My 'Retirement' Account

I’ve spent my entire working career working with retirement plans—but most of it not focused on a retirement plan of my own.

In that sense, I am perhaps like many, maybe most of you. Oh, I thought about retirement (a lot, just not mine), maxed out my 401(k) (when I wasn’t co-funding college tuitions), and was at least intellectually cognizant of the potential costs of living for decades without a salaried paycheck. Much has been made of how difficult it is for younger workers to grasp the reality of retirement—but the reality is that retirement “myopia” is not limited to younger workers.

That said, and as you will hopefully have seen in the lead post today, I have announced my “retirement” —though it’s not retirement[i] in the traditional cessation of work sense. Yes, while I love what I do and the people I do it with (for the very most part)—I’ve been cranking out a daily news service (and then some) pretty much every working day (including vacations) across multiple firms and audiences since 1995.[ii] Simply stated, I am at a point in my life where I am ready (financially and spiritually) to spend less time “working”—and more time focusing on the things I want to spend time doing.

If you’ve ever left a job you love (even for one you hope to love more), then you’ll appreciate just how important it is to be leaving your work in good hands. To that end, I am thrilled to have John Sullivan coming on board. He has been a good friend and kindred spirit over the past several years. He, like I when I joined the ARA, is excited at the prospects of helping contribute and shape retirement policy, rather than merely observing and commenting upon those efforts. I’m thrilled that both he (and Brian Graff) want me to continue to contribute content and perspective to those efforts—and that I have been asked—for at least the next two years—to continue to lead the content development of the nation’s leading, largest and most significant retirement plan advisor conference, the NAPA 401(k) Summit. 

Beyond that, my plans for “retirement” (and yes, I am going to continue to describe it with quotation marks) are still emerging. Some travel, yes—some time with family, for sure—perhaps (finally) the book that I have been meaning to write for years… but was too busy writing to get around to it.   

It has been my great good fortune to have “stumbled” as a part-time college internship into a profession that I love—one that has not only provided a good living (albeit with some bumps along the way), but to which I could, with a clear and enthusiastic conscience, invest heart and soul (not to mention blood, sweat and the occasional tears) in pursuit of a noble goal—helping strengthen and support Americans’ retirement. I’m doubly fortunate to have had the opportunity to share with—and hear from—so many of you over the years.

I’m thankful for the opportunity I have been given here, and to have the opportunity to not just explain but to shape retirement policy with your support, and those of the incredible team here at the American Retirement Association. I treasure what I have learned and continue to learn, as well as the people it has been my great joy to work with and learn from over the years. 

More importantly, I look forward with great anticipation to this next phase of my career…as we all continue working for America’s retirement.

Stay tuned!

- Nevin E. Adams, JD

 

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[i] My actual “retirement” date is still months away, of course (Feb. 28, 2023)—and with any luck at all, Congress will pass legislation sometime before the end of this year that will, once again (as it did in 2019), “complicate” my holidays. Indeed, I continue to tell folks that I am “retiring,” but not quitting. 

[ii] And working in this industry since 1978…

Are You ‘Anti’ Social?

 You may have missed it, but there’s been a bit of a “hub-bub” brewing on social media…about the impact of, and perhaps even the utility of, social media. Here’s some thoughts—and some tips. 

JD Carlson of Retireholics “fame” kicked things off with a post intriguingly titled “Forget About Social Media Content and Run Your 401(k) Business.” Oh, there were words[i] that followed, but you really didn’t have to read more than that to see where he was going.

Well, about a nanosecond after that post appeared on…social media… Sheri Fitts who, as you may know, spends a fair amount of her time and energy helping advisors (and other retirement professionals) be more effective on…social media… pushed back on JD’s basic premise. A bit.

Her argument was basically that while social media was important (we’ll come back to that), doing so without a clear focus or strategy was a mistake—but that ignoring the marketing impact of social media was perhaps a larger one.  And then, Faith Teope (who I’ve bantered with previously) took to LinkedIn to offer yet a third perspective—which seemed to be basically a message of “if it feels right for you, do it.” 

Influence Shells?

Now, all of these folks have arguably made, or at least enhanced, a name/brand for themselves on social media. They have followings, post regularly, and I think it’s fair to say—at least in the retirement space—are what would be considered “influencers.”

I’ve been on Twitter since 2008—LinkedIn even longer. Facebook (yes, I AM a Boomer, after all) since my kids got on it. I’ve read books on the subject of social media, attended conferences and training sessions (live and online) about how to use/leverage these tools—and spent a lot of time over the past couple of decades waiting for the day when the actual response to a LinkedIn (or Twitter) post…mattered. I don’t mean the “likes” that Twitter shares, or the “impressions” or number of “followers” these platforms attribute to one’s account. They’re valuable metrics, of course—widely shared (and sometimes trumpeted). 

But as much as I enjoy social media—and relish the relationships that I have found and fostered there, in my experience it's still a bit of an echo chamber—one frequented by people who are already “on” social media. Indeed, it seems for the very most part the people who are “there” are there to promote the use and value of social media to those not yet in that “club.” Not that you won’t find valuable content there—but plan sponsor clients? Participants? 

Don’t get me wrong—I am one of those folks “on” social media. I have tons of “followers” on LinkedIn, and spend some time each week cultivating and expanding that reach. People read and comment on what I post there, and I’m grateful and appreciative of that engagement. Having said that, I continue to do what I do there not because I see much current value in doing so—but rather because I feel that one day there MIGHT be—but don’t sense that that day is here yet.[ii]

What to Do (and Not)

So, at the risk of being non-controversial, I’m going to concur (I think) with most of what has already appeared in this discussion thread—and offer some unsolicited social media “guidance”:    

First things first. Doing social media, and certainly doing social media “right” takes time and energy, and my sense is that the ROI payoff for most is modest at best. It will take more time than you think, and likely return less than you hoped—and that’s time away from the business of running your business. If you’re not focusing on the business end of your business, no amount of two-minute TikTok videos (however captivating) is going to help that. Let me repeat—first things first. Unless, of course, you plan to get into the business of teaching folks how to do social media.  

If you’re going to do it, do it right. That means having something interesting to say, something worth sharing. Share it regularly—and professionally. This is about building a brand (you). But remember you’re marketing you and your expertise—not a product. You know how you fast forward past the commercials on a DVR? People will scroll past sales pitches even faster (though LinkedIn may still count that as a “view”).

Set reasonable, modest goals. I have had the benefit (inherited, for the most part) of a large and widespread email audience for more than two decades now (though I hope I’ve since earned and expanded on that). My expectations for social media engagement were (and remain) high, likely too high, compared to email clicks and opens. Know that going into it you probably won’t get much, if any, in the way of “return.” 

