DOL Stretches Credibility and Precedent in New State Plans Guidance

Several months ago, when the retirement industry was chiefly absorbed in the Department of Labor’s proposed conflicted advice regulations, a colleague commented that many would be surprised by soon-to-be-released guidance on state-based retirement savings programs.  True to this prediction, the guidance issued on November 18^th by the DOL’s Employee Benefits Security Administration (EBSA) has given us all something more to ponder, and – at the risk of being called alarmist – perhaps to be quite concerned about. 

As hinted at by Labor Secretary Thomas Perez shortly before the November guidance was released, the agency issued both proposed regulations on state-mandated payroll withholding IRA programs, and also sub-regulatory guidance – Interpretive Bulletin 2015-02 – on state-coordinated ERISA-type plans.  FAQs accompanied the release, as well.  

The more than two dozen states that have taken steps toward implementing state-coordinated retirement solutions have been overwhelmingly interested in payroll withholding IRA programs.  If they proceed, most are expected to mandate that all but the smallest employers must offer such a program if they have no conventional retirement plan.  But given the political divisions that exist all the way from Washington down to local levels, whether this will happen in any given state is anything but certain. 

A small minority of states, at least until now, have shown interest in becoming involved in ERISA-style retirement plans for private sector employers and their workers.  This may change as the new EBSA guidance is digested, especially given the DOL’s very accommodating stance in Interpretive Bulletin 2015-02, offering several options for state involvement in ERISA plans for private sector employers.  This prospect should be of major concern to practitioners and providers in the employer-sponsored retirement plan space. 

It’s hard to fault state legislators and policymakers for taking the initiative on behalf of “plan-less” private sector workers within their borders.  They’ve watched the senators and congressmen they sent to Washington unable to make progress in broadening or enhancing options for their citizens to have greater retirement security.  If something is going to happen, the states’ seem to be concluding that they will have to act on their own instead of waiting for Congress.

I have to remind myself that those in the Department of Labor who drafted this guidance no doubt have good intentions and defensible motives.  They want to see more Americans better prepared to enter their retirement years with adequate financial resources.  But intentions and motives do not by themselves make good guidance or policy. 

Reasonable minds may differ regarding the things government should manage in a free market economy like ours.  But – such philosophical differences notwithstanding – is there any reason to expect that a state will do a better job of managing a retirement program than the private sector?  A number of states’ and other governmental units’ pension systems are in woeful shape.  There also is no shortage of examples of unprincipled use of political power and influence at the state level.  Can we be assured that this will not spill over into the administration of a state-sponsored retirement plan encouraged by this guidance?  One of the reasons ERISA was enacted was to provide both fairness and uniformity in the administration of retirement plans, and there is little reason to expect that every state will do an equally good job of it.

But, even if we accept the premise that state government-coordinated retirement programs for private sector workers are a reasonable way to broaden coverage and participation, there are parts of this DOL guidance that don’t pass muster.  The industry is justifiably asking how the agency could have reached some of its conclusions about acceptable state plan structures.

For instance, DOL takes the position that a state government could set up what would be called an “open MEP,” a multiple employer plan for employers that have no common interest, purpose, or ownership.  This is something that DOL has expressly and aggressively forbade in such recent guidance as Advisory Opinion 2012-04A.  In that 2012 guidance DOL maintained that in order to establish a MEP, the participating employers must have “substantial common control, ownership or organizational connections,” or “substantial economic, business or representational purpose” in common.  

Advisory Opinion 2012-04A further asserted that an unrelated coordinator of a MEP – such as a third-party administration (TPA) firm – would lack legitimacy if the only interest it held in the arrangement was for the purpose of providing benefits to the participating employers.  In that guidance DOL did, in fact, deny just such a firm’s request for approval of a proposed open MEP, citing the fact that there was “no employment-based common nexus or other genuine organizational relationship between the employers.”  This sounds like the very role that a state might be playing under a MEP option blessed by DOL in Interpretive Bulletin 2015-02. 

In legitimizing its new state-coordinated MEP option, DOL relied on a different argument in Advisory Opinion 2012-04A, one which stated that those sponsoring or maintaining the plan had to be tied to the participating employers “by genuine economic or representational interests.”   DOL now declares in Interpretive Bulletin 2015-02 that “a state has a unique representational interest in the health and welfare of its citizens that connects it to the in-state employers that choose to participate in the state MEP.”  Done and done!

There are also legitimate questions to be asked about the alternative DOL-approved options for state-coordinated ERISA plans.  Such as, do we want state governments deciding which service providers they will favor by including then in a state-approved retirement plan “marketplace?”  Do we want a state to sponsor a prototype plan document and offer it directly to employers, essentially competing with private sector firms that offer prototype documents and the services that go with them?

Right now, there are more troubling questions than there are reassuring answers.

Whose Responsibility is Socially Responsible Investing?

We sometimes complain when the federal agencies that oversee retirement plans drag their feet and fail to issue badly needed guidance.  Occasionally, however, the reverse is true, and we get an answer to a question that few – if anyone – has asked, or perhaps even anticipated.  Sometimes it’s an answer that makes things more complicated, rather than easier.  This may be the case with the Department of Labor’s recent issuance of Interpretive Bulletin 2015-01, released by its Employee Benefits Security Administration (EBSA).   It addresses the issue of retirement plans and investment options that might be considered “socially responsible” or “economically targeted.”  IB 2015-01 became effective on October 26^th, the date of its publication in the Federal Register.

Socially responsible or economically targeted investments are loosely defined as those which, in addition to meeting the primary objective of generating sound returns for a participant or beneficiary, may have the potential to positively influence the growth of a community, or have a positive social impact.  EBSA’s clearly stated intention is that IB-2015-01 should make plan administrators more comfortable choosing plan investments that fall into this category. 

IB 2015-01 withdraws a prior interpretive bulletin on this issue, IB-2008-01, which EBSA now feels may have “unduly discouraged fiduciaries from considering so-called economically targeted or socially responsible investments.”  Notice 2015-01 notes that “Fiduciaries need not treat commercially reasonable investments as inherently suspect or in need of special scrutiny merely because they take into consideration environmental, social, or other such factors.”   

What kinds of things could be considered socially responsible or economically targeted investing?  The range is probably wide, but it’s not hard to come up with several examples that many would find meet that definition.  Because mutual funds are such meat-and-potatoes investing options for retirement plans, particularly participant-directed individual account investing, I’ll focus on those.

