Yet Another Bad Idea From Washington

On August 2, 2018, Senator Marco Rubio (R) Florida introduced a bill that would allow any American worker to take paid time off to be with a new child. Representative Ann Wagner (R) Missouri is apparently set to introduce the same bill in the House.  These two bills are, once again, a prime example of bad pension policy coming out of Washington.

You might ask what a paid family leave program has to do with pension policy?  That’s exactly the point.  The two should be unrelated.  Unfortunately, in this instance the “cost” of financing paid family leave will require the employee to delay their Social Security benefits, or worse yet, reduce their future monthly checks by approximately 3%[1].  What? We are going to encourage employees to reduce their future pension income to finance paid family leave?

In my June article on these same pages, I wrote extensively about why current pension laws encourage too much leakage from defined contribution plans.  Congress keeps passing more laws that encourage Americans to borrow money from their retirement savings or to raid future benefits. Now Senator Rubio has come up with the novel idea to begin “raiding” your future Social Security benefits as well. Really?  We already face a retirement income crisis in America and now we have another way to exacerbate the problem by using Social Security to finance something completely unrelated to retirement security.

There are a few other reasons this bill is a bad idea:

  • First off, the bill provides this little scheme only for caring for a new infant, which accounts for about a fourth of the reasons for family leave in the first place. The vast majority of Americans take paid leave to recover from a serious illness or to care for a family member who is sick or disabled. So, this bad idea doesn’t even begin to cover the major reasons Americans take paid leave. Considering that you have to raid your future Social Security income to have this benefit, I guess it is a good thing the bill is pretty restrictive.


  • Perhaps more importantly, this bill  would negatively impact low-wage earners the most. Low wage earners are more likely to work for an employer who does not offer paid leave, yet those low wage earners are also most likely to rely on Social Security as the only source (or major source) of retirement income.  So the poorer wage earners are the ones most likely to use the benefit, and the most likely to suffer.  What kind of social, economic, or pension policy is that?


  • Once again, Congress proposes these bad ideas because we lack a national pension policy. In addition, many lawmakers don’t understand pensions or insurance in the first place, which makes it difficult for them to design effective legislation for either.


Three states (California, New Jersey, and Rhode Island) have paid leave policies in place that are financed through their state disability programs.  That is where paid leave benefits more properly belong.   In those three states the cost of paid leave plans are paid for and appropriately funded, instead of raiding future Social Security benefits.  Congress should study what these states have done before they propose a national paid family leave program that raids Social Security.

It is good that Congress is at least looking at a national paid leave policy.  That’s a start, considering the United States is almost alone among developed countries in not offering a national program. However, let’s be smart about how we solve this problem.  Raiding future pension benefits to pay for this type of paid leave plan is just bad public policy and only adds to our national retirement security problem.

 This article is for information purposes only.  It is not legal or tax advice.  Readers should seek the advice of their legal and tax counsels before contemplating action on this information.

[1]Estimates by The Urban Institute

Let’s Rescue the 401(k) & 457 Plans Before It’s Too Late

Everyday, we see a new article or study telling us of the shortcomings of IRC Section 401(k), 457, and 403(b) plans.  On June 23, 2018, the Wall Street Journal published an excellent article titled  “Time Bomb Looms for Aging America”. As with many others, this is an excellent article.

The bottom line (again) is that design flaws in the legislation, lack of a coherent national pension policy, and overall poor savings habits of Americans are combining to create a perfect storm that will lead to poverty in retirement for millions of Americans.  It’s time to fix the structure of retirement in America, and the first step is to change the design of defined contribution plans.

Pension Plans Instead of Savings Plans

There have been lots of legislative changes over the past 20 years that focused at putting money into these plans, and encouraging saving.  While auto-enrollment and default savings options have certainly helped, they have not addressed the fundamental weakness of defined contribution plans.  That weakness is the easy ability to get money out of these plans before retirement.  Pension plans are for retirement, and they should be designed that way.

Unfortunately, Congress, the retirement industry, and plan sponsors have encouraged all sorts of legislation making it easier to get money out of these plans before retirement.   That has been a tragic mistake. Loans, financial hardship, availability of cash upon termination of employment and a number of other features have clearly given most American the impression these plans can be used as a piggy bank for savings instead of long term pension plans.

It’s time to change the laws so all defined contribution plans become pension plans instead of savings plans:

  1. Eliminate loans. If an employee needs cash for certain needs then they should go to a bank or other institution to take care of that need.  Loaning out a portion of your future retirement income never made any sense. The argument was that employees are more likely to join these plans if they know they can get the money out when they need it.  Think about it.  Does that really make any sense?  If this is a pension plan for retirement, employees should know that when they sign up and not be enticed to join on the premise the funds will be available before they retire.