Nurture the engagement you do get. Like, share, forward—but by all means COMMENT as you do on the content you see as valuable. It will be good for your visibility, likely expand your network—and it will keep you engaged with topic(s) you care about. It’s also good for your “shelf life.”        

Remember that you don’t need to do it. Honestly, my sense is that most of the folks you ostensibly want to reach (clients and prospects) aren’t (yet) spending a lot of time on LinkedIn (or Facebook, or Twitter, or even TikTok—at least not intentionally). Doing it before you’re ready will be counter-productive at best, and if your clients—prospective or current—aren’t “there,” do you really need to be?  If you’re not yet ready—don’t. 

After all, there are plenty of advisors enjoying a great deal of success today…without relying on social media.

- Nevin E. Adams, JD

 

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[i] For those of you who like more words, “What’s more effective, a post on LinkedIn with 11 likes and one comment from your co-worker or good old-fashioned marketing concepts like strategic partnerships, custom emails, networking, webinars, mailings, events, email blasts, client referrals programs, etc.? For most of you, the latter will crush 100% of the time when talking about actual ROI.”

[ii] And if you’re unaware of the “hub-bub” about which I started this piece, you are proving my point.

Have You Hugged Your TPA Today?

If you work with TPAs—third party administrators—you might want to avoid bugging them this week. 

As you may well know (certainly if you work with TPAs), this year, Monday (Oct. 17th) is the deadline to file Form 5500s, and for most TPAs, that’s a pretty all-consuming focus. So much so that every year on the day AFTER the Form 5500 filing deadline, John Hancock declares an annual day of recognition for TPAs. 

Now, to its credit, John Hancock goes so far as to note that National TPA Day is also a reminder to financial professionals (especially those still getting established) that partnering with TPAs may be an important pathway to success. Not that everyone feels that way, of course.

I’m talking about the disconnects in focus between retirement plan advisors and TPAs—an issue that is, perhaps, as old as ERISA itself—this “tension” between these two critical roles. Not in every case, of course—there are plenty of advisors that will tell you how many times their TPA partner has gotten them out of a real mess, and TPAs that will commend the leadership demonstrated by their advisor teammate. But that, it seems, isn’t the majority experience, though it proves it can be that. 

As it turns out, I’ve spent some time on both sides of that “divide,” and a fair amount of time able to observe both from a distance. I’ve listened to groups of TPAs gripe about advisors who “won’t stay in their lanes”—and advisors frustrated with TPAs who, when asked what time it is, insist first on explaining how a watch is made. I can remember personal experiences trying to explain complex plan design decisions with real-world implications—only to have the decision-makers decide it was time to step out for the equivalent of “brandy and cigars” with the plan advisor, leaving the decisions—undecided.   

The beauty of these times—and our associations—is that I was able to reach out on an ad hoc basis to folks that I knew could also appreciate both sides of the “debate,” and who cared enough to try and do something about it. This core group—Mary Patch, Chad Johansen, JD Carlson, Shannon Edwards, Justin Bonestroo & Amanda Iverson—have given up a LOT of their time and energy over the past many months to this undertaking. COVID helped in some ways—nobody was travelling as much, and we’re all now well accustomed to meeting virtually to solve problems. 

Our collective sense was that what makes the difference in these relationships is having a shared set of goals and expectations, alongside role clarity and confidence in the perspectives and expertise of the partner(s). We started with posts that have run on NAPA-Net on a monthly basis beginning last year (links below), came to something of a crescendo with a special TPA panel at the 2022 NAPA 401(k) Summit, and ultimately culminated in a checklist of sorts that you can find here. Think of it as a relationship pre-screener.

That checklist alone (and we’re hoping you’ll reconsider Compliance Administrator or Compliance Consultant as replacements for that awful TPA moniker) won’t solve all communication/expectation issues, but we hope it will be a solid foundation to open a dialogue. At its most basic, it should allow you to find out what services potential (or current) TPA partners provide, which are standard to their practice(s), and which are “extra.” But ultimately—and most significantly—it is designed to align expectations. 

There may well be things on this list of which you are unfamiliar—if so, this would be a good time to find out more about them, as I assure you, they are important, and SOMEBODY should be attending to them.  The core team is now working on some background explanations—if some jump out at you for a quicker explanation, please let me know. I—and indeed the entire core team—would love for you to begin using this checklist in your partner discussions—and to let us know what works—and of course, what doesn’t in the days and weeks ahead.

My undying thanks again to the core team for the love, humor, friendship and passion on this effort–– and to about a dozen advisors (you know who you are) who provided some terrific insights and perspective as the checklist neared completion. 

And ultimately to you, gentle reader, for helping us build this bridge…

- Nevin E. Adams, JD

Finding the Right TPA Partner

Bundled Versus Unbundled: 5 Myths

Resource ‘Full’?

What’s in a Name?     

(What Is) The Most Important Retirement Number

 What’s the most important number when it comes to retirement?

Once upon a time it might have been considered to be “65”—that traditional age for retirement—but even though it’s the default in many retirement calculators, until recently it hadn’t even been the most common age for actual retirement. Heck, it’s not even “good enough” for full Social Security benefits these days.[i] 

Perhaps a more precise focus number in retirement planning is the one that purports to provide some level of financial security in retirement[ii]—indeed, some years back there was a commercial that prompted folks to determine their “number”—a reference to a financial result that was deemed necessary to “retire the way you want” (and perhaps when you want, though that wasn’t part of the “pitch”).

But while that was (and is) “A” number, in order to get to it, for it to have any semblance of actually fulfilling that promise (premise?), you had to first get to several other numbers; how long you expected to live in retirement is a big one—and one dependent on another number, the age at which you planned/hoped to retire—not to mention how much you expected to need in order to live in retirement.  And that, generally, if somewhat unartfully, is typically considered to be dependent on yet another number—a percentage of the amount you lived on PRE-retirement—all of which might well turn out to be dependent on yet another number—the financial resources available to you. And that likely turns out to be a product of several other numbers—personal savings, pensions, Social Security—and yes, that’s even more math, as those often depend on other…numbers, as they are impacted by markets, taxes, drawdown rates, etc... 

Little wonder that surveys show that so many haven’t made even a single attempt to make that retirement readiness assessment—and that includes “guessing” at it.

Well, for my money (literally) there may not be one single most important number about retirement, but if you’re ever going to have decent shot at achieving a modicum of the peace of mind that long-term financial security provides, you need to have at least a sense of things, a reality “check” if you will. To that end, the Plan Sponsor Council of America’s annual 401(k) Day[iii] education campaign is a great place to start in terms of pulling together the numbers that will both tell you how much you need—as well as the all-important how much you have—to do the math, to—in the words of this year’s 401(k) Day campaign—“know your numbers.”[iv]

Let’s face it, if that most important number is when can you afford to retire—or at least to not have to rely on a regular paycheck—well, it may feel like you need a crystal ball—but you’ll have a better shot at accurately predicting that future if you start with some sense of not only where you want to be (and when), but where you are. 

