in mind (we’ll return to them throughout), what did the “haters” have to say?

The ‘Fixes’

Well, the Bloomberg editors’ “fix” to the system they claim is “broken” involves: (1) making access universal (but wait, what about Social Security?)—with a 3% auto-default rate with an opt out (they cite the UK’s NEST opt-out rate of 8%, though the opt-out rate for comparable state-run IRA programs in the U.S. is three to five times larger); (2) making it “simple” (the federal government’s Thrift Savings Plan, or TSP was cited), ostensibly with an abbreviated fund menu—or perhaps just because it’s a government solution; (3) making it “portable” (actually, they want it centralized, presumably with the federal government, so that it never has/get to be moved/rolled over), and (4) they want it to be “progressive,” which basically means shifting the current deferral of taxes to a straight-up government match to “the lowest earners.”[i]

There’s really nothing new here—the solution seems to be, more or less, a “nationalization” of retirement savings—with a program focused on helping those at the lower end of the income scale, but completely ignoring the vast sea of middle-income savers—for whom Social Security alone likely won’t come close to replicating their retirement income needs. 

The Washington Post op-ed was crafted by Daniel Hemel, a professor at the University of Chicago Law School and a visiting professor at New York University School of Law. He seems quite angered at the bipartisan support for SECURE 2.0 (actually the Securing a Strong Retirement Act of 2022) as some kind of sell-out by Congress to the financial services industry. He has an issue with “mega-IRAs,” but he also takes aim at Roth contributions, the extension of the required minimum distribution timeline, the non-tax refundability of the Saver’s Credit, as well as the scaled increase in the catch-up limits—all of which are characterized as either a giveaway to the rich, a budgetary “gimmick”—or both. He offers no solutions to any of this—though he does suggest that a focus on a strengthened Social Security would be a better use of their time (I, for one, would support that). Nor is there an acknowledgement that somewhere along the way this system “built for the rich” has somehow managed to wind up with roughly two-thirds of its participants in tax brackets that by most measures would fall significantly lower than that label would encompass. Groups for which this “broken” system is a lifeline beyond the baseline of Social Security and the pension benefits they never had. 

And then, just ahead of that article, Teresa Ghilarducci, a familiar critic of 401(k)s, pens an article ostensibly focused on the provisions of SECURE 2.0 (even taking the time to try and explain why it garnered such strong bipartisan support) on her way to pointing out why her proposal (now labeled the Ghilarducci/Hassett/EIG retirement proposal) is superior. Now, most of us would think that legislation—any legislation—that passed the U.S. House of Representatives by a margin of 414-5 would have to be on something as innocuous as naming a post pffice—that it would advance so many aspects of retirement security instead is a testament to the importance of the issue(s), and the potential to make strides in addressing them. 

Well, Ms. Ghilarducci seems to think that while SECURE 2.0 is perhaps better than a poke in the eye with a sharp stick (my words, not hers), but she claims the fixes it provides are too little (and probably too late), compared with her solution (if bipartisanship in the U.S. Congress is quickly dispensed with, she takes great pride in her alignment with conservative economist Dr. Hassett) that would build a TSP-like program for—well, everybody—or at least those who don’t already have a retirement savings plan at work. This particular article doesn’t go into the details of her solution, but we’ve seen (and written) about it before. Mind you, she’s not really worried about what you and I might consider middle-income workers—her focus is on the lower end (less than $52,000 median household earnings). It calls for a government (rather than an employer) match—but one that is only 3%. Now, that’s a number that has appeared in previous proposals she has put forth—and Jack VanDerhei, while at the Employee Benefit Research Institute, projected that it comes in well under where the status quo brings that same group in the current system.[ii]

‘Broken’ Premises

Now, those of us who actually work with real people know that this so-called “broken” system works amazingly well—for those who have access to it—including, most especially, those at the lower end of the income scale. The academics routinely target the well-off in their criticisms, but ignore the needs of middle-income households for whom Social Security will almost certainly not be… enough. And completely discount/ignore the role that the current tax preferences play in fostering the formation and maintenance of these retirement plans. 

Indeed, underneath all of the criticisms, the real issue seems to be that—as we’ve noted repeatedly—not enough working Americans have access to that system. What these critics don’t seem to appreciate is that, rather than closing that gap by encouraging more plan formation and participation, these random op-eds—often based on myopic views and faulty premises—only serve to undermine that goal. But then, perhaps there’s a reason… 

There are plenty of success stories out there—I’ll bet every single one of our 35,000+ readers know one, ten, a dozen, perhaps hundreds… it’s past time we started telling them.

