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Retirement Saving: How Responsible is the 401k Fiduciary?

November 04
02:04 2014

Nevin Adams, ASPPA’s Chief of Communications and Editor in Chief of NAPA Net and NAPA Net the Magazine, recently penned an article discussing the fifth annual Wells Fargo Middle-Class Retirement study. In it, he questioned the 994448_53508805_piggy_bank_stock_xchng_royalty_free_300popular meme the national media has taken when reporting on the retirement savings landscape in America. “Imagine if you will a retelling of the story of the three little pigs,” Adams told FiduciaryNews.com. “In this one we’d bemoan the fate of the two who had built houses made of straw and sticks, criticizing the system that allowed them to build such inadequate structures, even though they had the opportunity to do something else. Oh, and we’d totally ignore that their brother pig, who had the same choices available to him, took the time and made the effort to build a brick house. That’s pretty much the story that was drawn from a recent survey about retirement savings…”

The idea of institutional provided retirement benefits is not new. “The Social Security idea came from Otto Von Bismarck in Germany,” says Ilene Davis at Financial Independence Services in Cocoa, Florida. “I believe some of the impetus for Social Security for retirees had to do with young people unable to get work and this gave older workers an incentive to stop working.”

While that may have been one of the objectives, the severe economic doldrums of the 1930s require several confidence building measures. Retirement benefits were a priority and the government led the way, with corporate America following soon after World War II. “Social Security was started as a retirement-only benefit not long after the Great Depression,” says Greg Lessard, Founder & President of Aspen Leaf Partners in Golden, Colorado. “It was most likely politically motivated to give Americans more comfort that they’d be taken care of in their elder years. The corporate pension system was designed to attract talent to the company, and it was the only corporate retirement ‘invented’ at the point in time.”

Over several generations, we’ve seen an evolution from relying on institutions to provide retirement benefits to people taking on the responsibility themselves. It became apparent that the numbers didn’t add up when it came to pensions. The defined benefit system was soon beset with sometimes spectacular failures. “In the 1960s the government started taking notice on the flaws of retirement plans when companies like Studebaker closed and weren’t able to pay pensions,” says Jessica Maldonado, Vice President at Searcy Financial Services, Inc. in Overland Park, Kansas.

How bad were the numbers? Peter Huminski, President and Wealth Advisor at Thorium Wealth Management in Kernersville, North Carolina, says, “When the Social Security Act was passed in 1935 the average life expectancy was 58 for men and 62 for women and the retirement age was 65. By the 1980s the average life expectancy was 75 for men and 80 for women. That extended period of time necessitated changes to be made. The math was and is unsustainable.”

But it was more than just bad math. It was bad policy, and the awful human tendency to over-promise and under-deliver. “The ‘failure,’ if you can call it that, was policymakers’ inability to foresee the difficulty that corporations would have resisting promising ever-greater benefits without having to fund those benefits using reasonable rates of return and transparent accounting,” says Mathew Dahlberg, Owner of 111th Street Investments LLC in Kansas City, Missouri. Dahlberg also points out a cultural change which, given the vesting requirement associated with defined benefit plans, made pensions impractical for a growing portion of the workforce. He says, “Another vital, perhaps unpredictable trend helping the movement toward defined contribution plans has been the fact that workers today are much more mobile in their careers, i.e. they don’t spend all of their working lives with one or two employers anymore.”

With the trends not favorable, the government stepped in to try to protect pensioners.  “In 1967, Senator Javits proposed legislation to address funding, vesting, reporting and disclosure issues,” says Maldonado. “In 1974 ERISA was enacted. The revenue code of 1978 added section 401k that went mostly unnoticed for about two years. The landscape of workplace retirement plans were changed forever when Ted Benna in the 1980s redesigned a plan for one of his banking clients in the early 1980s. In 1981 401k plans began picking up momentum when large companies like Johnson & Johnson, Honeywell, JCPenny, Savannah Foods Industries, Hughes Aircraft, and Pepsico all adopted 401k plans.”

By the turn of the new millennium, professionals and policy makers both understood the two Achilles Heels of the 401k – people didn’t save and, when they do, they didn’t invest for long-term growth. The government stepped in again with the Pension Protection Act of 2006. Ironically, this legislation did more to increase 401k participation than anything else. It gave plan sponsors the opportunity to auto-enroll employees – thus, alleviating the lack of saving problem. It also defined default investment options – thus, alleviating the lack of long-term investing problem.

Many worry this hasn’t produced the desired savings levels. Robert A. Massa, Director of Retirement for Ascende, Inc. says, “Even in today’s environment with automatic enrollment and automatic contribution increases, the individual still must be responsible for their own savings. Employees can still opt out or change their contribution elections in a plan with automatic enrollment. Also, since 3% of pay is still the most common default contribution, employees who are defaulted to that rate are not likely to ever save enough to meet their long-term retirement needs. Even with automatic contribution increases, they could still come up sort of the amount needed to provide a successful retirement.