So, whether you’ve never done “the math”—or done it a zillion times—this 401(k) Day it’s worth taking another look—to make sure things (still) add up—and to do that, you first need to know the numbers—your numbers—the most important number of all. 

- Nevin E. Adams, JD 

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[i] https://www.ssa.gov/benefits/retirement/planner/agereduction.html

[ii] Though these days I suppose that is more accurately described as that point in life when you no longer depend on a regular paycheck. 

[iii] For the past several years, the day after Labor Day has been designated 401(k) Day (yes, there’s a tie-in with labor/workers, but just as significantly, the Employee Retirement Income Security Act (ERISA) was signed into law by then-President Ford on the day after Labor Day in 1974).

[iv] For plan sponsors[iv]—and those who support their efforts—the campaign also brings forth some important numbers about the retirement plan that has been, and will likely continue to be, such an integral component of the financing of those longer-term goals and aspirations. Significantly, along with benchmarking resources like PSCA’s Annual Survey of Profit-Sharing and 401(k) Plans, it can also help you assess how your plan and plan design matches up against—well, the “competition.”

‘Standing,’ Still

Our industry has long fretted over how 401(k) participants will respond to volatile markets. And perhaps not surprisingly, these days the headlines are, generally speaking, full of “stay the course” assurances.   

That said, as recently as a month ago the headlines—even OUR headlines read things like “Light 401(k) Trades in July Even as Wall Street Posts Strong Month, Hot July Brought Cool 401(k) Traders, July Brings Much-Needed Calm to 401k Trading Activity, 401(k) Trading Light in July Despite Market Gains.” As though this is a surprising result.

In fact, as long as I can remember, our industry (or at least its headline writers) has long been somewhat amazed that participants have been as “resilient” in the face of volatile markets as they have—consistently—been over time. We’ve rationalized that ostensibly rational behavior in different ways, at different times. In 1987 (before there was daily trading in 401(k)s) it was said that the markets had come back before participants (via those once-a-quarter transfer windows) had a chance to respond. In 2001-2002, we told ourselves that our brilliant education programs (not to mention the ubiquitous “stay the course” messages) had an impact. In 2007-2008, we comforted ourselves with the notion that there was nowhere (else) to go (granted, that wasn’t really comforting).

Today—though it’s not really mentioned—I’d like to believe that it has something to do with the shift to professional asset allocation products[i]; target-date funds and managed accounts. After all, haven’t we told participants that the purpose of these platforms was to leave the business of investing to the professionals?

But whatever rationale we may want to apply, the reality has always been that there’s not much trading activity in 401(k) accounts, even during periods of extreme volatility and concern. This is routinely borne out by annual reports from Vanguard and Fidelity, and more frequently tracked (on a monthly basis) by Alight[ii]. Inevitably the commentary commends those who “stay the course,” because those who do transfer monies tend to “lock in” their losses, selling low and buying high. Those who do transfer serve as cautionary tales—perhaps even reassuring the participants who, once again, failed to do anything.      

The reality is that participants, generally speaking, aren’t really qualified to make these kind of investment decisions, particularly during periods of extreme volatility. Let’s face it, even the best self-directed investors typically have a day job that doesn’t allow the time or inclination to keep up with the markets, or the trends that underlie them (not to mention that some of those great investing ideas at 10:00 AM fade by the time that fund trading actually occurs at the market close). The advent of daily valuation allowed us to make quick, if not always wise, decisions—but, thankfully, most don’t. 

The bottom line is that while the counsel provided participants during times like these is generally “stay the course”—that counsel is valid only if the course you’re on was correct in the first place. 

  - Nevin E. Adams, JD

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[i] Indeed, Vanguard notes that in 2021, only 3% of all pure target-date fund investors made an exchange, a rate nearly five times lower than all other investors.

[ii] The Alight 401(k) index recorded 7.5 times normal trading on Feb. 22 as Russian troops massed near the Ukraine border, 2.9 times normal trading the next day, and 6 times normal trading on Feb. 24 when the invasion began.  But “normal” is “when the net daily movement of participants’ balances, as a percent of total 401(k) balances within the Alight Solutions 401(k) Index™, equals between 0.3 times and 1.5 times the average daily net activity of the preceding 12 months.” Vanguard’s assessment of 2021 activity is that only 8% of participants traded, and just 4.3% did in 2022 (through June 30) while Fidelity says just 5% did (and 85% of those only did so once). Principal reported 2.44% traded, according to a MarketWatch report.   

5 Dangerous Fiduciary Assumptions

There’s an old saying that when you assume… well, here are some assumptions that can create real headaches for retirement plan fiduciaries.

Assuming that the worst-case deadline for depositing participant contributions IS the deadline for depositing participant contributions.

The legal requirements for depositing contributions to the plan are perhaps the most widely misunderstood elements of plan administration. A delay in contribution deposits is also one of the most common signs that an employer is in financial trouble—and that the Labor Department is likely to investigate.

Note that the law requires that participant contributions be deposited in the plan as soon as it is reasonably possible to segregate them from the company’s assets, but no later than the 15th business day of the month following the payday. If employers can reasonably make the deposits sooner, they need to do so. Many have read the worst-case situation (the 15th business day of the month following) to be the legal requirement. It is not.

Assuming that not being required to have an investment policy statement means you don’t need to have an investment policy.

While plan advisers and consultants routinely counsel on the need for, and importance of, an investment policy statement (IPS), the reality is that the law does not require one, and thus, many plan sponsors—sometimes at the direction of legal counsel—choose not to put one in place.

Of course, while the law does not, in fact, specifically require a written 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, plan sponsors (and the advisors they work with) will find it easier to conduct the plan’s investment business in accordance with a set of established, prudent standards—if those standards are already in writing, 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.

Assuming that ERISA’s required fiduciary bond covers your liability as an ERISA plan fiduciary. 

These are two very different things with similar names. Suffice it to say that the Fidelity Bond required by ERISA protects the plan and its participants from potential malfeasance on the part of those who handle plan assets. The plan is the named insured in the fidelity bond. 

On the other hand, Fiduciary Liability Insurance typically protects the plan’s fiduciaries from claims of a breach of fiduciary responsibilities—an important protection since ERISA plan fiduciaries have personal liability, not only for their actions, but for the actions of their co-fiduciaries. The cost of the insurance can be paid by the employer or by the plan fiduciary—but not from plan assets.

Assuming that hiring a fiduciary keeps you from being a fiduciary.

ERISA has a couple of very specific exceptions through which you can limit—but not eliminate—fiduciary obligations. The first has to do with the specific decisions made by a qualified investment manager—and, even then, a plan sponsor/fiduciary remains responsible for the prudent selection and monitoring of that investment manager’s activities on behalf of the plan.