The characteristics that define a mutual fund as socially responsible or economically targeted can be measured both in terms of what they include, and what they exclude.  Some funds may invest in alternative or renewable energy companies, such as wind generation, geothermal, biodiesel, or ethanol production.  These funds might, due to this focus, exclude holdings in fossil fuels, such as coal mining or offshore oil drilling.  Some exclude holdings in companies associated with the nuclear power industry.

Some such funds exclude defense contractor stock.  Others exclude the stock of such high-performing companies as Apple, because factory working conditions in some of the countries where certain Apple products are made are considered substandard.  Some of these funds are actually titled in a manner that touts their emphasis on social consciousness, including such terms as “social choice” or “social equity,” as part of their formal naming.

A little bit of EBSA interpretive bulletin history is called for here.  In 1994, EBSA’s IB-94-01 stated that socially responsible or economically targeted investments were not incompatible with retirement plan investment selections, as long as such investments have “an expected rate of return that is commensurate to rates of return of alternative investments with similar risk characteristics.”  As a follow-up in 2008, a brief clause in IB-2008-01 seemed to be a vote of no-confidence for socially responsible or economically targeted investing.  It stated that “consideration of collateral, non-economic factors in selecting plan investments should be rare, and when considered, should be documented in a manner that demonstrates compliance with ERISA’s rigorous fiduciary standards.”

EBSA now believes that its 2008 guidance may have put a chill on retirement plan fiduciaries selecting and offering such investments.  Actually, IB-2015-01 and an accompanying news release seem to have turned the 2008 guidance more or less on its head.  The news release states that while socially responsible or economically targeted investment considerations “may not accept lower returns or take on greater risks,” they are “more than just tiebreakers, but rather are proper components of the fiduciary’s analysis of the economic and financial merits of competing investment choices.” 

Furthermore, an accompanying EBSA fact sheet addressing the documentation issue seems to directly counter IB-2008-01, stating that “no special documentation is presumptively required for such investments…” and that “the appropriate level of documentation would depend on the facts and circumstances.” 

Two things, at least, are troublesome here.  One is EBSA’s inconsistency over time in the emphasis it places on fiduciary caution, and the embrace of investment considerations that have little if anything to do with generating returns for participants and beneficiaries.   Second is the unmentioned, but no less real, matter of just what is “socially responsible.”  One need look no farther than America’s democratic political system to know that there is no fool-proof consensus on what is moral, ethical, or socially responsible. 

One citizen may think nuclear power is a destructive genie that should be kept corked in a bottle, and would shun any related investment.  Another, however, may believe that nuclear power should be made safer and promoted to help the nation move away from fossil fuels.  One investor may believe that only by maintaining a world-leading defense capability can the U.S. remain free and defend the interests of democratic peoples; therefore, invest in defense companies.  Another may believe that the military industrial complex bears responsibility for our involvement in conflicts around the globe, and owning an interest in them should be avoided.  I could certainly come up with more examples of such conflicting views.

Should a plan administrator or investment committee be encouraged to make such thumbs-up or thumbs-down decisions on investment availability?  Is it possible to be even-handed and take into consideration very divergent views on social issues when selecting an investment lineup?  Is it even fair to put plan fiduciaries in a position of feeling pressure to weigh issues of social responsibility in the selection of investment options? 

There are readily understood standards for selecting and continuing to monitor an investment for its financial suitability.  Picking investments that are compatible with a participant’s conscience is another matter altogether.  IB-2015-01’s suggestion that social responsibility considerations “are proper components of the fiduciary’s analysis … of investment choices” is quite likely to raise more questions than it answers.

Some Retirement Savings Numbers of Note

If ever there was an enterprise inextricably tied to numbers and statistics, it is our retirement industry.  Numbers are the bedrock of retirement plan operations and recordkeeping.  We continually analyze rates of worker access to retirement savings options.  We compare the U.S. savings rate with our counterparts around the world (sometimes unfavorably, at least by recent history).  We try to quantify such subjective things as worker confidence in a secure retirement.  Some federal agency number crunchers even think they can calculate how much retirement savers lose as a result of investment advisor conflicts of interest.  Stats and numbers: they are part and parcel of our business.

I recently came across a thought-provoking study compiled by the Transamerica Center for Retirement Studies, entitled Retirement Readiness Survey 2015.  The Center is a division of Transamerica Institute, a nonprofit private foundation funded by Transamerica Life Insurance Company and other third party funders.  This 15^th annual survey is one of the longest-running of its kind, and polls American workers and their employers to explore attitudes and behaviors on retirement benefits and security.  Many of its queries were measured by level of interviewee education, which – like it or not – is often a predictor of both income and financial literacy.

One of the questions commonly asked in such studies concerns having a retirement strategy, generally meaning whether an effort has been made to calculate how much will be needed in order to have a reasonably comfortable retirement.  There are lots of variables affecting retirement security that can’t be fully known.  They include the ups and downs of securities markets, the general state of our U.S. economy, inflation rates, our health, or the age when we choose or are forced to leave the workforce.  But, in order to set savings goals, it’s imperative to have some idea of what the target is.

The Transamerica study may be overly generous in measuring the share of the U.S. population that has a retirement strategy.  It counts both written and unwritten strategies.   An “unwritten” strategy seems almost a contradiction in terms, and I’m inclined to discount its value in any serious effort to measure Americans’ self-assessment of their retirement preparedness. 

Only a small minority have made an attempt to create a tangible, written retirement plan.  Among those who have, a notable predictor is the education level of the survey subject.  Generally speaking, the higher the level of educational attainment, the more likely that the individual has made a serious attempt to develop a savings strategy.    

This may be the result of several factors that often intertwine.   Higher education levels commonly translate to higher lifetime earnings.  Higher earnings may not only lead to more disposable income that can be saved, but may also mean being employed where there is a retirement plan in place.  Access to a retirement plan generally brings with it at least basic information on investing, as well as encouragement to save through that employer’s plan.  Such individuals are the most likely to think about their future retirement security, and take action.

Among workers with a high school education, or less, only seven (7) percent had a written retirement strategy or plan.  In sharp contrast, 24 percent of those with post-graduate college attendance or a post-graduate degree had a written plan.  College graduates with a basic bachelor’s degree were found to have a written plan in 18 percent of interviews.  Among those with trade school or non-degreed college attendance, 13 percent could point to a written plan they had created.  Assuming similar numbers of interviewees in the four groups, an average of just 15 percent had a written plan or strategy.

