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Have You Seen this “‘Vanity’ Paper” Purporting to Solve 401k Fiduciary Issues?

September 09
00:02 2014

Two investment professionals recently had a paper published on the Social Science Research Network (SSRN) that has received much attention in both the industry media and the mass media. Dated “June 2014,” titled “Let’s Save Retirement,” the 238129_2680_thumbsdown_stock_xchng_royalty_free_300document was written by Russell L. Olson and Douglas W. Phillips. The University of Rochester’s “Investment Office Staff” web-site lists Phillips as “Senior Vice President, Institutional Resources” and Olson as “Investor In Residence.” Both have decades of investment experience, Phillips for a variety of universities and Olson primarily as pension manager for Kodak. According to SSRN, neither man has published any research papers.

The two authors use the paper to explain why the current American retirement environment needs to be fixed and then, based in part what they see as advantages of retirement policies in other countries, make six recommendations regarding our nation’s retirement policy. Despite the press, which is rare for an industry white paper, the reaction among industry veterans was quite blunt and pointed.

Robert Toth of Toth Law Offices in Fort Wayne, Indiana, has more than 25 years of experience in employee benefits law. He pulls no punches when he says, “This paper is what I would kindly call a ‘vanity’ paper, which has clearly not undergone any sort of peer review. To say it lacks rigor is to put it mildly, and should not be given any serious consideration at all. As an author of a number of serious papers in this area myself, I am stunned at the lack of thought and care which this evidences. I would have enjoyed a serious discussion of this issue. The University of Rochester likely is unaware of this paper and, if they are, should be embarrassed.”

Andrew Remo, NAPA’s Congressional Affairs Manager, agrees with Toth. He wrote an entire article with the tongue-in-cheek title “Let’s Save Retirement… by Killing the 401(k).” Remo says, “Their proposal is a cobbled-together mish-mash of ideas that have been tried before – in some cases adopted, and in other cases discarded. In fact, the most misleading aspect of the report might be the notion that it represents new thinking.”

“There are serious proposals which are currently being debated on whether a state, for example, should offer a cost-effective investment and administrative platform (such as in California) which can be made available to all employers,” says Toth, who adds, “This paper adds little to those serious discussions, and even detracts from them. This paper really should not be considered a serious effort. The paper is not well thought out, makes blatant unsupportable statements about a number of matters for which there are substantial studies in place (and which the authors have clearly not read). They don’t even make the case at any point in their paper supporting their central theme that ‘without radical reform, our nation will have a rapidly growing percentage of impoverished elderly.’ I have no doubt the authors believe this, but they present absolutely no data or any serious argument of any sort to justify this.”

“I can’t speak to their motivations,” says Remo, “but their proposal does seem to have elements in common with testimony that John Bogle gave in a 2009 hearing for the U.S. House Education and Labor Committee.” Indeed, testifying alongside Bogle at that same hearing, Dean Baker, co-director of the Center for Economic and Policy Research and Alicia Munnell, director of the Center for Retirement Research at Boston College at that time both proposed a new form of retirement vehicle similar to what Olson and Phillips call “Trusteed Retirement Funds (TRFs). Bogle himself advocated a vehicle nearly identical to the TRF, even including its objective to place people in annuities.

The two University of Rochester workers aren’t the only ones to reference – either directly or indirectly – the work of Bogle, Munnell et al. Martin Smith did the same in his controversial “Retirement Gamble” Frontline piece on PBS. Ironically, despite relying on similar sources, Olson and Phillips cite “Retirement Gamble” with the parenthetical qualification “Some people feel this documentary was a bit one-sided.”

Many of the “concerns” of Olson and Phillips have already been addressed by auto-enrollment, auto-escalation and single default options. It’s not that the authors were incorrect in describing the consensus view on what had been the short-comings of the original 401k structure. It’s just that they apparently ignore – or simply weren’t aware of – the fixes already in place.

Toth calls the paper “a confusing mess of ideas, written by authors who have little understanding of even what is in the marketplace. We effectively have a version of TRFs currently, through collective trusts, ETFs (which are held by collective trusts), and insurance company separate accounts – and anyone else which is a ‘DFE’ (direct filing entity).”

Nonetheless, and perhaps the most notorious aspect of the paper, is the authors’ suggestion that the government administer the TRF. “One only needs to look at the mess that is Social Security to realize that our federal government does a pretty poor job of managing ‘retirement plan assets,’” says Terrance P. Power, President of The Platinum 401k, Inc. in Clearwater, Florida. “Most states fare no better.”

Still, Power, thinks outsourcing may be the answer, although not in the manner recommended by the paper’s authors. “The University of Rochester researchers did strike a solid point in suggesting that an employer may not be the best choice to run their own company retirement plan,” says Power. “In fact, the United States is one of the few countries that still allow this. Most countries require an employer to utilize an independent third party to oversee their company retirement program… which is exactly the format of most multiple employer retirement plans (MEPs). Pending legislation and inquiries by the Department of Labor ERISA Advisory Council into Outsourcing Employee Benefit Plan Programs only underscores the very solid movement towards having an independent multiple employer plan solution being the preferred strategy for small to medium sized employers.”

Toth says, “Terry is right about MEPs as well. But, as Terry, Troy Tisue and I all testified before the ERISA Advisory Council, MEPs are limited under current law – but current law allows plans to aggregate administrative services and investment platforms, (including the use of DFEs), and a number of vendors are pursuing developing those products.” did make an attempt to contact the authors at their emails indicated on the University of Rochester web-site, but they did not respond prior to the deadline. As result, we’ll give Toth the last word. He says, “In short, this is an awful paper. Not because I disagree with the idea of providing cost effective platforms for small employers (and would welcome a serious discussion of valid ways to promote this), but because this is one of the least credible papers I have read in a very, very, long time.”

Interested in learning more about important topics confronting 401k fiduciaries? Explore Mr. Carosa’s book 401(k) Fiduciary Solutions and discover how to solve those hidden traps that often pop up in 401k plans.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


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