The second exception has to do with specific investment decisions made by properly informed and empowered individual participants in accordance with ERISA Section 404(c). Here also, even if the plan meets the 404(c) criteria (and it is by no means certain it will), the plan fiduciary remains responsible for the prudent selection and monitoring of the options on the investment menu (and, as the Tibble case reminds us, that obligation is ongoing).

Outside of these two exceptions, the plan sponsor/fiduciary is essentially responsible for the quality of the investments of the plan—including those that participants make. Oh, and hiring a 3(16) fiduciary? Still on the hook as a fiduciary for selecting that provider.

Assuming you have to figure it all out on your own.

ERISA imposes a duty of prudence on plan fiduciaries that is often referred to as one of the highest duties known to law—and for good reason. Those fiduciaries must act “with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.”

The “familiar with such matters” is the sticking point for those who might otherwise be inclined to simply adopt a “do unto others as you would have others do unto you” approach. Similarly, those who might be naturally predisposed toward a kind of Hippocratic, “first, do no harm” stance are afforded no such discretion under ERISA’s strictures. That said, the Department of Labor has stated that “[l]acking that expertise, a fiduciary will want to hire someone with that professional knowledge to carry out the investment and other functions.”

Simply stated, if you lack the skill, prudence and diligence of an expert in such matters, you are not only entitled to get help—you are expected to do so.

- Nevin E. Adams, JD

A Guide Path for Your Glide Path(s)

A recent report—and a new wave of litigation—reminds us that all target-date funds are not designed the same. 

We all know that target-date funds are different, even if their names sometimes suggest otherwise.  Different management teams both set and monitor asset allocations—allocations that can vary widely with regard to the type and quantity of underlying assets. Fees can certainly be different, and some favor a reliance on passive investing versus an active engagement. But the difference that can often account for many of the other differences is the glide path, and more specifically the glide path’s “goal”—and here I am referring to the difference between funds that opt for a “to” retirement versus a “through” retirement focus. 

Now, admittedly it’s a “target date” fund, not necessarily a retirement date fund—and indeed if those were once upon a time considered one and the same, that’s apparently no longer the case. Indeed, and as a recent stream of litigation reminds us, the largest target-date fund providers these days are nearly all in what we call “through” retirement date funds, meaning that their glidepath is designed to carry you past the traditional retirement date “through” to the end of your life.

That’s not an illogical approach—after all, once you get to 65, your odds of making it to 85 (or beyond) are surprisingly good, and two decades is a lifetime[i] (and then some) when it comes to investment time horizons. Indeed, and without question, target-date funds have been a godsend for millions and millions of individuals who are time-pressed and lacking in investment expertise. Let’s face it, even those who have a fair degree of investment acumen find it challenging to keep up with the demands of personal portfolio management alongside the demands of a daily schedule. 

That said, a recent Morningstar whitepaper cautioned (in its title, helpfully) “Plan Sponsors May Not Always Consider Participants’ Behavior or Needs When Selecting Target-Date Glide Paths.” That paper cautioned that “through” glidepaths generally include around 13 percentage points more in equity at age 65 than their peers invested in “to” glide paths, as the average “through” series holds 46% in stocks versus just 33% for the average “to” series. That makes them riskier (or at least more volatile), and potentially riskier than those defaulted into those options may know—or desire.

Therein lies the rub—the Morningstar paper also reminds us that nearly a decade ago the Labor Department provided some "Tips for ERISA Fiduciaries" regarding target-date funds. Tips that included the importance of “Establish[ing] a process for comparing and selecting TDFs,” under which the Labor Department suggested that plan fiduciaries “… should consider how well the TDF’s characteristics align with eligible employees’ ages and likely retirement dates. It also may be helpful for plan fiduciaries to discuss with their prospective TDF providers the possible significance of other characteristics of the participant population, such as participation in a traditional defined benefit pension plan offered by the employer, salary levels, turnover rates, contribution rates and withdrawal patterns.”

Considering the variety of workforce demographics, and the relatively small number of target-date providers garnering the majority of money flowing into TDFs, it seems unlikely that many plan sponsors have yet really focused on the Labor Department’s tips, specifically with regard to questions of demographic alignment with the TDF glidepaths. For those who haven’t, it’s certainly worth a (re)consideration. 

And while you’re at it, it might be a good idea to make sure that it’s aligned with the communication and education to the participants who’ve been placed upon them.

- Nevin E. Adams, JD

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[i] More cynically perhaps, one can understand and appreciate the interests of those designing the glidepaths in assuming that those invested there would choose to continue to retain that investment expertise, rather than cycle it down and reinvest in a completely different asset class.

‘Damned’ (Even) If You Do

 The flurry of lawsuits unleashed on holders of the BlackRock LifePath target-date funds is not without precedent—but it’s surely a head scratcher.

I’m referring, of course, to the recent swarm of lawsuits challenging nearly a dozen of the nation’s largest 401(k) plans and their decision(s) to select, and hold, on their investment menu the BlackRock LifePath target-date fund suite. It’s a decision that the Shah Miller law firm (on behalf of multiple ex-participant plaintiffs) says was the result of fiduciaries who “chased low fees” over performance.[i]

Of course, it’s not unusual for these types of lawsuits cite obscure articles as authority, rely on Form 5500 data that often doesn’t tell the whole story, state as fact things that are really only theories (or opinions), lean on averages, or base comparative conclusions on surveys distorted by sampling size or content. 

But in a characterization straight out of George Orwell’s 1984, this one draws straight from a point of analysis that, to my eyes, anyway, seems to say one thing while the plaintiffs’ attorneys claim to see something completely the opposite. “War is peace,” if you will.

Setting aside for a minute the reality that performance isn’t necessarily indicative of an imprudent process[ii]—and that it’s been far more common over the past two decades for fiduciaries to be challenged on the allegedly “excessive” fees than performance (though the latter is often tagged on to the fee claim), the plaintiffs here have challenged the selection of a fund suite that Morningstar has identified as among the “best” in that category—run by an “innovative team with topnotch resources.”

Nor is the Morningstar evaluation irrelevant here—indeed, the plaintiffs lean heavily on it to draw their conclusions of poor performance, though they do so primarily by challenging the benchmark, insisting that the suite be benchmarked against other target-date suites—despite their striking difference in focus and glidepath. See, the BlackRock series operates with a “to” retirement date focus, rather than the “through” retirement focus that most others in this space have now embraced (and all of the ones the plaintiffs point to). That means, of course, that the asset allocation, certainly in the components nearing retirement age, are more conservative than those that are managing for 20-30 years beyond that. And—in bull markets, anyway—more conservative often means lower performance. On the other hand—and certainly if your goal is to wind down your investment risk as you approach retirement… and here one can’t help but remember 2008… (not to mention 2022…) 

Not that the BlackRock glidepaths are overly conservative—in fact, the Morningstar commentary (and the lawsuits that cite it) acknowledge that for newer target date funds—those for younger investors—BlackRock’s have tended to be more equity-laden, at least compared with those the plaintiffs would have serve as its benchmark. This lawsuits seem to mistake this difference for some kind of “equity discrepancy,” rather than a deliberate, thoughtful glidepath, one oriented to do what all target-date funds once claimed to—to move to more conservative asset allocations as one neared the target date (and, arguably still do, though the “throughs” have a different endpoint in mind). 