- Nevin E. Adams, JD

---

[i] Weirdly, as a throw-in they suggest that folks should be able to “tap their accounts for the occasional emergency expense”—which they claim would “save billions more that would otherwise go toward interest on often-predatory payday loans.”

[ii] My thinking is that, like earlier proposals, her math works because she assumes that any balances not actually withdrawn by the individual (and perhaps their spouse) would be absorbed into the “pool” and used to fund other payouts.

Planes, Trains, and ...U-Hauls?

One of my favorite holiday movies is “Planes, Trains, & Automobiles”—but who thought so many would have to live it? 

The movie I’m referring to is that 1987 John Hughes classic starring Steve Martin and John Candy as a pair of travelers (Martin an advertising exec, Candy a traveling shower curtain ring salesman—and you think you have a hard job) trying to get home for Thanksgiving. There are any number of misadventures along the way—involving the aforementioned means of transportation on the trip from New York to Chicago… via Wichita and St. Louis. 

Well, a couple of weeks back several hundred advisors found themselves reliving that experience as a series of unrelated events emerged to thwart their scheduled travel to the NAPA 401(k) Summit in Tampa. It started early the day before the event with a strike by Alaska Airlines pilots, by mid-morning Southwest Airlines was experiencing ““intermittent performance issues following routine overnight maintenance of some of [its] backend technology,” there was snow in the upper Midwest, and in early afternoon the southeast found itself covered by a massive series of thunderstorms—all of which had an impact—and a ripple impact across the systems of travel—and all at a time when air traffic was arguably even more complicated by a large volume of Spring Break traffic as well. And that’s not even considering the normal issues with mechanical issues that some who missed the other events had to contend with.

As you might imagine, a good part of that Saturday was consumed not only worrying about, but hearing from, and responding to, speakers and staff who were ensnarled in those travel issues. At the same time, I heard from at least a dozen individuals who, on the ground in Tampa, but aware of the travel issues, reached out to me to volunteer their services as a stand-in for speakers who couldn’t get here in time. Meanwhile, there was the “call” to be made with regard to the outdoor activities that were being planned for Sunday (Flo-Rida) and Monday nights.

Sunday morning dawned with a great deal of uncertainty as to what we’d be looking at in terms of attendance and speakers. But what impressed me throughout was just how hard people were working to get to Tampa. And over the three days of the conference people just… kept on coming… 

There were some amazing stories of persistence and perseverance throughout—but the one that made the deepest impression on me was that of Odyssey Financial Group’s Michelle Coble and Adam Bahner. Based in Oklahoma City, OK, they got as far as Atlanta when not one, but two of the flights from there to Tampa were cancelled—and they were told that there were no seats on the flights out to Tampa for two days. There were no rental cars to be had, and the trains—well, they wouldn’t get to Tampa on time. So they rented a U-Haul—and drove that last leg from Atlanta to Tampa! 

When all was said and done, we had an amazing conference. Sure, some couldn’t get there—many despite enormous effort and inconvenience. But it was clear from the opening session all they way through to the close that those who were there were there because they really wanted to be there—and the level of enthusiasm and engagement—and I think the quality of the content and networking—were through the roof[i].

So, my sincere thanks and appreciation to the speakers and sponsors, to those who “stepped up” to fill gaps, and those who volunteered to do so (because even if we didn’t have to call on you, it relieved some planning pressure)—to the steering committee who helped ensure those gaps were filled, to the conference staff for all the extra work (and stress) that accompanied all this uncertainty.

But most especially, my thanks to all who (including those above) made those (extraordinary) efforts to “get there” via planes, trains, automobiles—and even U-Hauls—to be part of what, by any measure, was an extraordinary event! 

p.s.: Mark your calendars now for the NEXT one—April 2-4, 2023 in San Diego!

---

[i][i] And, despite all the bad weather on Saturday, the weather during the conference was great, and the outdoor events unaffected!

Not-So-Unforeseen Outcomes

 Thanks to their mother, my kids have grown up with a variety of pets in our house—but none more bizarre than our experience with… a chicken.

