“Obama-Save” (as opposed to Obama-Care)

On Monday, January 25, 2010, the White House released a fact sheet on their Middle-Class Task Force initiatives. The fact sheet has few details, but there is a great summary of the retirement-related initiatives here on PlanSponsor.com. I have a number of thoughts and concerns about these initiatives that I’ll outline below.

Let me just say up front: commission-based investment advisors and insurance product sellers (and maybe Mr. Biden’s Middle Class Taskforce) will NOT like my viewpoint … but that’s too bad! My company is about helping Plan Sponsors and their Participants do the right thing, the right way … period. Figure out how to line up with that philosophy and we won’t have a problem.

I watched the January 25th Middle-Class Task Force Committee meeting video … all of it. I watched Vice President Biden and President Obama’s video remarks on the initiatives being proposed … all of it. I’ve read the White House Fact Sheet and the Press Release. My overall impression – again – is that they just don’t “get it.”

Their overall objectives, as they relate to retirement savings (since that’s what I’m about), are as follows:

• “Help workers and plan sponsors make sure they are getting investment, recordkeeping, and other services at a fair price.” (Fee Disclosure)
• “Helping workers avoid common errors that undermine retirement security, while providing strong protections against conflicts of interest.” (Investment Advice)
• Reduce “the risks that retirees will outlive their savings or that their retirees’ living standards will be eroded by investment losses or inflation.“ (Savings Sufficiency)
• “Help ensure that employers that offer [target-date funds] as part of 401(k) plans can better evaluate their suitability for their workforce and that workers have access to good choices in saving for retirement and receive clear disclosures about the risk of loss.” (Appropriate Investment Selection)
• A streamlining of the auto-enrollment process “which has been shown to boost participation, especially for low- and middle-income workers.” (Participation Issues)

I’m fine with all of these objectives. Helping Plan Sponsors (employers) address these issues is what Vantage Retirement Services is all about, along with compliance and plan-level risk management. It’s the methods I object to … not because they won’t advance accomplishment of the objectives, but because they

a) have not been thought through as to their practical implications on employers and workers,
b) create new issues for workers, and/or
c) amount to “arranging the deck chairs” for workers.

They won’t advance accomplishment of the objectives enough or in the right direction.

I covered some of this in a prior post, but let’s take each of these initiatives one at a time. Each of these topics deserves its own post as well … stay tuned! Again, the fact sheet had very few details, which prompts many of my questions.

Fee Disclosure

The fact sheet language says, “The Administration is improving the transparency of 401(k) fees to help workers and plan sponsors make sure they are getting investment, record-keeping, and other services at a fair price.”

Not to invoke memories of “depends on what the definition of ‘IS’ is” here, but what constitutes and “improvement in transparency” and what is “a fair price?” For that matter, what, specifically, constitute investment services, record-keeping services, and “other” services?

If the current DOL Fee Disclosure Worksheet is any indication of what we have to look forward to in this regard … well … we’re in trouble here.

a) Service Providers do not (because they don’t know how) fill out this form consistently, which prevents an “apples-to-apples” comparison between providers.
b) Plan Sponsors (most) do not understand what any of it means anyway.
c) There is no “map” to show revenue sharing arrangements and their various “rabbit trails.”
d) Plan Participants … well there’s no way 95% of them would understand any of the jargon used on this form.

In defense of this initiative, if they come up with a disclosure that “gets down to brass tacks” and truly (and simply) explains who is getting paid what, for what, how, and by whom, along with a participant-specific dollar figure of costs incurred – then explains how the participant can affect their own plan costs based on their choices – then all will be right with the world.

Investment Advice

The fact sheet language on this topic says, “The Administration is encouraging plan sponsors to make unbiased investment advice available to workers, helping workers avoid common errors that undermine retirement security, while providing strong protections against conflicts of interest.”