There is, of course, a certain tendency among plan fiduciaries to seek the comfort of the pack in making plan design and investment decisions—which is understandable when one considers the personal liability that comes with that assignment. But these suits seem to create a not-so-subtle inference that any glidepath that varies from the through retirement “pack” is going to be viewed as imprudent—not based on a bad or unreasoned theory, but rather based on a specific time window when certain strategies simply don’t match those of different philosophies. 

So, how is this particular approach constructed? The analysts at Morningstar see it this way: “This index-based series benefits from BlackRock’s robust approach to asset allocation and a research-intensive culture. They keep costs low by investing exclusively in passive index funds, though this gives management fewer tools to outperform over shorter periods compared with more active strategies that can tactically tilt the portfolio or select talented active managers. Yet, the team continues to innovate, with current research looking at ways to get targeted fixed-income exposures across the glide path.”

The report goes on to note that, “Continuing to revisit prior assumptions and make proactive changes that are backed by rigorous research gives us confidence that the team will continue to evolve the series over the long term to investors’ benefit.”

Little wonder then that the BlackRock suite winds up with a “gold” Morningstar Analyst rating. 

What’s harder to figure out is why the plaintiffs’ bar decided to take to task the large plans and plan fiduciaries that opted for this suite and approach. 

Well, perhaps except for the obvious.

- Nevin E. Adams, JD

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[i] There were other allegations that varied with the plan targeted, but the LifePath funds and performance was the dominant claim.

[ii] At this juncture we have no way to know what processes, if any, the charged plan fiduciaries have in place to provide the prudent process and review required of plan fiduciaries—not that the plaintiffs have kept that from inferring its absence. 

Could ESG Options Undermine Participant Outcomes?

Despite surveys to the contrary, a new study finds that overall interest in ESG strategies by participants is “relatively weak” and “driven by naïve diversification.”

The difference may, of course, be attributed to the difference between what individuals say—and what they actually do. Unlike surveys that purport to capture participant (and plan sponsor) sentiments, the research by David Blanchett of PGIM and Zhikun Liu of the Employee Benefit Research Institute (EBRI) looks at the actual allocation decisions of 9,324[i] newly enrolled DC participants who are self-directing their accounts in a DC plan that offers at least one ESG fund. 

‘Weak Preferences’

They do so in a paper titled “ESG Fund Allocations Among New, Do-It-Yourself Defined Contribution Plan Participants,” they claim to find that overall interest in ESG strategies among these participants is “relatively weak,” with only 8.9% of participants having any allocation to an ESG fund and average allocations to ESG strategies of just 18.7% among those holding any ESG funds.[ii] Indeed, while they note “some clear demographic preferences for ESG funds (e.g., among younger participants with higher incomes),” they find that ESG allocations appear to be “primarily a function of weak preferences, driven by naïve diversification.”

Now, that hardly sounds like the heightened interest and engagement with those options that some participant surveys have captured (well, aside from that by younger participants with higher deferral rates and higher incomes). However, the research claims that the two factors which appeared to drive the largest allocations to ESG funds were not related to participant demographics, but rather the number of funds in the participant portfolio and the percentage of participants in the respective DC plan allocating to an ESG fund. 

If that seems a confusing descriptor, they found a “notable increase” in the probability of owning an ESG fund as the number of portfolio holdings increases—basically, the more funds the individual holds, the more likely he or she is to have an ESG offering among them. This tendency they characterized as attributable to “naïve diversification”—again, basically, if you’re simply picking a larger number of funds overall, then they concluded that the decision to allocate to the ESG fund is “likely based on a weak preference, not necessarily conviction in ESG.” Said another way, if you’re picking a lot of different funds, the more you pick, the better the odds that an ESG fund will (randomly) be among them.

On the other hand, those looking for a more optimistic future for ESG might take heart from their conclusion that “the fact ESG allocations increase as more participants in a plan allocate to ESG funds suggests plan interest effects could be an especially strong driver of future growth in ESG funds (despite relatively low usage today).” In fact, they noted a “notable plan interest effect, whereby ESG allocations are significantly higher in plans where general ESG usage is higher.”

Plan Sponsor Cautions

That said, the current decision-making by those participants appears to be “sub-optimal” (worse than you might expect) from a return standpoint—with the researchers here basically finding that participants who self-direct their portfolios have significantly lower expected returns than those using professionally managed investment options, such as target-date funds—something that proponents of professionally managed asset allocation solutions shouldn’t find surprising. To put it another way, those more likely to pick ESG funds are more likely to be the “do it yourself” (DIY) types—and those don’t do as well as those professionally managed solutions. This, as the researchers point out, can be an “important consideration for plan sponsors when adding ESG funds to the core menu to the extent they entice participants to self-direct their accounts.” So, adding an ESG fund might encourage more DIY investing by those interested in ESG—and that interest pulls them away from the professionally managed, higher-returning alternatives.   

In fact, an additional analysis suggests that those DIY participants have expected returns that are approximately 100 basis points lower than investors using professionally managed portfolios, such as target-date funds and managed accounts. And this, the researchers comment, suggests that adding ESG funds to core menus may create additional implicit return “costs” for participants—by adding those options that encourage participants to make choices other than professionally managed multi-asset options (e.g., target-date funds).[iii]

Overall, the researchers comment that their analysis paints a “mixed picture about the actual participant interest, and drivers of demand, for ESG funds in DC plans and suggests that plan sponsors should take a thoughtful approach when considering adding ESG funds to an existing core menu.”

Or—it seems fair to say—when adding (or subtracting) any funds at all.

- Nevin E. Adams, JD

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[i] Of the 9,324 participants included in the dataset, only 833 had some allocation to an ESG fund, which is 8.9% of the total.

[ii] Among participants with an allocation to an ESG fund, the average allocation was 18.7%, with a standard deviation of 19.0%. The total average balance allocation to ESG funds is 1.7% (including all participants). There are only 56 participants (0.6% of the total) with ESG allocations greater than 50% of their balance and only 19 participants (0.2% of the total) with 100% of their balance in ESG funds. “In other words, even among participants who select the ESG funds, they almost always play a relatively supporting role as part of the overall portfolio.”