Today, we can lead the horse to water, but who, if anyone, is responsible for making him drink? “I don’t see any legal obligation on the part of the plan fiduciary to force the participant ‘horses’ to drink, or to drink ‘enough,’ says Adams.

“It’s each American’s responsibility to understand that if they don’t save in addition to the benefits they’re paying for via taxes, then they may be forced into living a very different lifestyle once they can’t, or choose not to, work anymore,” says Lessard says “ I don’t know what the solution is for effective delivery of this message.”

Today’s system features a dyad of self-responsibility and a government safety-net. The fear is that duality may soon suffer the same mathematical reality of corporate pension. Tony Liddle, Senior Advisor at Sark Investments in Rhinelander, Wisconsin, says, “The problem with today’s system is that it is a hybrid of two things. From the 1930s to the 1960s it was a three-legged stool – Social Security, Pension, and Savings. If you were terrible at saving you still had two-thirds there for you. Today, if you are terrible at saving, all you have is Social Security. My (under 40) generation may actually be facing no Social Security, so if you are a terrible saver – no pension and then no Social Security – what does that leave….nothing!”

Many fair-minded people understand the continuing need for some sort of safety-net, but recognize the risk that portends to society. Dahlberg says, “In terms of who should be responsible for funding a person’s retirement, the solution will have to be a combination of both private and public funding. On the one hand, individuals must be incentivized, through tax breaks, company matches, and financial education, to save for their own old age, however on the other hand, there must always be a minimum government safety net for the impoverished. The trick will always be creating a hybrid system that fairly mitigates the temptation of the ‘rent-seekers’ (i.e. freeloaders) while balancing the needs of the ‘responsible’ taxpayers who save diligently over their lifetimes.”

Oddly, the last several years have witnessed an attack on this dyad not from the free-rider problem’s point of view, but from the self-responsibility point-of-view. Some politicians have even gone so far as to question whether those who take the initiatives to save throughout their life should reap the rewards of those savings during retirement. Indeed, these extremists advocate the government step in to guarantee that everyone live the same lifestyle in retirement by limiting the benefits of those who happened to have spent their entire working careers saving diligently. Needless to say, this is a controversial proposal.

“Those who save throughout their life should definitely reap the rewards of those savings during retirement. They worked hard, saved and delayed gratification,” says Ed Snyder, President of Oaktree Financial Advisors, Inc. in Carmel, Indiana.

Andrew Meadows, Consumer and Brand Ambassador at The Online 401k and Producer of Broken Eggs Film in San Francisco, California, says, “No one lives with the same means today. We are a society with different classes. Much of that separation comes from hard work and resources to achieve success. Anyone who puts in the extra work, care, and foresight for their own future should reap all the rewards they’ve worked 65 years to create. However, no one wants to be the old person living in poverty that is pitied by their community. Programs should be created to avoid anyone living in poverty, including our seniors. It’s heartbreaking to see someone who worked very hard throughout their lives lose everything and live poorly. What is the reward in that? There will always be a range of comfort felt by retirees. It truly is up to us to think ahead and do something for our future selves every day. Not planning for the future is simply not an option. Work hard, be frugal now, and live well in retirement.”

“If someone saves their entire life into a retirement plan, they should benefit for their thrift, not be penalized for it,” says Kirk Chisholm, Wealth Manager & Principal at Innovative Advisory Group based in Lexington, Massachusetts. “Penalizing people for saving creates a negative incentive which inevitably changes the behavior of people to become more dependent on government programs. Others who neglected the habits of a prudent person, should not benefit in the same way that the saver has. As for why the government should not step in and guarantee everyone the same retirement, there are two reasons: 1) Our country is structured as a capitalist economy not a socialist one. Such a proposal would not work well for the United States; and, 2) It would bankrupt our economy, unless everyone was provided a lot less retirement benefit.”

Clearly, the government has provided some good when it comes to retirement savings. Returning to the other side of the equation, there are active discussions as to exactly how aggressive the government should be in forcing citizens to safe for their retirement. The same question is being asked of plan sponsors? How much should the responsibility for individual employee savings lay with the companies that offer retirement benefits?

“While employers will likely never go back to the liability of a DB plan, workplaces can make lemonade out of the lemons they have to work with today,” says Steve Wilbourne, Founder and CEO of Questis, Inc. in Charleston, South Carolina. “Employers must invest in their employees and be willing to share the risk associated solving the lifetime income equation. How? Better plans, investment automation, auto enroll, etc., etc. – it will take many, many features, but most of all a commitment of the employer to recognize that the risk doesn’t leave the room just because they ‘check the box’ and offer a savings plan. If they’re employees don’t utilize that savings plan, as well as other financial benefits offered, then those employees drag those financial burdens back to work and thus decrease productivity, increase turnover, and even increase healthcare costs.”