My son’s elementary school class had been exposed to the miracle of life over the course of several weeks by watching a set of chicks spring forth from eggs that had been carefully tended by the class. Once hatched and ready to be turned loose, the teacher offered to let selected children take one home—provided they obtained their parent’s permission, of course. My son was smart enough to ask his mother—who, seeing how much it meant to him—and much to my amazement, acquiesced to the request. 

And so “Grr”[i] entered our lives. Mind you, we were living in a residential neighborhood in Connecticut at the time, miles and miles from anything remotely resembling a farm. That said, the little peeping chick was adorable, and my wife persuaded me that, as the chick grew we’d be able to erect a small pen in the back yard. We even joked about being able to have fresh eggs.

Or did until the day we discovered that Grr was biologically incapable of such things—at which point it was clear that while we had thought things might turn out one way—well, we now had a loud, smelly and fairly aggressive bird in our house! It’s not that this was completely unforeseen, but it certainly didn’t take a lot of imagination to see that it could go “wrong.”

In that spirit, there are a couple of initiatives rumbling around in Congress at the moment—arguably well-intentioned, but almost certainly likely to have consequences that are not unforeseeable, though surely not what their champions expect or intend. 

The first of these is an initiative focused on expanding spousal consent—not the beneficiary designation requirement in place since the mid-1980s, but one that would basically require an in-person notarized consent for most distributions. The second revolves around discussions to significantly expand the size and flexibility of emergency savings accounts. 

‘Missed’ Directions

The expanded spousal consent provision is well-intentioned, of course. Much as the beneficiary designation requirement, it is designed to prevent one spouse from taking advantage of the other by wiping out what might well be their life savings without their knowledge or involvement. On the other hand, it doesn’t require much imagination to, in a day when men and women are about equally likely to have a 401(k), envision a situation where an abused spouse, needing to access the funds in their account to escape their situation, would be precluded by this legislation from doing so by the very spouse they are seeking to escape.[ii]

Now as for those emergency savings accounts—while the notion is quite popular these days—the problem lies with an idea being touted by the Aspen Institute. It would establish a sidecar emergency savings account with your 401(k) that could be matched—but that you could basically withdraw for pretty much any reason once you got the match. More on that in a minute.

Now, emergencies come in all shapes and sizes—but the Aspen proposal is calling for $5,000 in those accounts (rather than the $1,000 embodied in legislation such as The Enhancing Emergency and Retirement Savings Act of 2021—and they’re suggesting it as $5,000 every year. Five thousand dollars that could be put in the “emergency” savings account every year (just) long enough to get the match—and then, as mentioned above—withdrawn for pretty much any reason whatsoever. And then the next year they could do it all over again. And again. In fact, it doesn’t require a lot of imagination to see this turning into one of those “Christmas Club” savings accounts that banks offered once upon a time. Which arguably stands to create a whole other type of emergency: retirement plan “leakage”—on steroids.

You don’t need 20/20 hindsight to know that bringing a chick into a suburban Connecticut home won’t end well. We did it with a genuine desire to do something nice for our son—and hoped in our hearts that it would turn out differently than our brains would acknowledge. It didn’t, of course—but it turned out to be a situation that didn’t last long, and—thanks to a farm-owning colleague—had a (relatively) happy ending.

Something that ill conceived legislation, however well intentioned—can’t—and shouldn’t—depend upon. Particularly when the potential negative outcomes are… not so unforeseen.

- Nevin E. Adams, JD

---

[i] While the name eventually seemed to fit his personality, my son simply chose to name it after a favorite character in the “Invader Zim” cartoon series.

[ii] The good news is that the champions of this legislation have decided to study the matter and its potential implications under the auspices of the Government Accountability Office.

A Thumb on the Scale(s)?

Years back I remember being part of a Q&A with a group of plan sponsors—the focus was the challenge of not only getting, but keeping their plans in compliance, while also looking for creative ways to engage and encourage participants. Then at one point, a tired looking gentleman, expressing frustration with the pressures of audits and litigation, said: “I wish the DOL would just tell us what to do.” 

I cautioned him at the time that he ought to be careful what he wished for—that he might just get it.

Sure enough, in mid-March the Labor Department issued a “compliance assistance release” which was unique both in format and, arguably, focus. It reminded plan fiduciaries of the significance of their review and assessment of prudence of plan investments—and then said in no uncertain terms that it had concerns about the ability of cryptocurrency to meet those high standards. Indeed, the release plainly stated that those who did include such options could “expect to be questioned about how they can square their actions with their duties of prudence and loyalty…”—not just as standalone options on the menu, but even through a brokerage account. And so, while not an outright prohibition, it seems fair to say that it’s likely to have what lawyers call a “chilling effect” on cryptocurrency as a 401(k) investment option.