[iii] Some of the issues here are no doubt a consequence of current menu constructions. In the sampling studied, no plan offered more than five ESG funds, and the vast majority (approximately 76%) offered only one ESG fund. “This suggests it would be relatively difficult to build a diversified portfolio using only the ESG funds in DC plans currently,” the authors note. Moreover—and adding to the reality that it is “relatively difficult to build a truly diversified portfolio using only ESG funds”—they explain that roughly half of all ESG funds available are large blend funds. Only 13 of the funds (8.7% of the identifiable category total) are fixed income funds, and only 12 (8.1% of the identifiable total) are balanced funds. “The difficulty associated with building a diversified portfolio with only ESG funds has important implications on overall portfolio efficiency. If allocating to ESG funds requires participants to opt out of using a professionally managed portfolio option (e.g., target-date funds or retirement managed accounts), it may negatively impact future expected returns”—a cost the authors say they plan to quantify in a future work.

Are We Worrying About the ‘Right’ Retirement Risks?

As if there wasn’t enough to worry about regarding retirement—a new research paper suggests we’re not worrying about the “right” things.

More precisely, that paper, published by the Center for Retirement Research at Boston College, was titled, “How Well Do Retirees Assess the Risks They Face in Retirement?” And, as you might suppose, the answer provided at the conclusion of the paper is—“not very well.” 

The premise of the paper relies on the author’s identification of five major risks in retirement, which turn out to be:

• Longevity risk (the risk of outliving one’s resources)
• Market risk (the financial risk not only from the markets, but from things like the housing market)
• Health risk (the risk of unexpected medical and long-term care expenses)
• Family risk (the risks arising from divorce, death, or the unexpected illness of an adult child)
• Policy risk (notably the sustainability at current benefit levels of Social Security)

Arguably, all of these are legitimate risks that need to be considered and dealt with as part of any reasonable retirement plan, though one might argue that even these aren’t exhaustive (consider, for example, inflation—but more on that in a moment).

The paper’s author performs some statistical alchemy and then determines that the three top risks retirees should be worrying about are:

(1) longevity; (2) health; and (3) market.

But, according to the author’s analysis retirees are most worried about are:

(1) market; (2) longevity; and (3) health.

Now, despite the headlines[i] that followed the publication—and aside from the specific ordering—those actually seem to match up pretty well to me. However, the “point” seems to be that retirees are more worried about the market than they “should” be, that the bigger risks to their retirement are that they might outlive their savings—and/or that their bad health might drain them faster than expected—but they’re focused on the market impact on savings. Bottom line: retirees are worried about the “wrong” things.

At this point, a couple of points should be made. First, the assessment of what these retirees are worried about was drawn from 2016 data. And secondly, the conclusions about what retirees are concerned about are gleaned from a series of questions in that databank[ii]—which, with the “help” of the author’s calculations, are turned into those weighted sentiments of concern. And then, having crafted some subjective sense of the relative concerns of those elements, the author purports to establish the “objective” benchmark against which they are to be judged. 

Market risk falls relatively low on this scale because of his assumed 20-year investment horizon in retirement, though retirees may lack that confidence, particularly these days.

The paper’s author concludes by highlighting the need to educate the public on these various retirement risks (and presumably their relative importance, based on their likely impact), most specifically the need for lifetime income products (to shield against the longevity risk) and long-term care support (to buffer against the health care concerns).

Now, I’d argue that a judgment based on subjective 2016 data doesn’t tell us much about what retirees (particularly these days) are actually concerned about—and even if it did, it doesn’t seem to me that there’s enough difference in priorities to matter. 

To me, it’s not so much which risks retirees are concerned about, much less their ordering—but that they are aware of the potential risks and seeking help on how best to mitigate them. But what I do think is important—and here I agree with the study’s author—is (more) education about the multiple potential risks to retirement security—and not just for those already in retirement, but for those of us still trying to make preparations against those risks. 

- Nevin E. Adams, JD

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[i] Retirees are underestimating retirement risk, study finds, Seniors Badly Misjudge Key Retirement Risks, When saving for retirement, seniors overestimate market volatility and underestimate life expectancy.

[ii] The source data—the Health and Retirement Study (HRS)—asks respondents to assess the probability of various outcomes. The respondents give a number from 0 to 100, where 0 means absolutely no chance and 100 means absolutely sure to happen. And for these purposes, the questions ranged from “the probability that stocks will be worth more next year than they are today,” to the chance of gaining 20% or more over the next year and the chance of losing 20% or more, to the probability of the probability of spending $1,500 or more in the coming year on health care.

The Sure Not-So-Sure Thing

 By some accounts, I just spent the past week in “retirement”—driving around sightseeing, reading some good books, hanging out with family, and yes—even walking on a beach.

And I have to tell you—if that was retirement, I don’t know how I’m going to afford it.

Now, I realize that isn’t the stuff of most “real” retirements, though it is frequently the stuff of retirement planning brochures. My week was a family vacation, and it was spent doing the things that families do on vacations.[i] And it served as a stark reminder that while sitting on a beach doesn’t cost much, making arrangements to stay—and eat—in proximity to the aforementioned beach is a whole other financial consideration.

That said, when those actually in retirement are asked about their retirement confidence—well, it’s pretty high. According to the Employee Benefit Research Institute/Greenwald Associates annual Retirement Confidence Survey, 77% of current retirees report feeling either very (33%) or somewhat confident about having enough money to live comfortably throughout their retirement years. All of which suggests that if there’s a lot of uncertainty about what retirement will be like/cost, once you’re “in it”—well, you both have a sense of what it’s going to cost, and how much you have to cover it.[ii] That, by the way, despite the reality that the same RCS has for years found that significant numbers of individuals have found themselves in retirement through no choice of their own[iii]—sometimes due to health, sometimes due to employment-related decisions. 

Today we are looking at an unusual confluence of events: a tight job market in the middle of what has been termed the “Great Resignation,” surging inflation at rates not seen in a generation, and investment markets that, after a remarkable run-up—well, let’s just say it’s been rough on most 401(k) accounts. We’re getting the same kinds of investment advice we always do/give during such downturns—but one can’t help but wonder if it’s “different” this time—if the disruptions are anything but “transitory.”

“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, or deal with the financial consequences of an unexpected medical emergency (or that of a loved one). That this happens at the same time that your investment portfolio is taking a sustained “hit” contributes to the sense of economic pessimism that garners so much press, polling and political aspirant attention in this election season. Without question, things cost more than they did (when you can find them on the store shelf), and those on fixed incomes (and that includes a growing number of current workers who perhaps haven’t gotten a pay increase in a while) have to make “adjustments”—often painful ones. And if all of this doesn’t warrant changes in financial plans, it certainly warrants a new level of discussion about them.  

Perhaps the only “sure” things are death and taxes after all—but the lesson for those of us still drawing a paycheck and planning for retirement is the importance of preparing for that third “sure” thing when it comes to retirement planning: uncertainty.