Governments role, to some, focuses on providing the regulatory framework to support the plan sponsor and to nudge employees to save more. Robert M. Wyrick, Jr., Managing Member at MFA Capital Advisors in Houston, Texas, says, “I believe the government has an obligation to provide some level of retirement protection for a portion of society. In a capitalistic society, many will fail to achieve financial security, and as a compassionate nation, we must provide a basic standard of living to the retired in our country. Beyond that, retirement funding must be the responsibility of the individual. However, it is important the government keep their Social Security pact with its citizens. Going forward, it seems far more productive to incentivize saving and planning for retirement as many of the new rules such as catch-up contributions are now doing.”

Maldonado agrees with the idea that the government’s roles is to encourage, not to mandate. She says, “Ultimately self-responsibility is key, but there are a few things that the government can/should do to better equip people to make good choices. We could do a much better job of helping participants understand the ramifications of their behavior. Similar to what they’ve done to help reduce American obesity by requiring the printing of calories and contents on labels and menus at fast food places now showing their nutritional content, we could certainly help people make better retirement choices by attempting to change their behavior by putting it in front of their noses.”

Perhaps the new “three-legged stool” is “employee, employer, and government.” Huminiski says, “I believe that it is both the individual’s and the government’s responsibility. The individual needs to save on a regular and consistent basis and spend well below their means. The government’s responsibility is to maintain a tax structure that allows and encourages people to save, and maintains tax rates that do not put undue burden on taxpayers. I also believe that the corporate community has a responsibility to encourage savings amongst its employees whether it be through matching and education or some other vehicle (e.g., corporate pension)”

Can – or should –the government try to do more than merely spur employees to save? Unfortunately, a demonstrably poor track record has soured the confidence many have in the government’s ability to take on these types of tasks. Wilbourne says, “The government should simply get out of the way and let the private sector fix it, but that’s not realistic at this point. The ship has sailed and America has a sorry state of personal finances – retirement income is as bad as it gets. If we rely on Social Security to burden our future income load, then we’re all doomed. Relying on the Social Security is a path to poverty and a further burden on the taxpayer. Yet, we need the government to help. Social Security is a piece of the pie, but government can provide continued support through regulatory leadership to hold employers accountable.”

It may be possible to lower the hurdle of expectations with regard to government assistance. “Government provides a subsistence living, not a living wage income stream,” says Massa. “If you ask a person on welfare if they want the government to provide more help, they will almost always say yes. But people on welfare have the same dreams as everyone else in America; a big house, nice cars, a comfortable lifestyle. You cannot achieve that through government assistance. Individuals must save on their own.”

To others, though, the government has no place whatsoever. “Government should not be involved in retirement at all,” says Davis says. “Each individual should be responsible for providing for the future needs of themselves and dependents. Personally, I think Social Security has done far more harm to this country in undermining self-sufficiency. I support changing Social Security to a personal pension where those who save get the benefits, and those who choose not to save bear the consequences.”

Many believe the cost of Social Security is measurable. “What I think really shows what could have been is a couple cities in Texas that opted out of Social Security, and whose retirees received more benefits than those who went on Social Security,” says Davis. She refers to Galveston, Matagorda and Brazoria Counties in Texas, where, thanks to a loophole Congress closed in 1983, these municipalities were able to opt out of Social Security and replace it with what they call the “Alternate Plan.” According to a 2011 Forbes article, workers in these counties receive retirement benefits between 80-120% greater than workers with comparable salaries under Social Security.

Ultimately, Dahlberg sums up what many feel is reasonable and prudent when it comes to answering the question “Whose job is it to save for retirement?” He says, “I feel that public policy’s goal should be to guarantee that everyone has a minimal level of support in retirement, and absolutely no more. Everyone’s lifestyle should not be the same in retirement, as not everyone proactively saves and not everyone earns equally. Indeed, as mentioned above, the difficulty is constructing a system whereby the public support option is the least attractive option, in order to incentivize the public to want to avoid that option. Otherwise the system will be unsustainable.”

The government provides the blueprints; the 401k fiduciary provides the materials; but building a secure retirement is best left to the individual. And that’s money in the bank.

If you’d like to discover other important topics confronting 401k fiduciaries, then you’re invited to explore Mr. Carosa’s book 401(k) Fiduciary Solutions and discover how to solve those hidden traps that often pop up in 401k plans. His forthcoming book Hey! What’s My Number? – The One Thing Every Retirement Investor Wants and Needs to Know! will be available later this year.

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.

