Friday, May 17, 2013

DOL Takes Next Step Toward Lifetime Income Rules

If we were to identify one message that towers over all others in the retirement savings realm, it would be that the typical American is saving far too little to assure a financially comfortable retirement.   We can talk all we want to about whether retirement plans offer the most prudent investment offerings, whether fees associated with these plans and the underlying investments are appropriate, and whether workers are being adequately educated to make the right investing decisions.  But the one critical thing that improvements in these areas will not alter is the fact that the typical participant is not saving enough to start with.
This inescapable truth is certainly one of the motivators for the current focus of lawmakers and regulators on providing plan participants and beneficiaries with projections of the resources they will have during the years after their retirement.  “Lifetime income streams” is the operative term, and the latest manifestation is the advance notice of proposed rulemaking (ANPRM) issued by the Department of Labor’s Employee Benefits Security Administration (EBSA), and published on May 8th in the Federal Register.  This proposal and request for public comment describes the lifetime income projections EBSA is considering requiring on benefit statements provided to plan participants and beneficiaries.  They include projecting future retirement accumulations if a worker continues to save, as well as estimates of monthly income for life, based both on current retirement assets, and estimated assets with continued saving. 
Fear can be a great motivator, and fear of an impoverished retirement could well be the result of these lifetime income projections.  If it is demonstrated to workers that current balances or current retirement saving patterns cannot be counted on to produce assets that will last through retirement or sustain an individual’s lifestyle, it appears that EBSA’s hope is that this will be the motivator that leads workers to change their behavior and save more. 
One of the things a bit surprising about EBSA’s recent release was that it stopped short of the status of proposed regulations.  This, after EBSA had collected over 700 public comments since 2010 on how best to present lifetime income information to participants and beneficiaries.  Some speculate that by laying out the agency’s preferred options, while at the same time asking for comment on them, EBSA is casting itself as more responsive, perhaps avoiding criticism for issuing a set of rules without adequate opportunity for interested groups to respond.  We well remember EBSA presenting fiduciary definition regulations in October of 2010, only to withdraw them in November of 2011 in the face of heavy and organized opposition.  Perhaps EBSA wants to avoid a déjà vu experience.
One of the themes we are already hearing in industry responses is that it would be much simpler to require projections only over single life expectancy.  This, it’s being said, would make it unnecessary to track marital status in order to make projections over joint life expectancy for married participants, with further complexity if a 50 percent survivor benefit is required.  A single life projection would certainly be simpler.  But, given Congress’ and the Tax Code’s history of protecting spousal retirement benefits, this is a position I believe EBSA is unlikely to adopt.  Adding to this is the consideration that a lifetime income projection based on a single life expectancy would yield a significantly higher monthly benefit than if it were calculated over joint life expectancy with a 50 percent survivor benefit.  Such a projection would be out of sync with the combined life expectancy of—and assets needed by—a typical couple. 
At least one of the elements of EBSA’s release will likely be seen differently by various groups and can be seen as a mixed blessing.  It is the proposed flexibility to use either an EBSA-provided safe harbor, or—alternatively—a reasonableness standard, both when projecting potential future retirement accumulations, and converting current and potential future balances to monthly lifetime income.  Flexibility is always appreciated in our industry.  The ability to use projections, calculators and methods that some have already developed and are using will be appreciated.   On the flip side, if one plan uses the EBSA-provided safe harbors and another plan uses “reasonable” assumptions for contributions, interest rates, mortality, etc., then similarly situated individuals could have lifetime income projections that differ, potentially greatly.  This could invite plan-to-plan comparisons that may be misleading, and leave participants or beneficiaries believing that one plan’s investment performance is superior, when in fact this may not be so.  It will be interesting to see the responses EBSA receives related to this part of their proposal.
EBSA has not indicated when it intends to act upon the responses received during the public comment period that ends July 8, 2013. The agency has suggested the possibility that it might stop short of issuing actual regulations on lifetime income streams if it can find an alternate means of achieving its objective. However, it seems highly unlikely that EBSA would willingly allow a purely voluntary delivery of lifetime income projections to plan participants and beneficiaries.  More to come on this as it will continue to be an area of focus in the coming months and years.