There are other statistics in the Transamerica study that are worth sharing.  The use of a professional financial advisor to help with investment decisions and planning for future retirement security also showed a great disparity when measured against the education of the interviewee.  Forty seven percent of those with advanced degrees or graduate school exposure had used a financial advisor, while 25 percent of those whose education was limited to high school level did so.  In between were college graduates at 49 percent and “trade school/some college” interviewees at 33 percent. 

Asset allocation on the spectrum from conservative to aggressive also varied markedly by education.  Seventy-nine percent of those with a post-graduate degree were invested either in stocks or in a balanced mix of stocks, bonds and other investments.  Only 49 percent of those with high school level education were invested this aggressively.  College grads and trade school/some college folks were positioned in between; the higher the education level, the more aggressive the investing.  Rather alarming, Transamerica interviewers found that 35 percent of those with high school level education were unsure of what they were invested in.  One need look no farther than this to support the contention that Investment education is critically important, apparently more so for those with less formal education.

Participation rates for those who are actually offered such an opportunity varied similarly across educational lines.  Eighty-seven (87) percent of those with graduate school exposure – and those with bachelor’s degrees as well – participated when they were given the opportunity, while only 67 percent of those educated through high school or less education took advantage of the opportunity.  Those with trade school or less-than-degreed college exposure accepted a participation offer 79 percent of the time.

It should not be a great surprise that contribution rates of those more highly educated would be greater, given the generally reliable likelihood that higher education leads to higher lifetime income.  Obviously there are exceptions, but they mostly prove the rule.  The average plan participant with a post-graduate degree – and those with a bachelor’s degree, as well – contributed 10 percent of income to retirement saving.  Both those high school-level-educated and having trade school or non-degreed college exposure contributed six percent of income, on average. 

There are many other statistics of interest in Transamerica’s Retirement Readiness Survey 2015; these are among those that stand out.  Certainly there are facts and circumstances that make saving more difficult for some workers than for others.  Balancing basic financial needs against income is an obvious one; these needs differ at different stages of life.  But basic investment education and savings habit formation, with access to some kind of formal retirement savings, can have a positive impact on saving outcomes, even if the first steps are small ones.  For that reason it is critical that we preserve and expand access to retirement savings options, as well as to meaningful investment education and advice.

Is it Manpower Shortage, Intrusiveness – or Both – Behind New Form 5500-SUP?

Beyond the divisiveness and unwillingness to compromise that seem to have infected many of our lawmakers in Washington, D.C., there is also a growing distrust of some government agencies.  Actually, this distrust is encountered from Pennsylvania Avenue to Main Street, USA, and includes agencies and personnel responsible for implementing our laws and the regulations that spring from them. 

While the U.S. Department of Labor has recently been targeted for its proposed fiduciary regulations, the most consistently criticized and attacked government agency has undoubtedly been the Internal Revenue Service.  Some of the animosity comes from lawmakers’ dislike for the complex Internal Revenue Code, which – they may be forgetting – is a creature of the Congress itself. 

Being the police force tasked with enforcing this Code has made the IRS an available and visible target, including for grandstanding politicians wanting to score points with their constituents.  It seems that in every Congressional biennium some lawmaker proposes legislation to eliminate the IRS altogether.  While such proposals are rarely taken seriously, and there are functions performed by the IRS that are vital, the proposals are an indication of how disliked the IRS is.

The IRS didn’t do itself any public relations favors when some of its staffers allegedly targeted for special scrutiny a number of conservative groups seeking nonprofit status, a controversy that is still being played out.  However limited, or extensive, such practices might actually have been, given the hostility some politicians have for the IRS it was like pouring gasoline on a fire. 

Realistically, politicians’ attitudes do matter, because one way they can attack the IRS is by cutting the agency’s funding.  One can argue endlessly over whether the IRS or other federal agencies spend their taxpayer-funded annual budgets wisely.  But stagnating IRS funding has led to the loss of about 8,000 of its employees since 2010, this at a time when responding to landmark court decisions and complicated legislation – like the Affordable Care Act – is placing even greater demands on the agency.

Cuts in IRS funding have left fewer field staff available to perform audits of individual taxpayers, businesses, and retirement plans.  It has been estimated that there is now less than a 1% probability that an employer-sponsored retirement plan will be examined.  Another indication of IRS staff resource scarcity is the elimination of most plan determination letter reviews, except in the year of plan establishing and year of termination. 

To make its auditing resources more efficient, the IRS is focusing on plans it believes have the greatest probability of compliance problems.  Such information has come to the IRS in surveys it has conducted, the most high-profile occurring with some 1,200 401(k) plans in 2010.  The IRS sought information on plan design, contributions, nondiscrimination testing, employer demographics, loans, and more.  With a gun to employers’ heads warning of potential audits for non-response, the IRS got the data it wanted.

There is also information contained in Form 5500 filings that identifies plans with 401(k) features, plans with automatic enrollment, with participant-directed accounts, that use a default investment option, etc.  While most Form 5500 filings go to the Department of Labor, it is generally understood that some information is shared between the two enforcement agencies.

The IRS has proposed a way to collect detailed plan-specific compliance data on a regular basis, via new Form 5500-SUP, Annual Return of Employee Benefit Plan Supplemental Information.  A draft of the form was released in March, and the IRS envisions its use for 2015 plan years.   

Many, if not most, feel that the process of plans and service providers gearing up to report this information for the first time could take significantly longer than the 2015 plan year Form 5500 filing deadline, which – for calendar year plans – would be July 31, 2016.  In many cases the information sought is not maintained in a place or format that is readily obtained, especially not capturable or transferable by electronic means.  Given the fact that many plans are presently in the throes of restatement for the Pension Protection Act of 2006 (PPA), the timing for a 2015 Form 5500-SUP is very problematic, at best. 

Some feel that a plan that provides data on its methodology for conducting coverage and nondiscrimination testing, its amending history, opinion or advisory letter information, etc., is making itself an all too convenient target for an IRS audit.  The flip side of the argument  is that the IRS is attempting to do its compliance oversight job with diminishing personnel and budget resources, and that in its design of Form 5500-SUP the Service has taken a logical step in trying to take a more “rifle” – rather than shotgun – approach to monitoring plan compliance.  Reasonable minds may differ!