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

4 Comments

  1. Adam Riley
    Adam Riley November 04, 15:06

    And when if ever do we raise the question of stagnant wage increases and reduced pension responsibility for employers? It’s fine to blame the employee for not saving – and that blame is deserved. But employer’s are not making up for the benefits they are withdrawing in pension plans with additional wages. Lump in a runaway health care, drug costs and health insurance marketplace, an aging population (which taps the resources of the modern worker), and modest inflation and you have to put some blame somewhere other than the employee. To add insult to injury – the current boom and bust market cycle gives the modern saver some pause when considering whether to “Invest for the long term”. The brick pig is a pearl of idealized fantasy – the reality is that bricks are dear and many savers are doing the best they can do – on an absolute scale, not a relative one, to build a wood or straw house. There is definitely room for some social and political intervention to offset the challenges faced by the modern saver. We have a long way to go before moral hazard sets in for most of our folks – certainly we could go as far as we did with the ’08 bailouts for big banks, can’t we?

  2. Christopher Carosa, CTFA
    Christopher Carosa, CTFA Author November 04, 15:18

    Adam: Hence, the new three-legged stool, right? (and don’t get me started about runaway health care: I just got my new ObamaCare premiums for my two employees. The increase alone is enough for me to hire a third employee. Where is that money going to come from? And if I’m impacted this way with only two employees, imagine those who have 10, or 50, or even 100. It appears that it’s tough to single out businesses when the stool has three legs, and, right now, it appears the government is not holding up its end of the bargain. Sorry for the rant, but those premium increases seem incredibly unfair and only reinforce the idea that our government is too big, leaving honest citizens powerless to do anything about it.)

  3. Dennis Ackley
    Dennis Ackley November 05, 14:39

    Perhaps you’ve been too kind summarizing the history of retirement plans – especially 401ks.
    In the early and mid-1980s, many organizations revised their supplemental thrift plans by adding a 401k feature. That was fine. The vast majority of these organizations had DB plans.
    But beginning in the late-1980s, some organizations began changing the name of 401k supplemental plans to 401k RETIREMENT plans. These organizations either had no DB plan or began decreasing that plan’s stature.
    The instant 401k RETIREMENT plans were introduced, every individual participant became fully responsible for using it to:
    * define their own future financial target,
    * fund and invest to reach their target, and
    * distribute their account over their lifetime.
    That’s fine – except the 401k RETIREMENT plan participants where not taught how to do any of that. There was no sophisticated, science-supported teaching effort implemented to help make that learning happen. And that’s how 401k education remains.
    401k education has become the largest failure ever of adult education.
    Let’s not hide the failure of 401k education behind the ‘you can lead a horse to water…’ platitude.
    Horses know what water is. Participants know nearly nothing about defining a target, funding, investing, and distributing a 401k RETIREMENT plan account.
    Most of 401k education is rooted in mutual fund sales presentations delivered in a lecture by a person the audience doesn’t know or trust. The ‘pedagogy’ is based on ‘telling’ – not teaching. Socrates pointed out the failing of ‘telling’ in teaching two thousand years ago. And when 401ks were being introduced, Richard Feynman was pointing out out how the failure of students to learn was much the fault of the teacher and the teaching approach.
    Among the failings of 401k education, hiding from participants the realistic cost of accumulating retirement income is the worst.
    Twenty years ago plan sponsors could have asked a pension actuary how much a person funding a ‘pension-plan-for-one’ could expect each month from a $100,000 401k account (a balance many employees will not achieve). Or plan sponsors could have asked an annuity sales person how much monthly income $100k would buy. Yet today, how many participants have a realistic idea of the amounts?
    Think of what could have been accomplished in the last 20 years if the retirement industry and plan sponsors would have asked leading education thinkers and researchers — especially in adult education — to help construct an effective 401k educational approach. Content experts could have been asked to define the specific competencies young employees need to get a good start using a 401k. And the educational testing specialists could have created methods to see if learning those competencies had taken place.
    Perhaps today we would have a science-based, individual discovery-powered learning approach that would motivate young people – including innumerates – to use 401k RETIREMENT plans successfully.
    If plan sponsors know participants do not have the knowledge to be successful using a 401k plan, the sponsors are probably legally fault-free…and ‘can’t make them drink’ wins. But why would an employer offer a RETIREMENT plan the sponsor knows participants will not know how to use?
    The lesson of building a retirement house out of straw is a hard one when you find out late in life that you have too few years left to build one out of bricks.
    Dennis Ackley

  4. Christopher Carosa, CTFA
    Christopher Carosa, CTFA Author November 05, 14:51

    Dennis: Great comment. By any chance did you attend the session I presented at CFDD 2014? This was precisely the issue I addressed, include a “how-to” set of examples to more from the standard “telling” approach” to education towards a more participatory “hands-on” approach. These materials will be available in a soon-to-be unveiled “practitioner-only” portion of the site.

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