Monday, May 6, 2013

PBS Frontline Presents "Fuzzy" Retirement Plan Picture

In today’s world of ever-expanding communication channels, both formal and informal, the lines between journalism, opinion and entertainment are increasingly becoming blurred.   The Public Broadcasting System (PBS) television “documentary” The Retirement Gamble, aired on April 23rd on many PBS stations, is a good example of this. 

“Documentary” is in quotes here because in my opinion this presentation did not live up to the standards of the balanced journalism one would expect of PBS.  Rather than a presentation of information and facts, which is what a documentary is generally thought to be, this was an uncharacteristically simplistic, soap opera-like, and—least pardonable—unbalanced and biased program with an apparent agenda.  Two of its primary sources of information were academics who are well-known foes of 401(k) plans, and of plan participants being responsible for directing their own investments.  While Frontline did present interviews from some highly-placed persons at several investment firms that are significant players in the retirement industry, it seems they chose very small portions of the interviews to televise that were  intentionally designed to make these individuals look unsure and ill-informed.  We also know that others in the retirement industry were interviewed at length but Frontline chose not to present those interviews and that side of the retirement story.  It appears that interviews that presented ideas, suggestions or conclusions contrary to the program’s agenda, were not included.  Definitely not an unbiased or balanced approach. 

A main take-away for the typical viewer is likely to be that American workers will have inadequate retirement assets because they are being fleeced by the mutual fund industry, through fees charged for their investments.  Another impression may be that there is no meaningful oversight by regulatory agencies charged with protecting the interests of workers who save for retirement, something that recent DOL and IRS regulatory history would tend to refute.

It would be unbalanced on my part to claim that there are never conflicts of interest in the retirement plan investment, service and administration environments.  We live in a largely for-profit, capitalistic world, where personal gain is a driving force in the economy of our country and other nations.  Human imperfection being what it is, there are occasional abuses.

Sometimes, however, what one man portrays as abuse may be another man’s reasonable reward for his efforts, time and talent.  Portraying issues in black and white terms is convenient when trying to win a debate, support a thesis, or sway audience opinions.  But such clear distinctions are not so common in the real world.  As journalist and essayist H. L. Mencken put it, “For every complex problem there is a simple solution, and it’s wrong.”

That said, there is certainly a place for seeking—for mandating—honesty and fair dealing, especially in environments where the in expertise of others—such as a retirement investor—makes them vulnerable to being misled and taken advantage of.  But, rather than the unregulated, exploitative plan administration and investment environment that Frontline presents, we and others in the industry believe we are moving steadily in a direction that protects the retirement plan participant.  This is happening through regulations addressing fee disclosure, investment performance, investment advice, automatic employee enrollment, and more importantly, a genuine desire on the part of many retirement professionals to help participants achieve a secure retirement.

Some may argue that in a perfect world a retirement plan participant would be able to invest his or her retirement plan contributions without any sales charge, advisory fee, marketing fee, surrender charge, or expense of any kind.  But that world does not and cannot ever exist.  In such a world there would be no incentive for professionals in the investment and retirement industries to provide the services and support that plans and plan participants need.

Also not stated by Frontline was the fact that there are fees associated with investments outside of retirement plans, whether they are mutual funds, annuities, or some other investment vehicle.  Charges are not unique to retirement investing.  The reality is that investing through one’s retirement plan often results in lower charges due to the types of investments, share classes, and volume of dollars being invested.   No less important, there can be equally great—or greater—undesirable long-term consequences for not investing at all, or investing too conservatively. 

Are 401(k) plans as they exist today the perfect solution to a secure retirement for all Americans?  Perhaps not perfect, but they are an extremely valuable and beneficial tool.  A secure retirement, like employment, health, personal happiness, and many other things, has never been a guarantee.  In the absence of a government-mandated or operated retirement system, American workers must use the tools available to them.  Can we sharpen those tools, or add new ones to our tool kit to do the job better?  Yes.  But it’s important that we not fail to appreciate and properly use those tools available to us now, as we work toward perfecting them.