Ambiguity, however, is not reasonable.  For example, a plan is asked to declare whether it passed 410(b) coverage testing by the ratio percentage test or by the average benefits test.  Eligibility need not be determined by just one or the other across the board; some plans use both.  Another question asks for the date of the most recent “plan amendment/restatement for the required tax law changes.”  Is this question limited to full restatement events only?  Is it intended to capture dates associated with interim amendments?  If interim amendments, the IRS should be providing plans with a list of interim amendments appropriate to the particular year’s Form 5500 filing. 

There are questions on Form 5500-SUP the answers to which will come from other providers, which the preparer may be in no position to authenticate or verify.  Is the preparer potentially on the hook for the work of others over whom it truly had no control?  Mandating that the preparer of the Form 5500-SUP be identified will result in a public record disclosure of the client/preparer relationship; something not required of preparers of Form 5500 itself.   Is this really necessary?  As a matter of public record, I don't believe it is. 

We should probably expect that some level of compliance self-reporting is in all retirement plans’ future.  We are also aware that new procedures have growing pains.  But this initial attempt could and should be improved greatly, both in terms of content and in terms of timing.  

Battle Lines Are Drawn in Fiduciary Regulations Fight

Long ago, in distant elementary and junior high school days, some of the most galvanizing words on the playground or in the neighborhood were heard in the battle cry “Fight…fight..”  Brawls major or minor have always had the power to stir the blood and draw a crowd.  Back then, the motivation was likely to be nothing more serious than someone’s wounded pride, pecking order conflicts, or the mistaken belief that the opposite sex was impressed by such macho behavior. 

Times change, and we hopefully outgrow the need for those juvenile tests of strength and will.  But that doesn’t mean that the appetite for combativeness goes completely away.  It’s a part of everyday life, from the competitiveness of business to the sparring of politics and policy making.  We’ve been treated to a classic demonstration of this combativeness in the aftermath of the Department of Labor’s April release of proposed regulations on – how apropos – “conflicted investment advice,” much better-known as fiduciary definition regulations. 

The avowed intent of these regulations is to assure that those saving for retirement receive investment advice that is in their best interest, not advice biased in some manner that favors the advisor over the saver.  Proponents believe some version of these regulations will do this.  Opponents believe the rules as proposed will result in such advisor anxiety over possible fiduciary liability that smaller investors – particularly IRA investors – will be left without the investment advice they need.

Most of the shots in the minor war that has ensued have been fired from a distance, in newsletters, speeches, editorials and the like.  Some also in Congress, including legislation to halt or defund the regulations, and lawmaker pleas to Secretary of Labor Thomas Perez.  A dramatic exception, perhaps worthy of comparison to a Las Vegas fight card, occurred in a hearing held June 17^th by the Health, Education, Labor and Pensions (HELP) subcommittee of the House Committee on Education and the Workforce. 

That hearing bore the unambiguous title “Restricting Access to Financial Advice: Evaluating the Costs and Consequences for Working Families and Retirees.”  Unambiguous, in that it clearly expressed the organizers’ judgment that unless the proposed regulations are significantly modified, their effect will be to deny many retirement savers the guidance they critically need to prepare for life after their careers.

It might be overstatement to call the hearing and the testimony of lead witness Perez and private sector witnesses a “pitched battle.”  But some who witnessed it have characterized the testimony as intense and spirited.  As one put it, “Secretary Perez vigorously defended the proposal and the need for its adoption.” 

Secretary Perez repeated a previously-presented example of a couple that invested IRA rollover assets in an annuity investment whose fees he characterized as excessive.  He stressed that this was not illegal, because advisors in such circumstances operate under an investment “suitability” standard, rather than a best-interest fiduciary standard.  This the Secretary characterized as “flawed,” expressing his belief that the compensation interests of the advisor are almost inevitably in conflict with the best interests of the investor.

There seemed to be little disagreement on whether the best interest of the retirement saver is the appropriate standard of conduct for those who provide investment advice.  But there was little agreement that the regulatory formula proposed by the DOL can be successfully adapted to the actual investment marketplace, particularly where IRAs are concerned. 

While the proposed regulations allow variable forms of advisor compensation, they do so at the price of a binding contractual relationship – a “best interest contract” – between advisor and client.  That contract was described by Secretary Perez as necessary to enforce a best interest standard.

But a number of witnesses believe that the proposed regulations are unclear in defining just when in the advisor-client relationship this contract would be necessary, and fear that those who do not want to become fiduciaries will stop short of giving savers even basic investment education, to avoid being ensnared in a fiduciary net.    

Secretary Perez expressed his belief that these proposed regulations do a much better job than the long-since-withdrawn 2010 regulations in carving out and allowing advisors to provide investment education without giving themselves fiduciary liability.  But there was significant disagreement from other witnesses, to which Secretary Perez sharply asked for “chapter and verse” language on how they would improve it. 

Witnesses also expressed the belief that the best-interest contract, now commonly referred to as “BIC,” and the education-versus-advice conundrum, together will lead to more litigation in the form of breach-of-contract lawsuits.  To which the Secretary responded that binding arbitration language in the proposed regulations was intended to resolve such conflicts.  Many advisors, however, are unlikely to be cheered by the prospect of arbitration any more than they would welcome litigation.  Both have costs in time, expense, and uncertain outcomes.

As summers always seem to do, this one is flying by.  The deadline for submitting written comments on these proposed regulations, July 21^st, is already upon us.  It’s now less than a month to the public hearing scheduled for August 10^th through 12^th, with an additional day in case it is needed.  Based on the combativeness we have seen so far, it would surprise no one if this bout goes that extra round.

Many Ifs, Ands & Buts in EBSA’s Fiduciary Solution

When we were young, we may have been told that beginning a sentence with the word “but” was inappropriate.  We believed it because the people who said so were adults, and were supposed to know such things.  Later, we learned that “but” is a “coordinating conjunction,” and many good writers properly begin sentences with it.  Perhaps we had been intentionally misled because “but” is a word of protest often used by children.  “But I don’t want to eat my broccoli!” “But I’m not sorry!” 

Appropriate or not, “But” was the first word that came to mind when I had digested the Department of Labor’s “conflicted advice” – formerly fiduciary definition – proposed regulations, issued in April.  (Some other words that came to mind are less charitable.)  “But how can you propose,” I wondered, “a solution that seems generous to the present advising environment, but sets a snare that can spring future litigation and fiduciary liability even on principled and conscientious advisers?” 

I’m certainly not unsympathetic to the need for retirement savers to receive principled advice when making critical investing decisions.  They deserve no less.  But the most prominent solution being prescribed by the Department’s Employee Benefits Security Administration (EBSA) – the proposed Best Interest Contract – has some ingredients that beg the question of whether the remedy is worse than the malady.