- Nevin E. Adams, JD

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[i] In fairness, we also spend a day tracking down the gravesites of some ancestors, and that probably isn’t on most vacation agendas!

[ii] It’s worth highlighting, of course, that workers reporting they or their spouse have money in a DC plan or IRA or have benefits in a DB plan from a current or previous employer are twice as likely as those without any of these plans to be at least somewhat confident (83% with a plan vs. 40% without one). 

[iii] In the 2022 RCS, 32% who retired earlier than planned say they did so because of a hardship, such as a health problem or disability, not related to COVID-19. Another 23% say that they retired due to changes at their company, but 38% say they could afford to retire earlier.

Back to ‘Normal’?

Things are—slowly—getting back to normal. Planes are filling up, commutes are slowing with increased traffic volumes, and in-person meetings are back underway. 

And while for many readers things have been back to “normal” for some time, I’ve had the opportunity over the past two months to participate in three separate advisor events that were the first such in-person gatherings since the onset of the pandemic.

We’ve learned not only how to navigate things like virtual committee meetings and education sessions, but found that in many cases those platforms could be even more effective in extending our reach to individuals who might not have made it to an in-person session, or who might have been more receptive to those messages in the wake of COVID concerns about health and job security. 

While we’re not quite “done” with COVID (and perhaps we never will be), we’ve learned a lot of valuable lessons. The notion that we have to be in a physical office to be productive has been soundly rebuffed. At the same time, in every in-person gathering I have had the opportunity to be part of these past several months, there is an energy, an excitement, an enthusiasm that transcends any I’ve experienced in even the most engaging “virtual” formats. Oh, one day in the distant future we may not need that social connection—or perhaps we’ll simply tell ourselves that whatever is “lost” is more than compensated for by the convenience and cost savings of remote engagement.

But “those” days aren’t yet these days—and in just a couple of weeks we’ll be convening—in person—for our 10th annual NAPA D.C. Fly-In Forum. I still remember attending the first one as a “special guest,” and being struck even then by the quality of the program and speakers. More importantly, the room was full then—as it continues to be—of the nation’s leading retirement plan advisors, networking and engaging not only with each other, but with some of the most influential voices in Washington.

This year looks to be no exception—and as impactful as last year’s “virtual” version surely was, it really can’t compete with the reality of an in-person event—not to mention the opportunity to walk to—and through—our nation’s Capitol. 

We’ll have a lot to talk about—while the Labor Department’s next steps on the so-called fiduciary rule and ESG rules have just been pushed back, the final proscriptions of PTE 2020-02 have just taken hold (notably the requirement to document, in writing, the best interest case for a rollover recommendation), and the controversy regarding the recent compliance assistance release on cryptocurrency is still reverberating. 

This year’s Fly-In Forum will feature comments from Ali Khawar, who has been serving as Acting Assistant Secretary for the EBSA, as well as Zeena Abdul-Rahman, Branch Chief, Investment Company Rulemaking Office, Division of Investment Management at U.S. Securities and Exchange Commission to speak to ESG, as well as a very special panel of Hill staffers for some “inside the Beltway” perspective, and a panel of expert ERISA litigators to discuss recent developments, and provide insights on staying out of court. And no NAPA D.C. Fly-in Forum would be complete without the appearance of key legislators, which this year will include Sens. Ben Cardin (D-MD), John Barrasso (R-WY) and Rob Portman (R-OH) to shed light on the incredible opportunities contained in SECURE 2.0, RISE & SHINE, the EARN Act, and/or the combination/assimilation of all of the foregoing.   

But for me—and for the dozens of advisors who have participated over the past 10 years—the most impressive aspect of our Fly-In Forum is the second day, where delegate-advisors have an opportunity, assisted (and prepped) by the NAPA GAC team, to meet with legislators and their staff on Capitol Hill, to share your perspectives, ideas and concerns, based on your front-line, real-life experiences working with retirement plans, plan sponsors and participants. Heading into a crucial mid-term election cycle, your voice—your insights and perspectives—have never been more critical.

Whether you’ve done this a dozen times, or have never had the opportunity, the NAPA D.C. Fly-In Forum is an amazing “first-hand” experience. For those ready to get off the sidelines and contribute to a real difference in retirement policy, you won’t find a better “ticket” than the NAPA D.C. Fly-In Forum.

Things may be getting back to “normal”—but it’s anything but business as usual.

- Nevin E. Adams, JD

Looking Before You 'Leap'

As new rules about rollover disclosures kick in, a new report highlights an often unacknowledged risk of rollovers—high(er) fees.

That’s right—a new report from Pew Trusts seems to have stirred up a new awareness of that issue—all this attention just as PTE 2020-02 brings the written requirement of why a rollover is in the best interests of participants into play.

That difference shouldn’t come as a surprise to anyone who has ever compared the fees in their 401(k) to an IRA. Most 401(k)s benefit from institutional pricing, and if the menu of available investment options isn’t quite as broad as that in an IRA, they benefit from the selection and monitoring by ERISA fiduciaries. Yes, IRAs are just that—individual retirement accounts—smaller, generally speaking with more options—and yes, much more likely to be charged retail mutual fund fees—more expensive. In that sense the report—though it’s garnered headlines of late—doesn’t really tell us anything we didn’t know, if we’d only stop to acknowledge it. 

However, sure as I am willing to accept the conclusions based on both personal experience and professional acumen, I am a tad skeptical in the results of the analysis. The title is truer than one might expect. The title of the report speaks volumes as it says: “Small Differences in Mutual Fund Fees Can Cut Billions From Americans' Retirement Savings.” Because, after all, it surely could—but does it?

The report that is garnering so much attention now claims that, in the aggregate, the amount of retirement savings lost in such rollovers potentially reaches tens of billions of dollars. Citing data from the Investment Company Institute, the report notes that in 2018 alone, investors rolled $516.7 billion from employer retirement plans into traditional IRAs. They go on to assert that an analysis of fee differentials suggests that over a hypothetical retirement period of 25 years, those retail investors could see an aggregate reduction in savings of about $45.5 billion—just from that single year of rollovers.

Math ‘Problems’

The analysis—based on data from Survivor-Bias-Free U.S. Mutual Fund Database, Center for Research in Security Prices—though it relies on medians and averages for its fee conclusions—and, based on those, it asserts that annual expenses for median retail shares (ostensibly what you’d have access to in an IRA) were 0.34 percentage points higher than those for institutional shares (again, ostensibly what you’d have access to via your typical 401(k). Similar projections are presented for hybrid, and for what the analysis purports to be the smallest median fee difference. Having chosen these points of reference, the analysis simply does the math.[i]

Rollover Rationales

Regardless of the size of the differential—what role, if any, do fees play in these rollover decisions? Suffice it to say—not much. 