My personal opinion is that the Obama Administration “threw the baby out with the bath water” when they withdrew for additional guidance (read: scrapped) the PPA’06 Investment Advice regulations early last year. So isn’t this a reversal of their reversal of PPA’s investment advice rules? I’d like to think so. The PPA regulations were actually on the right track in encouraging (dare I say sanctioning) the provision of investment advice to participants. Plan Sponsors didn’t do it before PPA because of the steep fiduciary risks involved. After PPA, they could at least try to do the right thing by their participants and had some guidance for getting it done.

Maybe PPA didn’t go far enough to ensure “unbiased” advice, but the industry understood the risks of fiduciary responsibility and inherent conflicts of interest. Because of PPA’s step in the right direction, the advisory industry has adapted and changed in the right direction as well, with the advent of “fiduciary advisors”, Accredited Investment Fiduciary (AIF) designations, and fee-only advisory.

Hopefully this initiative will re-instate the PPA rules regarding provision of investment advice to participants and merely add some additional language around who is “qualified and appropriate” (read: accepts fiduciary responsibility and does not accept commissions/trails/12b-1/etc. fees) to provide the advice. [That’s where I lose my friends in the commission-based advisor world.]

Savings Sufficiency

The fact sheet language on this topic says, “The Administration is promoting the availability of annuities and other forms of guaranteed lifetime income, which transform savings into guaranteed future income, reducing the risks that retirees will outlive their savings or that their retirees’ living standards will be eroded by investment losses or inflation.”

Reducing “the risks that retirees will outlive their savings or that their retirees’ living standards will be eroded by investment losses or inflation” is a lofty and worthy goal. Those of us who understand personal finance and the retirement plan industry are passionate about it, no doubt. The problem comes in trying to create/implement a one-size-fits-all solution to the issue at hand.

That’s what the Administration is hoping to do with this initiative. The idea is that “if everyone would just get an annuity, then everyone would outlive their savings, have the standard of living they want, and not have their savings eroded by investment losses or inflation.” Polly-Anna at best; impossible at worst.

While I in no way claim to be an expert on annuities, I do know this about annuities and about people:

• Annuities are complicated. There are many varieties, terms, choices, and considerations just relating to annuities as a product, including:
  o Guaranteed income streams, life expectancies and payout interest rates
  o GMIB’s with or without income base “step up” features
  o Mortality and Expense fees (M&E) and surrender charges
  o Retail versus Institutional annuities
  o Individual versus Group annuities
  o Death benefits and JS&A annuities
  o Single-premium immediate annuities
  o Tax-Sheltered Annuities (TSAs)
  o Accumulation phase versus Distribution phase
  o Fixed or indexed annuities
  [I fully and humbly admit I only understand about half of this list and I have a degree in Finance.]
• People need to be able to determine and understand how much they need to save, over what period of time, to achieve what income for how long during retirement. (This is a tough one!)

Even among financial and industry professions, the appropriateness of annuities in a retirement account is hotly debated. See these articles and debates:
• Debate on LinkedIn Pension and Employee Benefits Specialists Group
• Article in Investment News magazine
• Article by Aaron Skloff, AIF, CFA, MBA, of Skloff Financial Group
• Article in SmartMoney magazine

In a recent LinkedIn discussion, Lucas Barton, CFP, Vice President at Lockton Companies made a wise statement: “Whether we like it or not, finding a more effective way to provide the average employee with a guaranteed amount of income when they retire (above and beyond SS) will become more and more important responsibility of Plan Sponsors.”

Employees have a hard enough time understanding the investment options and choices they currently have in their plans (mutual funds, stocks, bonds, stable value, risk tolerance, time horizon, etc.). How does adding annuities into the mix – let alone requiring them – help? [Okay, here’s where I start losing my friends in the insurance industry …]

To me, Savings Sufficiency is about EDUCATION #1. It’s not easy, it’s not sexy, and it’s not perfect, but education WORKS.

Appropriate Investment Selection

The fact sheet language on this topic says, “The Administration is reviewing and requiring clear disclosure regarding target-date funds, which automatically shift assets among a mix of stocks, bonds, and other investments over the course of an individual's lifetime. Due to their rapidly growing popularity, these funds should be closely reviewed to help ensure that employers that offer them as part of 401(k) plans can better evaluate their suitability for their workforce and that workers have access to good choices in saving for retirement and receive clear disclosures about the risk of loss.”