In late December the Labor Department issued a statement on the use of private equity in participant-directed plans—stating that, except in a minority of situations, plan-level fiduciaries of small, individual account plans are not likely suited to evaluate the use of PE investments in designated investment alternatives (DIAs) in individual account plans. It represented a step back from a June 2020 information letter that affirmed that PE investments “as a component of a professionally managed multi-asset class vehicle structured as a target date, target risk or balanced fund” can be offered as an investment option for participants in defined contribution plans under ERISA. It seems likely that some private equity firms (or those promoting such investments) had taken the initial guidance as something of a green light to promote those options beyond the limitations of the original letter—leading the Labor Department to clarify its position—and, arguably, to shut down active consideration of those options, at least by “small, individual account plans.” 

And then, of course, there’s the focus on ESG options, which the Trump administration clearly tried to undermine with its proposed and then (slightly muted) final regulation—and which the Biden administration first announced that it would not enforce, and has since then, with its own proposed regulation, sought to swing the pendulum in favor of those options—arguably to the point of not only encouraging, but requiring, consideration of those factors.

The reality is, of course, that times change. And even if the long-standing precepts of prudence and fiduciary responsibility haven’t changed, the environment in which those determinations are made has. Cryptocurrency wasn’t a “thing” until fairly recently (and it didn’t take long to find its way into 401(k) platforms), and those who may have misapplied (accidentally or “on purpose”) the Labor Department’s statement on private equity needed to be reminded. ESG is certainly a relatively recent—though not brand new—focus—but plan fiduciaries can perhaps be forgiven for feeling a bit “whipsawed” by the shifting sentiments between administrations.

Generally well-intentioned, the perspective of even the most seasoned and expert regulatory professional sometimes fails to appreciate the impact in the “real” world. That’s the value in the access—and influence—that NAPA, armed with the input, insight and perspective of NAPA members, provides to these processes. Insight and influence that allows you to “put a thumb on the scale” in providing a practical and pragmatic perspective on the rules and regulations that guide our industry— now, and in the days ahead. 

- Nevin E. Adams, JD

p.s.: Speaking of which, this would be a great time to get involved via the NAPA DC Fly-In Forum. Check it out—and apply today—at https://napadcflyin.org.

Getting 'Out' While the Getting's 'Good'

It’s been fun watching “Coach K” take another team to the Sweet 16 this year—hard to believe he’s been coaching for nearly half a century. 

I had the opportunity to see Mike Krzyzewski coach in person just once—and in the not-so-friendly confines of the claustrophobic Cameron Indoor Stadium (no, I was not rooting for Duke). And while he’s had better teams—and Duke’s not on my favorites list—I, for one, won’t be disappointed if he wound up an amazing career by winning it all… again (a sentiment made easier because the teams I was pulling for are no longer in contention).

And then there was Tom Brady—who may have had the shortest retirement in NFL history. Rumors notwithstanding, apparently Aaron Rodgers is still willing to keep playing. Presumably both are at least partially motivated by the possibility of hanging up their cleats with another championship ring on their hand—to get “out” at the top of your game. 

A Pew Research Center analysis of the most recent labor force data concludes that, as of the third quarter of 2021, just over half (50.3%) of U.S. adults 55 and older said they were out of the labor force due to retirement. That compares to 48.1% in the third quarter of 2019, before the onset of the pandemic. Looking through a more traditional retirement age focus, in the third quarter of 2021 two-thirds of those 65- to 74-year-olds were retired, compared with 64.0% in the same quarter of 2019.

Indeed, there’s a widely cited datapoint that 10,000 Boomers head into retirement every single day—an eye-dropping pace that is almost certainly higher these days. The Pew report notes that the leading edge of the Baby Boomer generation reached age 62 (the age at which workers can claim Social Security) in 2008. Between then and 2019, the retired population ages 55 and older grew by about 1 million retirees per year—but in the past two years, the ranks of retirees 55 and older have grown by… 3.5 million.