To the genuine relief of many, EBSA’s proposed regulations did not narrowly limit the types of compensation that can be received by advisers or brokers serving retirement savers.  Some had feared that a fee-only approach might be required to avoid prohibited transactions and their inherent liability, which many believe might have caused advisers to flee the small investor market.   On the contrary, EBSA’s proposed regulations make clear that compensation that may vary depending on the investments chosen – like commissions, 12-b1 fees, revenue sharing, etc. – can continue to be a part of the adviser or advising firm’s compensation structure.

But – and it’s an important “but” – the price for this freedom in compensation arrangements is the Best Interest Contract, or BIC, as it is becoming known in industry shorthand.  If variable compensation structures are used to compensate for investment advice, something normally prohibited, an adviser or advisory firm must agree to enter into this arrangement.  It is a contractual one, make no mistake.  In EBSA’s own words, “It would require retirement investment advisers and their firms to formally acknowledge fiduciary status and enter into a contract with their customers in which they commit to fundamental standards of impartial conduct.  These include giving advice that is in the customer’s best interest and making truthful statements about investments and their compensation.”  Fail to meet either general or specific conditions of the BIC, and an advisor could be exposed to potential EBSA prohibited transaction enforcement, IRS excise taxes, and client litigation. 

There are a number of things that stand out as problematic with EBSA’s proposal, but for now we’ll focus on just two.  One is subjectivity.   “Best interest” may be in the eye of the beholder.  How much emphasis should be given to the lowest possible fees?  Are higher fees justified by facts and circumstances, such as a more expensive fund whose manager has a track record for outperforming others?  Would advice that looks questionable today be considered acceptable in the historical context of the time and options available when it was given?  Will those with enforcement and judicial authority have the expertise and the impartiality to make these and other judgment calls?

Another problematic issue is the potential for litigation if a client does not feel that an advisor has lived up to expectations.  An advisor or advisory firm must warrant that it has not only identified possible conflicts of interest, but has adopted measures to take them into account and prevent financial harm to the investor.  Based on such warranties, clients will have a contract law basis for seeking legal remedies, including class actions, and – specific to IRAs – bringing a case under state law without the benefit of ERISA preemption.   

There is nothing new about risk and return; it’s fundamental to investing.  In the case of EBSA’s BIC it now applies to the advisor, as well.  The potential for legal exposure may prove to be an unacceptable risk for some advisors and advisory firms.  Some might say it is appropriate that risk of a fiduciary nature find its way to the doorstep of folks who dispense investment advice to retirement plan participants and IRA owners.   But how much is “too much?”

A major concern of some who question EBSA’s approach is that instead of conflicted advice, some retirement savers will get little or no advice.

The New Fiduciary Rule is Here. But Where is “Here?”

There has probably not been a retirement plan regulations proposal more contentious or debate-stirring than the “conflicted advice” regulations recently issued by the Department of Labor’s Employee Benefits Security Administration (EBSA).  That’s a bold statement, but as a retirement industry professional for nearly three decades, I don’t make it casually.  Controversy and government regulation seem to go hand-in-hand, but these regulations take that maxim to a new level; certainly as far as retirement plans are concerned.

Given the history of this proposal – formerly known as “fiduciary definition” regulations – some may have been in denial that it would ever see the light of day.  After all, the regulations were first proposed in 2010, withdrawn in 2011 after an extremely hostile reception, underwent extensive public comment and cost-benefit analysis, and several promised release deadlines were missed.  Seen by many as a potential political liability for supporters, some questioned whether the proposal might languish, unreleased.

But such unbelief was dispelled when – in February of this year – President Obama spoke at an American Association of Retirement Persons (AARP) event, his message alleging massive losses of retirement income as a result of investment decisions that were based on poor advice.  President Obama quoted from a White House Council of Economic Advisors study entitled The Effects of Conflicted Investment Advice on Retirement Savings.  A fact sheet, FAQs, and other items advising savers on how to protect their retirement assets were also released with this press conference. 

At roughly the same time, the federal Office of Management and Budget (OMB) took delivery of EBSA’s new proposed conflicted advice regulations, rules intended to reduce or prevent the kind of growth-robbing investment advising spoken of by the President.  One might note that the title “conflicted advice” now being used sends a more calculated and urgent message than “fiduciary definition” regulations ever could. 

In an unusually short time, less than two months, OMB cleared these regulations for release to the public.  The package of supporting materials EBSA released with the regulations was impressive, if not unprecedented.  In addition to the regulations and new and amended prohibited transaction exemptions, the non-technical explanatory materials were voluminous.  They included not only a typical news release, but the simultaneous release of a fact sheet and frequently-asked-questions (FAQs), elaborations that are commonly issued sometime after actual guidance.  All this, and a cost-benefit analysis document longer than the actual regulations.  “Well-defended” might be a good way to describe the new regulations.

Without going into minute detail of the new proposed fiduciary definition, it clearly is more inclusive, and if adopted would make it harder for many advisors to be found not to be fiduciaries.  One of the more telling departures from the existing regulations is the inclusion of IRA owners and IRA transactions, with particular emphasis on rollover transactions.  While it’s sometimes noted that the DOL does not have authority over IRAs, a 1978 presidential executive order transferred to the Secretary of Labor the authority to write regulations under Internal Revenue Code Section 4975, the statute governing prohibited transactions.  IRC Sec. 4975 applies to both employer-sponsored retirement plans and IRAs.  Thus EBSA’s claim to the right to regulate those who provide IRA investment advice.

One of the surprises of EBSA’s proposed regulations – surprising to some, at least – was allowing investment advisors as fiduciaries to continue to receive variable compensation for different investments chosen by their clients.  Many had expected that advisor-fiduciaries might be forced into a flat fee or “levelized” fee business model.  Instead, such compensation methods as commissions, revenue sharing, or 12-b1 fees can continue to be part of compensation for investment advice.

But the variable fee option does not come without strings.  An entirely new prohibited transaction exemption would have to be satisfied in order to maintain the option for variable compensation.  It is known as the Best Interest Contract Exemption, and the term “contract” is well chosen.  I'm not going to go over all its details in this particular blog, but several stand out as worthy of mention. 