I don’t have a whole lot to add on this one, except to say that this initiative should not just be applied to Target Date Funds. Yes, they’re fairly new on the market and still need to have some “kinks” worked out on glide-paths, etc.

I’d change the last sentence to read:

“ALL funds should be closely reviewed to help ensure that employers that offer them as part of 401(k) plans can better evaluate their suitability for their workforce and that workers have access to good choices in saving for retirement and receive clear disclosures about the risk of loss ON ALL FUND OPTIONS.”

Seems obviously, I know, but ALL Plan Sponsors need to do a better and more thorough job of this with the assistance of UNBIASED (conscious or unconscious) experts. This requires Plan Sponsors to thoroughly understand their employee population and bring that knowledge to the table with experts who can help them craft a suitable fund lineup and thorough education program for their employees.

Participation Issues

The fact sheet language on this topic says, “The Administration is streamlining the process for employers to automatically enroll workers in 401(k) plans, which has been shown to boost participation, especially for low- and middle-income workers.” They list this in the Fact Sheet under the heading of Establishing Automatic IRAs. This heading covers two (2) main points:

1. “The Obama-Biden Administration will promote the establishment of a system of automatic IRAs in the workplace by requiring employers who do not currently offer a retirement plan to enroll their employees in a direct-deposit IRA unless the employee opts out. The contributions will be voluntary and matched by the Savers Tax Credit for eligible families.”
2. “The Administration is also streamlining the process for employers to automatically enroll workers in 401(k) plans, which has been shown to boost participation, especially for low- and middle-income workers. New tax credits would help pay employer administrative costs and the smallest firms would be exempt.”

This is a significant tweak to the proposals they put out on Labor Day weekend 2009. This resolves some of the issues I had in my post back then.

The foundations of this initiative are:

• Employees can’t benefit from retirement programs if they don’t participate and inertia tends to keep them out - Agreed 
• Auto-enrollment works to increase participation in employer-sponsored plans – Agreed.

But I still have these questions/comments:

• Who will be “approved” IRA providers? Anybody who can open an IRA? Will these be a new and different kind of IRA or what is already provided? 
• Sounds like it basically means all employers will have to be able to do payroll deduction (pre-tax) and direct deposit to an outside account. Simple enough for most employers, but could cause problems for “less sophisticated” payrolls. 
• I won’t even get into the complications of the Savers Tax Credit except to say that they have not defined “eligible families.” That likely means that there will be an income level above which you are not eligible for the Tax Credit. The fact sheet indicates the credit (which they are very warmly referring to as a “match” even though it’s not) will be 50% of the first $1,000 of contributions by families earning less than $65,000 per year, with “partial credit” (undefined) to families earning between $65,000 and $85,000. 
• They say they will make these Savers Tax Credits “refundable” so that if you don’t owe any taxes on your return, the credit will increase your refund. Great! So you’re paying even less taxes and those employees who are paying the most taxes and contributing the most to their employer-sponsored plans (those making in excess of $65k/year) get … what … oh, nothing. Hey, at least they’re no longer talking about income tax refunds being deposited into retirement plans or buying Savings Bonds … whew! 
• Really not sure what “streamlining the process for employers to automatically enroll works in 401(k) plans” means. Maybe requiring automatic enrollment? 
• Also no clarity on “new tax credits to help pay employer administrative costs” means. Tax credits for employers? Which administrative costs? 
• “The smallest firms would be exempt.” How small is smallest? Are they exempt from the Automatic IRAs or the automatic enrollment or the tax credits?

I will now officially step down off my soapbox. I feel better just having vented. Thanks for listening/reading! [Sorry this post is so long, but I had a lot to say! ]

If you are a Plan Sponsor and all of this makes you feel a little squeamish, please know you are not alone. My consulting practice is about making sure you understand all of the issues around your plan and helping you have confidence that you’re doing the right things, the right way, at the right time.

Let me know if I can help … it’s what I do!