This is all a bit extraordinary. Back in the aftermath of the so-called “Great Recession,” retirement rates actually declined. By the third quarter of 2010, 48% of adults ages 55 and older[i] were retired, down from 50% in the same quarter of 2007, according to Pew. Of course, accompanying that downturn was a steep decline in the value of financial assets, not to mention home prices. Not surprisingly, that combination (and the rampant uncertainty of the times) apparently served to keep workers… working.

That’s not been the case in the aftermath of the pandemic; household wealth has been rising since the onset of the pandemic (thanks in no small part to the checks from the federal government), the markets have (certainly until recently) been robust, housing prices are rising (unfortunately, so are a lot of other things). Heck, even Social Security saw a nice bump (we’ll set aside the funding/sustainability concerns for another day).

Now there are doubtless many factors underlying these trends—surely the Boomers at least have been “conditioned” to think of the attainment of a certain age as time to cease, or wind down, full-time employment. Moreover, while it may be a phase rather than a permanent shift in sentiment, there’s no denying that many, perhaps most, workers are rethinking—work. 

 But one can’t help but note that the increases in financial wealth—and here some credit is surely due to the compounded impact of workplace benefit programs—employer contributions, and the savings that have benefited from the strong markets—that have provided the cushion, if not the wherewithal—to step out of the rat race—with the comfort and backing of their workplace retirement savings. 

And who wouldn’t want to get “out”… when the getting is “good.”

- Nevin E. Adams, JD

---

[i] I’m not sure why 55 was chosen as a marker. In fairness, the notion that roughly half the population 55 and older was “retired” strikes me as extraordinary, in and of itself. While some amount of that is surely involuntary, I can’t help but think that I’m doing something “wrong”… ;-} 

Life-Changing Times

 It’s hard to believe that just two years ago many of us went into our places of work, packed up, and went home for what most thought would be a week, maybe two—and wound up being a lot more than that.

In March 2020, my wife and I had just returned from a funeral in the Boston area. While the worst of what we would come to learn about COVID was—well, yet to be learned—we knew that cautions were in order. So we drove, rather than flew to the event—which wound up being full of strangers (many of whom were in what would come to be acknowledged as “vulnerable” health categories). Throughout we were aware, conscious of a certain risk, but we were not overly cautious—about on the order of what you would do when you come into contact with someone who had a cold. 

In hindsight, what might have been a “super spreader” event didn’t turn out to be one—even though less than 48 hours later the governor of the Commonwealth was putting in place lockdowns and restrictions that would have precluded our trip. We’ve not regretted that trip for a moment over the past two years, though on more than one occasion since I’ve thought to myself just how remarkable that was. It could have been life-changing.   

In fact, the past two years have been life-changing in such different ways—many have lost loved ones, and, worse, been precluded from saying “good-bye”—others have had damage to their health, or the health of loved ones—many more have suffered financial hardship—and, incredibly, some have not only emerged relatively unscathed, but prospered, at least financially—spared travel and commuting expenses, and perhaps even courtesy of assistance funds from the federal government. Most of us can identify with more than one of those categories. 

That said, while COVID, or the response to COVID, has affected us all[i] in some ways—and continues to do so—the impact was… uneven. Some industries—ours included—pretty much packed up one night, went home—and continued to do what we do every day (with modest adjustments). Others—restaurants, hotels, airlines, law enforcement, fire departments—couldn’t. Some—notably schools—tried to pivot to remote learning overnight with what are/were necessary, but arguably unsatisfying results. And then there were some—and here one can’t help but acknowledge the bravery, commitment and sacrifice of health care and long-term care workers—who not only “couldn’t,” but were required to put their very lives at risk in the service of others. 

These actions, and the response to these actions, will almost certainly be life-changing—in ways we cannot now fully appreciate. 

Amidst labels like the “Great Resignation,” it’s been widely proclaimed that we’re never going back to “normal”—that work, at least the notion of a 5 day/week physical location—has been changed…forever. And certainly, for some workers and workplaces, that is true. Whether that will be for good or ill, whether “cultures” can (or should) still be nurtured on that basis remains to be seen. 

However, the COVID pandemic has also illuminated—in a unique way—the importance of workplace benefits: the financial buffer that retirement savings can (and do) provide in an emergency, the synergies between our financial and physical health, and an opportunity for these programs to be—to the extent they aren’t already—an integral component of an organization’s culture.

And if these programs are an integral component of your culture—what does it say about your organization? Is it “just enough” to get by? 

Or could it be… should it be… life-changing?