An advisor or advisory firm would have to inform EBSA of their intent to use the exemption;  potentially attracting examination attention?  The provider of advice must warrant – guarantee – that it has identified possible conflicts of interest, and has adopted measures to prevent financial harm to the client.  Investment advice given must be in the client’s best interest, not merely suitable.  The formidable “prudent person” standard with which we are familiar from ERISA Section 404(c) would apply.  Clients would have recourse under contract law for breaches committed by the advisor, and contractual language limiting or disclaiming liability for violations could not be used.  Strong medicine to be sure.

Some questions, for now unanswered, present themselves.  Does this proposal have a chance to take effect in its present form?  And, how would the advising industry respond if it does?  The 2010 version of the regulations, withdrawn in 2011, generated a preponderance of criticism of a “too restrictive” flavor.  This proposal, however, has drawn criticism from both proponents and opponents of tighter fiduciary regulations.  That being the case, might EBSA be inclined to conclude that it has found a middle ground between its rules being too restrictive and too liberal?  We will be keeping a close eye on the official public comments, which will surely be made available for review.

Will Congress itself make a move to affect the implementation of these proposed regulations?  Well before their issuance, the Republican-controlled House of Representatives passed legislation that would require EBSA to wait for the Securities and Exchange Commission (SEC) to issue fiduciary regulations first.  The Senate has not acted on it, and there are no indications that it is anywhere near the top of that body’s agenda.  The point is probably moot, because any such legislation would certainly be vetoed by President Obama, and there is reason to doubt that enough Democrats would join Republicans in a vote to override such a veto.  In fact, while a number of Democrats openly and actively opposed the 2010 proposed regulations, that has not been heard with this regulatory effort to date.

Still beyond prediction is whether – if regulations closely resembling this take effect – advisors that would fall under a broadened fiduciary definition will maintain existing business models with variable compensation, given the disclosure, contractual and prudence stipulations that would be required.  Will some advisors move to fixed or levelized compensation models?  Will some decline working with small balance investors altogether?

Much, much more to come!

“March Madness” an Apt Name for Fiduciary Regulations Battle

Perhaps it’s fitting that the country is in the period we’ve come to know as “March Madness.”  As even casual sports fans know, the term refers to the NCAA men’s and women’s college basketball tournaments.  It’s a time when basketball junkies are filling in the brackets for their friendly “it’s not really gambling” office pools, scratching their heads over the prospects of teams they’ve never heard of, and getting caught up in a fever that is the college sports equivalent of the Super Bowl. 

In the retirement industry we are generating a little March madness of our own.  I’m not aware that any Las Vegas bookmakers are establishing odds, but the players in this contest are definitely serious about the outcome.  No one will be cutting down basketball nets, or pulling a “Champions” T-shirt over their uniform when it’s over.  But without a doubt, one side or the other will see itself as the winner if it prevails. 

The contest in our industry is the battle over the Department of Labor’s proposal for defining “fiduciary” in the context of retirement plan accounts and IRAs.  In question is: under what circumstances will a financial advisor, investment advisor, or broker, be considered a fiduciary, with all of the responsibilities and the duty of care that entails?  

We have seen these same opposing forces arrayed against one another on this stage before.  In October of 2010, DOL’s Employee Benefits Security Administration (EBSA) issued proposed fiduciary definition regulations.  This guidance expanded the fiduciary definition beyond the so-called “five-part test” that has been in effect for some 40 years.  Certain advising relationships that might not have been considered “fiduciary” under the old regulations, now would be. 

The regulations applied to advising IRA owners as well as qualified plan participants, and to situations where participants might be rolling over assets from employer plans to IRAs.  Under much criticism for this expanded application, EBSA withdrew the proposed regulations in September of 2011, promising to perform a more robust economic study of the impact of these rules and to review the issues raised by public comments on the original proposed regulations.  Some cynically suggested that the decision to withdraw the controversial proposal and to re-propose it a later date was motivated by presidential and general election year politics, a time when regulatory red tape is always in the crosshairs of one party or another.

Fast-forward to today, and the oft-promised (threatened?) and several-times-postponed reincarnation of EBSA’s fiduciary regulations has now left that office.  The regulations now reside with the federal Office of Management and Budget (OMB), where such guidance typically resides for up to 90 days for “fly-specking” before eventual release. 

It seems almost as if we’re still in the midst of an election campaign, so visible, caustic and politically-charged are the energies and commentary being poured into support – or opposition – to the anticipated regulations.  The match-to-the-tinder seems to have been the Obama administration’s release in late February of a report entitled The Effects of Conflicted Investment Advice on Retirement Savings.  As is now widely known, the report contends that many retirement savers suffer substantial financial losses due to advisor conflicts of interest.  It is significant that these anticipated regulations are now widely being referred to as the “conflicted advice” regulations, a name that unquestionably is more charged than “fiduciary definition” regulations.  “Politically charged” would not be putting it too strongly. 

There have been numerous salvos fired by members of Congress in the direction of Labor Secretary Thomas Perez, including letters from the House Committee on Education and the Workforce, and the Senate Health, Education, Labor and Pensions (HELP) Committee, expressing concern that the anticipated regulations will lead to advisors abandoning many investors with small accounts, and that the EBSA regulations may conflict with fiduciary regulations that the Dodd-Frank Wall Street Reform and Investor Protection Act charged the Securities and Exchange Commission (SEC) with drafting.  These committee letters pointedly ask for proof that EBSA has attempted to coordinate its regulations with the SEC.    A bill, the Retail Investors Protection Act, has been introduced in the House that would require EBSA to defer issuing fiduciary regulations until the SEC acts first.  Meanwhile, Secretary Perez has said emphatically that these regulations will be issued.

Not all lawmakers are challenging the administration and EBSA on the advisability of EBSA going forward with release of its fiduciary definition regulations.  Elizabeth Warren, widely expected to be in the running for a nomination to the Democratic Party presidential ticket in 2016, recently used the forum of a Senate Special Committee on Aging hearing to reinforce the administration’s message that advisor conflicts of interest are hurting Americans’ retirement preparedness. 

Apart from the vigorous sparring among administration policymakers and Washington lawmakers, there are numerous pro and con analyses and opinion pieces appearing almost daily in industry and general media.  It appears that the all-too-brief calm between election cycle storms that we’ve come to expect may not be a reality this time.  Instead it’s “game on” for what could be one of the defining regulatory actions of the Obama administration – or not!

Does Retirement Saving Cost, or Pay?