At least according to another report[ii] published last September by Pew, based on a survey of 1,125 older workers and recent retirees ages 55 to 75 between May 12 and June 5, 2020—roughly half currently and the rest working full time, though all had at least $30,000 in retirement savings. The survey asked participants a series of questions about whom they had consulted in deciding what to do with their retirement savings and how they planned to handle their savings (in the case of those still working), or what they had done with their savings (in the case of retirees).

Now, there are many reasons underlying the distribution decision—fees, convenience, investment options—but when the workers weighed in they said they were most motivated to stay in their current plan because they preferred the investment options—a reason cited by 50% of respondents as the most important reason, and mentioned by nearly three-quarters (73%) as at least one reason why they intend to leave their savings in their current plan when they retire. Not surprisingly—since those surveyed had at least $30,000 in savings—more than half felt that staying in their current plan would be convenient.

On the other hand, only about 3 in 10 were motivated to plan on keeping their savings in their current plan because they thought it would have lower fees than other options, and a mere 15% said lower fees in their current plan was the most important reason for planning to leave their savings where they are.

‘Control’ Voice

Near-retirees planning to roll their savings into an IRA at retirement were similarly motivated by convenience and investment options, according to the report. However, the strongest motivating factor for those respondents was the ability to have greater control over their investments, with more than 6 in 10 (63%) saying that was one reason that they planned to roll their workplace savings into an IRA, while for nearly 4 in 10 it was the most important reason. Roughly a quarter said that investment performance was behind their plan to move their savings into an IRA when they retired, and the same number actually said it was because the IRA had lower fees. 

Control was most important among retirees as well; about 18% of retirees cited lower fees as a reason for rolling over their savings, slightly less than the 25% of near retirees who cited fees as a reason—more specifically that the IRA had lower fees than their current plan. Only 4% of retirees said it was the most important reason, nearly identical to the 3% of near retirees who said the same.

Said another way, fees were not a major consideration in the rollover decision—and when it did manifest itself as a reason, it was because the IRA fees were believed to be lower than their current plan. Which, again, in view of certain market realities, suggests that those workers didn’t appreciate/understand the fees paid in their 401(k).  

The reality is, a small difference in mutual fund fees can cut billions from Americans’ savings—an impact that, unfortunately, many of those contemplating a rollover may not realize[iii] or prioritize in their decisions. 

That said, while those new disclosures documenting why a rollover is in the participants’ best interest may not solve the problem—they should make it easier for advisors to help them better understand what they may be giving up. And perhaps all of this attention to this important issue will help participants who aren't working with an advisor to "look" before they simply leap... 

- Nevin E. Adams, JD

[i] While the comparisons are certainly “directionally” accurate assuming the math is correct, the size and scope of the impact surely suffer from the imprecision of the markers employed. But considering the sheer size of the rollover market (it now outpaces that of the 401(k), it’s surely a significant amount.

[ii] Pew Survey Explores Consumer Trend to Roll Over Workplace Savings Into IRA Plans

[iii] The Pew report notes that “although few said that they would continue a rollover into an IRA with higher fees than their workplace plan, previous research by Pew has shown that many people struggle to fully understand their investment fees. Just 25% of workers in an earlier Pew survey said that they had read and understood the fee disclosure of their retirement account. 

Dividing Lines

 It’s been said that there remains more that unites us than divides us—but that’s not how it feels most days. 

However, such times are not all that unusual for this diverse nation. Indeed, if today’s battle lines do seem harsher and more extreme, my sense is that it’s only because they are magnified by media and social media, transported to us every minute of the day and night by devices we dare not relinquish any longer than to recharge the battery.

Consider the nation’s declaration of independence which we will commemorate on Monday. Students of history—not to mention aficionados of the musical 1776 or readers of David McCullough’s John Adams or viewers of its HBO miniseries adaptation—know that the decision to declare independence was no easy matter. Indeed, the political bartering and frustrations involved in getting to a “unanimous Declaration of the thirteen United States of America” would have been all-too familiar to the legislators of today. Even then, it was declared to be “unanimous” only because one of the 13 colonies voting was persuaded to abstain from the vote rather than oppose it. 

While we celebrate the Fourth of July as Independence Day, that is neither the day on which the Continental Congress passed the resolution (July 2), nor the day on which the declaration was signed by the members of that Congress (only President of Congress John Hancock and Charles Thomson, Secretary, signed it on the 4th (the former in a hand “large enough for King George to read without his spectacles”). Most delegates didn't sign it until August 2. One didn't sign until 1781. Three delegates never signed.

The signers—who stood to lose everything they possessed, including their lives—surely did so with trepidation. Indeed, Hancock reportedly said at the signing (on August 2) that they must all stick together—to which Benjamin Franklin reportedly responded, “Yes, we must, indeed, all hang together, or most assuredly we shall all hang separately.” 

Of course, that declaration was neither the beginning nor the end. Hostilities with England had already been underway for more than a year, the terrible winter at Valley Forge was more than a year in the future, General Cornwallis’ surrender at Yorktown was still more than five years off, and an official end to the hostilities would not come until 1783. 

Invoking the Vision

Less than 100 years later, even as the nation approached another Independence Day celebration, President Abraham Lincoln would find himself in the middle of an enormously unpopular war fought to keep the nation together, while two American armies converged at Gettysburg for what would be the bloodiest battle in the nation’s history. Even so, President Lincoln later that year invoked the vision of the nation’s founders to launch his Gettysburg Address with the words; “Four score and seven years ago our fathers brought forth on this continent, a new nation, conceived in liberty, and dedicated to the proposition that all men are created equal.” This at a time when the outcome of that conflict—and his own reelection prospects a year later—were anything but certain. 

Without question we live in times of great social distress, where it seems that everything, literally everything, has been polarized and politicized into divergent and irreconcilable camps. Those looking for common ground or points of potential agreement seem to be few and far between, while those seeking compromise are typically condemned for trying. Indeed, the choices our nation faces today—on terrorism, the fighting in Ukraine, health care, energy costs, inflation, the economy, and yes, even retirement savings[i]—seem relatively modest in scope when considered next to the daunting prospects our forefathers faced in 1776. What they could not have had at that time—but what their vision has surely bequeathed to us—is a confidence in what we now consider American ideals and the resilience of the American spirit.

Their sacrifices were made a long time ago—and the liberties they fought to win, and later to preserve, are so interwoven into the fabric of our day-to-day expectations that it is easy to forget just how precious and rare they remain in this world. 

With all its faults, all its frailties, what we have here remains a special gift. It’s a national treasure we should appreciate every day—even if we only celebrate it once a year. 

- Nevin E. Adams, JD

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[i] Those of us who have committed ourselves to build, expand and nurture a more secure retirement for American workers have to find solace in the overwhelmingly bipartisan legislative efforts—both in recent months, and before—in support of that goal. 

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

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[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.