- Nevin E. Adams, JD

---

[i] Indeed, I’ve walked away from this experience convinced of a couple of things: (1) most of the jobs that can’t be done from home are probably worth more than they’re paid; (2) many of us live further from the ones we love than we realize; and (3) many likely live further from work than we’d prefer. 

Is the Retirement System ‘Fragile’?

It’s not all about “the Benjamins,” but a recent analysis of the nation’s private retirement system certainly puts a lot of emphasis on the accumulation of aggregate assets in retirement plans.

The Morningstar report—“Retirement Plan Landscape Report, An In-Depth Look at the Trends and Forces Reshaping U.S. Retirement Plans”—is extraordinarily diverse and comprehensive[i] in its assessment—though while the report’s authors seemed to be striving for a balanced assessment, the overall sense was one of a leaky boat.

No Surprises 

There were some findings that seemed to surprise the authors that didn’t strike me as all that remarkable. Apparently (I hope you’re sitting down for this one) larger plans pay lower fees (expressed as basis points) than smaller plans. They are also more likely to invest in collective investment trusts (which tend to have lower fees, though that isn’t necessarily the case).

What I did find surprising was Morningstar’s assessment that those smaller plans pay, on average, “just” 88 basis points (compared to the 41 basis points estimated for larger plans)—indeed, I found both numbers pretty reassuring. On the other hand, “averages” can often obscure reality, and the authors also found that smaller plans also feature a much wider range of fees between plans—with roughly a third of those plans costing participants more than 100 basis points in total.

And make no mistake: Those higher fees are—literally—a “toll” on retirement. The Morningstar report says that two workers who save the same amount and invested the same way might well result in an individual who worked for a smaller employer (and who participated in a smaller plan) having 10% less in retirement savings. That’s a hefty price to pay—but then this is hardly the only area in life where larger purchasers are able to obtain a volume discount.

ESG ‘Risk’

There was also little surprise in the finding that “Plan sponsors appear to have shied away from considering environmental, social and governance (ESG) information and analysis, in part because of regulatory uncertainty.” Oddly, Morningstar’s analysis—here they leverage their own ratings system to ascertain funds that might be considered to be exposed to ESG “risk”[ii]—produces a number that, while well short of what Morningstar would apparently deem prudent,[iii] still notes that “as many as 48% of retirement plans with at least 100 participants already offer investment strategies that use ESG analysis to evaluate investments”—though that belies the results of most industry surveys (including PSCA’s 64th Annual Survey of 401(k) and Profit Sharing Plans). On the other hand, the report acknowledges that this includes funds with a “broad definition” of ESG—funds that presumably take those type factors into account without touting that as an explicit emphasis (and perhaps without the awareness and focus of plan fiduciaries). Regardless, and undoubtedly for the reasons cited by the report, there’s little question that plan sponsors outside of the public and non-profit sectors have indeed shied away from ESG. At least for the moment.

Assets Oriented

There was, however, some interesting new ground in the apparent “churn” in the system. The report states that more than 380,000 plans closed during the period from 2011 to 2020—a result it attributes largely to employers going out of business. While that is certain a point of vulnerability for those previously covered by those plans (not to mention the presumed loss of employment), the solution for that lies beyond the retirement system per se.

As we have noted consistently, the report expresses concerns about coverage and the access to workplace savings, but ultimately differentiates its focus from traditional retirement system analysis by focusing on the size and flow of the system, as measured by assets. Indeed, and as noted above, the report seems particularly obsessed on the subject of assets—not on an individual level, or on obtaining a measure of retirement income adequacy, but on the premise that more assets mean the ability for plans in the system to negotiate for lower fees (and, on a related note, to opt for investment types, notably CITs, that have lower expenses). But while the emphasis was intriguingly unique, it’s also the basis upon which these authors affix the “fragile” label to the system, as if “the system”—as measured by assets—must constantly grow in order to be considered healthy. 

Now, there were some jaw-dropping numbers behind this premise—the report claims that there have been outflows of more than $400 billion a year since 2015, at least as reported by plans in their annual filings. However, at a time when 10,000 Boomers are said to be heading off into retirement every day, one might well expect a lot of them to be taking their retirement savings with them. 

‘Out’ Flows?

The concerns expressed in Morningstar’s analysis seems to assume that much of the outflow is pre-retirement “leakage”—though they seem equally concerned about rollovers. Why? Well, once again they write that, “More assets in the defined-contribution system would help more sponsors gain the leverage to demand lower fees from asset managers and drive down costs for end investors.” While true enough, it seems an odd anchoring. 