February will likely be remembered in our industry for a seismic response to the Obama administration’s launch of a campaign to generate support for regulations governing fiduciary behavior in the advising of retirement savers.  We certainly have our own thoughts on the matter, as we have expressed in the past and most likely will again. 

For that reason, some may have overlooked the release by the Congressional Research Service (CRS) of a report on the largest individual income tax breaks for fiscal year 2015, which CRS has historically described as “tax costs.”  This is something the CRS has been doing for many, many years, but it is especially relevant at a time when those in Congress and in commerce have their eyes on possible major tax reform.  There is virtually no way to substantially lower individual and corporate tax rates without cutting into some of these tax provisions that now save citizens billions in federal taxes each year.  “Cutting into,” in plain terms, could potentially mean reducing the benefits of some – or all – of these and other individual tax breaks.

The lineup in this top-five roster of so-called tax costs is projected to be as follows for the 2015 fiscal year:  1) home mortgage interest deduction, $74.8 billion; 2) state and local tax deduction, $59.2 billion; 3) charitable giving deduction, $45.6 billion; 4) state and local real estate tax deduction, $34 billion; and 5) retirement savings deduction, $18.3 billion. 

It is a bit like stepping through a mine field to make comparative judgments about the value or importance of federally-delivered benefits, whether it is an entitlement like a social welfare program, or a tax break like a deduction for a Traditional IRA contribution.  Each has its advocates, and credible arguments can be made for many of these benefits.  Favoring one while questioning another exposes a person to accusations of partisanship.  But it’s part of our responsibility as citizens to make value judgments, and grapple with issues where there may not be answers written in black or white, or answers that will be universally popular. 

It is not my intention to step on any toes, but I do happen to feel that there are differences in the relative importance to our society of some of these tax benefits.  Differences, too, in which actually result in a loss of tax revenue.  One of the true “sacred cows” in American tax law is the home mortgage interest deduction for one’s principal residence.  We are generally allowed to reduce our taxable income by this amount of interest paid when we file our individual income tax returns.  This is especially beneficial in the early years of home mortgage payments, when a high proportion of that payment represents interest, and a much lesser proportion represents principal. 

Many, if not most, Americans grow up with the admirable goal and expectation of owning a home.  For some, the tax benefit of a mortgage interest deduction might be a deal-breaker when it comes to when – or whether – they will become home owners.  To date though, I haven't seen anything that would show that this would be the case for a majority of citizens.  Certainly the housing industry, and the associated professions of real estate broker, mortgage banker, contractor, insurance provider and numerous others, benefit from robust activity in home buying. 

But are tax incentives that make home ownership easier for an increment of Americans more important than preparing us for security in retirement?    A value judgment to be sure but one that at some point will likely have to be made.  The annual “tax cost” estimated by CRS for home mortgage interest deductions is four times the estimated cost in lost revenue as a result of IRA deductions and contributions to employers’ retirement plans.  Furthermore, citizens who reduce their taxable income via the home mortgage interest deduction do not pay this tax benefit back to the U.S. Treasury at some future time.  Contrast this with deductible IRA contributions and pre-tax amounts deferred into 401(k) plans which are eventually taxed when a retiree withdraws them for financial support in retirement.  Contrary to the way these retirement benefits are often characterized, they are not a permanent “cost” to the federal tax revenue stream.  Again, I do not mean to imply this tax benefit does not serve a valuable benefit but rather want to point out that comparing this to retirement benefits, is not an apples to apples comparison.

Next after the home mortgage interest deduction as a tax cost are deductions for state and local non-business taxes paid.  This amount is three times the so-called annual tax cost for retirement contributions, and is never recovered.  Charitable giving comes next on CRS’s list, and is almost two-and-one-half times the retirement number.  I have no quarrel with the importance to our society of tax incentives for charitable giving and in fact strongly believe they serve an important purpose.  But perhaps we should not impede the average American’s ability to provide for their own security in retirement – helping to insulate them from the need to rely on social programs – by reducing their tax incentives for saving, in order to deliver maximum tax benefits for charitable giving.

The same can be said for CRS’s #4 cost, from deductions for state and local real estate taxes paid.  This is twice as large as the price tag for retirement saving incentives.  Like the others, it too is a permanent tax loss, whereas most retirement saving pours back its tax “cost” when amounts are taken from these savings arrangements and included in income.

The administration’s fiduciary campaign cited at the start of this blog has been criticized for a lack of perspective.  Perspective is also needed when lawmakers consider the relationship between an imagined cost of retirement tax benefits, and the real and painful costs of having a retiree population unprepared for that stage of life.

Where Are We Bound in 2015-16?

The turn of the New Year can be a time to start fresh, which is why so many people make New Year’s resolutions, vowing to change some behavior, or in some way live differently than in the past.  On a less personal level, for workers and most businesses, it’s the start of a new tax year, and of course a time to begin reckoning with the tax year just ended. 

For those we’ve sent to Washington, D.C., to govern us, it’s an opportunity to regroup and take a fresh look at priorities for the coming session.  This year, 2015, is a pivotal one, with the seating of new senators and congressmen and the start of the final Congress with President Obama at the helm.  The dynamics have changed, of course, with both the House of Representatives and Senate controlled by the Republican Party, mirroring the potentially adversarial scenario faced by Mr. Obama’s two immediate predecessors, President Bush and President Clinton. 

Because of this shift in the balance of power on Capitol Hill, there has been lot of uncertainty over how the 114^th Congress and the President will interact, and how they will be able – or not – to govern in the roughly 22 months until the 2016 presidential and congressional elections.  The Republicans now hold 247 seats in the House and 54 in the Senate, an advantage that party has not enjoyed since the 71^st Congress of 1929-1931.  To start this year, the early indications are an ongoing inability to interact seems to be continuing.

One thing that did not change with the 2014 elections is the leadership of the federal agencies with oversight over tax-favored savings arrangements, such as employer-sponsored retirement plans, IRAs, Health Savings Accounts, Coverdell Education Savings Accounts, and the like.  This means that the power within these agencies has not shifted as a result of the elections, and the philosophies that might be reflected in their guidance are unlikely to be different during the next biennium. 

Having said that, however, there’s no denying that the ultimate leaders of such agencies as the Department of Labor and the Treasury Department – both cabinet functions – are political appointees.  Whether desirable or not, pressure sometimes finds its way down from the very top, through the cabinet members, and ultimately to the ranks where guidance is written and issued.  Many believe, for example, that the Department of Labor’s highly unpopular fiduciary definition guidance was first withdrawn – and then subsequently kept on hold – for political reasons in the presidential election year of 2012, and through 2014.  It now appears that at the end of this administration, a strong push to issue this guidance is at hand.