Indeed, in commenting on their assumptions, the authors comment that while they believe their estimates are “conservative,” and that “any errors understate the massive detectable flow of money out of DC plans,” they also admit that it is “…clear from Internal Revenue Service data that most flows out of plans are for rollovers rather than cash-outs…,” though they concede you can’t draw a distinction there between cash-outs and rollovers with the Form 5500 data.

Indeed, while 30,000-foot assessments of the retirement savings landscape are not unique, in looking nearly exclusively at the total pool of assets in that system and its implications, Morningstar’s report makes no attempt to correlate those assets to the needs of the individuals covered by the system. 

‘Pool’ Rules?

That asset-focused prism leaves it to claim that the entire system “relies on a few thousand employers to cover most people saving for retirement,” as though that’s a unique vulnerability. But the defined contribution retirement system is not one gigantic pool that must satisfy all obligations. Sure, it would be great if more employers, specifically more small employers, saw fit to offer a plan—but the fact that they don’t doesn’t put “the system” at risk. 

But those who do have these programs, and take advantage of them, face no jeopardy as a result (although they may well wind up being taxed at higher rates in the future). The U.S. DC system doesn’t “rely” on new employers to offer plans to compensate for those that are no longer doing so—though arguably the coverage gap, and the lack of ready access that results, are an issue of general concern.

All in all, the report offers an interesting assessment of “the system”—more thoughtful and comprehensive than most, though the obsession with total assets seems a bit myopic, and as one might expect a lot of assumptions, perhaps of necessity in a report as broad as this.  

In sum, while its conclusions are perhaps a bit “fragile” upon which to build a firm assessment, there’s plenty there to warrant discussion—and action.  But is the system "Fragile" - only for those who aren't part of it.

- Nevin E. Adams, JD

---

[i] While much of the report focuses on DC plans, the Morningstar researchers also intriguingly acknowledge that more than 33 million people are or will receive benefits from defined benefit plans as of 2019, and that DB plans accounted for more than 30% of distributions paid to participants in 2019 and they do not appear to have peaked. It even notes that approximately 8.8 million people who are no longer working are still entitled to future benefits and 11.7 million people who are still working will eventually receive benefits. Looks like those “dead” pension plans still have a lot of life in them! 

[ii] The percent of assets that are in the various categories of ESG risk assigned by the Morningstar® Sustainability Rating™ for funds, sometimes called the globe rating.

[iii] In fact, the report comments, “…sponsors have left the U.S. defined-contribution system in the aggregate tilted toward investments with more ESG risk—which is the degree to which companies fail to manage ESG risks, potentially imperiling their long-term economic value. Plan sponsors may wish to reexamine their investment choices using an ESG lens.” 

The Big(ger) Picture

Our industry often seems to treat participants like children who can’t make big decisions—but a recent research paper suggests they might make better choices if we expanded their perspective.

The paper, intriguingly titled “Financial Wellness Meets Behavioral Economics,” highlights a behavioral tendency known as “narrow framing”—basically a tendency to focus on one complex choice, or one element of a complex choice, at a time.  Now, at first blush this seems rational, and perhaps even prudent—but the paper suggests that this kind of linear thinking means that people are inclined to overlook real-life disruptions like financial emergencies—which are not only uncertain with regard to amount or timing, but even in terms of whether they will occur at all. Little wonder, therefore,  that studies routinely find that workers say they are ill prepared to come up with the funds to cover some kind of short-term emergency outlay of $400.

This particular e paper—authored by none other than Shlomo Benartzi, Professor Emeritus, UCLA Anderson School of Management and Senior Academic Advisor at Voya Financial, which published the paper—explains that “when it comes to household financial planning, the ‘one future’ fallacy often leads people to focus on predictable and recurring expenses, such as rent and the monthly phone bill.” It cites research by Abigail Sussman and Adam Alter that finds that people struggle to budget for any kind of “exceptional expense,” whether it’s a summer vacation or a new television. Since these expenses are not recurring, and most household budgets are narrowly framed around regular monthly charges, people fail to consider them as part of their financial plan. So far, so good.

The paper’s ultimate premise seems to be that if people could see the full range of their financial needs, they could do a better job of allocating funds—that, among other things,  they’d make more rational health care decisions if they were presented a full integrated cost impact of a plan with premiums and deductibles (the author suggests most focus on the deductible). In short, the paper suggests that we (advisors and the retirement industry generally) need to do a better, holistic job of helping individuals see the full range of options and alternatives, work with them to choose the most optimal—and, of course, make it easy for them to act, rather than defer acting on those choices.

Or, said another way (as the paper does), “the ultimate goal is to develop a data-driven financial wellness platform that helps people better allocate their scarce dollars.”

Now I don’t doubt for a minute that people “overlook” budgeting for emergency expenses because they don’t view them as a specific reality (I also figure that many don’t because they feel they have other, better uses for that money, including perhaps “eating”). In that sense, creating a “slot” for emergencies alongside the budgetary savings/spending slot for “retirement,” rent, food, and transportation is logical in both acknowledging the potential need alongside those that tend to be seen as “must-pays.”   

I’m not altogether sure, however, that an unspecified emergency (and approximated cost) will warrant the appropriate attention—and more than a little concerned that if it did, it would do so at the expense of items that feel more “discretionary” (like retirement).[i] And while this may be old-world thinking, I’ve seen (and heard of) far too many situations where giving people not only lots of decisions to make, but forcing them to come up with “answers” for all of them might well produce a misallocation of resources—or in a worst-case scenario, forestall a decision of any kind whatsoever.   

So from an academic perspective, “narrow framing” might well be a “bad behavior” that precludes “rational” decision-making, though I tend to see it more as a coping strategy for folks struggling to make complex financial decisions spread across limited means. But then I’d also argue that sometimes you need to make choices that, while perhaps deemed financially rational, aren’t necessarily the ones you need to make in order to sleep at night.

Thoughts?

- Nevin E. Adams, JD

---

[i] I am, however, convinced that the positioning of health care programs/options/expenses could do with some improvement.

A Savings Account

My decision as to whether or not to save in my workplace savings plan wasn’t long or complicated. 

Yes, I had to actually fill out a form, and yes, I actually had to figure out how to invest those savings (though in fairness, there were only four funds from which to choose, one of which was company stock). Yes, there was also a generous match, but when you’re young there are more enticing ways to spend your income than—well, not spending it. That said—and at age 22 I’d not always fully embraced my parents’ counsel—my mother didn’t hesitate to insist that I did so.  

My mother, now a retired school teacher, then (and still) reminds me with some regularity (and deserved pride) that she began having $50 taken out of her paycheck at work—though my father protested at the time they couldn’t afford to do so. Or at least he did until he saw that first quarterly statement—at which point he began looking into how he could start saving in his workplace savings plan. They started relatively late in their working lives—and yet she continues to draw from that 403(b) account (and my dad’s, which has outlived him) to this day.

Those memories have a special resonance for me this week—which happens to be America Saves Week—and while if you’re reading this, you likely save every day, many Americans don’t. While the overall theme/focus this year (it’s been a “thing” since 2007) is on “building financial resilience,” each day of this special week has a different focus: yesterday (Monday) was Save Automatically, today is Save for the Unexpected (and boy, hasn’t COVID reminded us anew and afresh of that need?), Wednesday—a particular favorite of mine—Save to Retire, while Save by Reducing Debt is on tap for Thursday and the week wraps up with a focus on Save as a Family.

Now, arguably every week could (or at least should) be America Saves Week—but this week’s special focus provides us all with an opportunity to share not only success stories, but practical insights on how to do what we’re told (often by ourselves) what can’t be done. 

You don’t have to have a workplace retirement savings plan in order to save, of course—but it helps. We regularly cite data that proves that even modest income workers—those earning between $30,000 and $50,000/year—are 12-15 times more likely to save via their workplace savings plan than left to do it on their own. It’s a combination of making it not only automatic, but easy! Particularly these days with automatic enrollment, diverse default investments like target-date funds and managed accounts, and the option of automatically increasing that rate of savings on a regular basis—easy, automatic and efficient. 

I’ve never been very comfortable lecturing others on the importance of saving—we all have unique circumstances and challenges to overcome, after all—and saving is, ultimately, a matter of personal responsibility and choice. But I need look no further than the example of my parents to see the impact that a savings discipline and, let’s face it, sacrifice, can make.

See, my dad thought they couldn’t afford to save, but the reality is—they couldn’t afford not to. 

- Nevin E. Adams, JD