But the intersection of presidential power and regulatory action can work both ways.  Prior to the 2012 and 2014 election the White House had reason to temper aggressive regulatory actions, for fear of election losses.  That is less a concern, at least at the presidential level, since our president cannot run again for reelection.  Perhaps because of this, we have already seen bold – some would say excessively bold – moves taken by executive action.  The last two years of a president’s term are sometimes the period in which the country’s top leader seeks to leave his stamp on the nation, and it could be so with regulatory actions that are favored by the current administration.  The proposed fiduciary regulation may be a good example of this. 

One consideration that could temper aggressive executive and regulatory activism in the next two years is a weighing of the odds for the 2016 election, with the obvious concern that unresponsive or uncompromising regulatory action could weigh against Democratic candidates in both congressional and presidential elections.

Despite the difficulty of governing with a divided, polarized government, one bright spot for the coming Congress is the elevation of Senator Orrin Hatch (R-UT) to chairmanship of the Senate Finance Committee.  Sen. Hatch has substantial credentials when it comes to retirement issues, and his committee plays a key role where retirement savings-related legislation is concerned.  In the last session of Congress Sen. Hatch introduced the Safe Annuity for Employee Retirement (SAFE) Act, and it will be one of his priorities in the 114^th Congress.

But don’t let that title fool you; the bill is not only, or primarily, about annuities.  Yes, the legislation advocates that retirees have access to investment options that can provide lifetime income.  In that respect it reflects the philosophy of the current qualifying longevity annuity contract (QLAC) regulations.  For example, dating back to 2013, Sen. Hatch’s bill mirrored these regulations in limiting to 25% the use of retirement assets to purchase qualifying deferred annuities.  The objective of both Sen. Hatch’s legislation and the current QLAC regulations is to enable what policy makers and lawmakers have long advocated – investment planning that takes into account guaranteed lifetime income options.  Such options are not the entire answer, but can be part of the formula in the retirement security equation.

But Sen. Hatch’s bill goes way beyond the annuity dimension.  It encourages greater use of automatic enrollment and automatic escalation of contributions in deferral-type plans.  It simplifies plan testing, reporting and disclosure.  It enhances the popular and successful 401(k) safe harbor plan, enhances the portability of lifetime income options from employer plans to IRAs, and offers numerous other positive – some might say overdue – retirement savings enhancements.

Whether these exact provisions are embraced, or refined, or in some form eventually become law, is of course uncertain.  In the current political environment an odds-maker would probably not give ANY legislation a high probability of success.  But if legislation such as this fails it won’t be for lack of vision and effort.  Sen. Hatch seems to have “the right stuff” to lead on the retirement savings front.  Whether others will have the good sense to follow is, of course, another question.

Let’s Help Participants Invest With Knowledge, Not Ignorance

One of the ways we understand and manage the world we live and work in is through statistical analysis.  We use it to determine worker efficiency and productivity, company profitability, marketing effectiveness, and many other things.  In our field, it’s also used to measure retirement saving behavior and worker decision making, among other things. 

A recent study compiled by the mutual fund industry-serving Investment Company Institute (ICI) contained something both revealing and disturbing about the saving behavior of participants in defined contribution retirement plans.  For illustration purposes several bar graphs from the study ICI Survey of DC Plan Recordkeepers are reproduced below.  They compare the years 2008 through 2013. 

If anyone needs a reminder, 2008 was the year when the stock market took a bungee-jump dive that reflected an economy as close to a second Great Depression as most of us ever want to see.  Fear of a financial meltdown gripped the country, and government and private industry together looked for ways to shore up the battered economy and restore some semblance of confidence.

Uncertainty and fear generated by business failures, wage stagnation, job losses, and securities market declines of as much as 40% were eventually reflected in retirement plan participant behavior.   Not necessarily informed or wise behavior, however. 

Perhaps most understandable of plan participant behaviors is “withdrawals,” including both in-service and hardship withdrawals.  In 2008 these were taken by a larger percentage of participants than in any subsequent year through 2013.  The incidence of withdrawals in 2008 was more than 10 percent higher than any other survey year.  The study does not specifically claim that this higher distribution rate was due to job loss, wage or salary cuts, a decline in value of other participant assets, or any specific factor.  But hard times and withdrawal of retirement assets often go hand-in-hand.

Similar to increased distribution activity in its retirement security implications is ceasing contributions.  This, too, occurred at a higher rate in 2008 than any other year through 2013.  Many also ceased contributing in the following year, 2009, when the ugly economic realities of the recession were continuing to manifest themselves.  As with withdrawal motivators, such factors as job loss, wage or salary cuts, or a decline in value of home or other participant assets – even just the fear of potential economic adversity – may have contributed to participants stopping contributions. 

There are a couple of other measures of participant behavior that might not alarm others as much as they alarm me.  To me they reflect participants lacking an understanding of informed investment behavior.  It concerns the changing of allocations in participants’ existing account balances and their new contributions. 

There will always be allocation changes, and should be, as participants age and – we hope – become more adept investors.  But in 2008 the rate of investment reallocation in existing accounts was 28 percent greater than the average from 2009 through 2013.  For new contributions, 2008 reallocation changes were 32 percent greater than the 2009-2013 average.  Anecdotal evidence tells us that most of these reallocations went to more conservative investments, such as cash-equivalents like money market funds, or guaranteed investments. 

Participants who exited from equity investments when they were at their lowest ebb in 2008 or 2009 essentially “locked in” their losses.  Those who held on and rode the wave back to where the markets are today in all probability recovered their losses.  Some may have seen the opportunity that a severe market decline can offer, and not only held on, but continued or even accelerated their contributions to historically solid – but temporarily depressed – investments.  They are the real winners. 

The point of this dialogue is that far too many plan participants – when faced with a market reversal – behave like poorly trained soldiers confronting their first battle.  Rather than hunkering down and preparing to weather the siege of a market decline, they panic, cast off their good judgment and head for the imagined security of a non-volatile investment.  Some may never again move back into the types of investments that have the potential to generate real long-term growth. 

Of course, some participants may be in that near-retirement stage where they should be in conservative investments.  But that’s not an excuse for the many who are in early or mid-career and have a long time horizon to retirement.  We need to do a better job of educating all participants so that investment decisions are driven by knowledge and reason, not ignorance and fear.