  1. Eliminate Financial Hardship and Unforeseeable Emergency Withdrawals.  Yes, I know it sounds cruel, but in my 40 years in the pension business I have seen all manner of silly and irresponsible requests for withdrawals from savings plans that were totally unnecessary.  That fact that getting a withdrawal from your retirement account is easier than getting money from a bank makes no sense at all.  Everyone encounters hardships, financial or otherwise in their life.  I have seen hundreds of examples of a person making a hardship withdrawal because they just couldn’t say no to their kid, their spouse, or other relative who knew they could help them out by making a withdrawal from their retirement account.  If such withdrawals weren’t possible, employees wouldn’t feel pressured by relatives or family to take money from their retirement savings. That simply would not be an option, which is a good deal for the employee in the pension plan.

 And, consider the time and expense plan sponsors have to devote to considering    hardship applications, and the often humiliating financial and personal disclosure that goes with it for the employee. Surely there must be a better way.  Banks, credit  unions and other options exist in the public and private sector which would be better suited to dealing with such hardships or emergencies.

  1. No Cash Option at Termination of Employment.  Rollovers to another plan upon subsequent employment would be the only option. Alternatively, a special type of Rollover IRA would be available but the ONLY way money can be taken from a Rollover IRA would be to combine it with an account from a future employer, or begin making withdrawals at age 65 or later.


  1. Account Available at Full Retirement. Lastly, any withdrawals from these accounts would be at normal retirement age or later.  Normal retirement age should be defined as the full normal retirement age under Social Security.  The only exception would be for disability, using the Social Security definition of disability.  So, if Social Security (or your public employee pension plan) certified your disability for purposes of income from the pension plan or Social Security, then your defined contribution funds would be available concurrently.


  1. Reduced Taxes for Withdrawals Over Life Expectancy.  Payouts during retirement would be subject to ordinary income tax, EXCEPT for payments made out over a period of time that is at least 2/3 of your life expectancy. The goal here is to encourage steady payments from your defined contribution plans that would help you budget your income over a reasonable period of time somewhat correlated to your life expectancy.  If you do that, then a portion of your income each year is not subject to tax.

Gee, These Changes Seem Pretty Extreme!  

Yes, in a sense they are, but let’s remember that Americans need pension plans, not savings plans or short-term piggy banks. The rules would be very similar to those that apply to defined benefit pension plans.  One of the great features of a defined benefit pension plan is that the funds are not available until retirement.  That’s the whole point.

We’ve spent too much time making defined contribution plans as leaky as a sieve.  And let’s remember that the changes above will make these plans much less expensive to administer.  Without loans, hardship applications and costly IRA rollovers upon separation of service, expenses for administration and service will reduce over time.

The fact is that defined contribution plans can’t work effectively unless we design them as actual pension plans, and not savings plans or piggy banks.


This article is for information purposes only.  It is not legal or tax advice.  Readers should seek the advice of their legal and tax counsels before contemplating action on this information. 

Copyright Gregory Seller Consulting, LLC





“White Label Funds” Facing New Pitfalls and Liabilities

Over the past decade, many large governmental defined contribution plans have replaced traditional mutual funds and retail commingled trusts with “white label funds.” These funds evolved as popular alternatives to retail mutual funds for a number of reasons:

  • Lower expenses (in most cases)
  • Ease of changing underlying managers without eliminating the entire fund
  • Focus participants on asset class and style rather than retail name or specific manager
  • Benefits of “multiple managers” in a common fund, rather than one manager

For the most part, many in the industry believe that white label funds have delivered the four benefits outlined above.  However, as these funds have matured, and the market has changed, there are a couple of issues which are not only raising concern among some plan sponsors, but have now resulted in legal action.

Cost Advantage Has Diminished As Traditional Managers Make Changes

When the concept of white label funds began to take off with large plan sponsors, the fee difference between these new funds and traditional retail mutual funds could be quite significant.  However, as more fund managers developed low-cost funds and commingled trusts, the fee difference has diminished.

In addition, many large fund managers have adopted “multi-manager” approaches to their retail and institutional funds, particularly in the target-date and risk-based asset allocation funds.  Depending upon the size of the plan and structure, the fee advantage for white label funds is no longer a guarantee.

Conflicts Have Emerged Which Create Liabilities for Plan Sponsors

When a plan sponsor creates custom white label funds, they are (in effect) becoming competitors to traditional fund managers.  However, they are still liable as fiduciaries to manage,  select and monitor investments in the best interests of plan participants and beneficiaries.  What if one or more of your white label funds does not measure up to alternatives available from other retail or institutional managers?

That question is one of the issues in a recent lawsuit where participants allege the plan sponsor eliminated top-performing retail mutual funds and replaced them with brand new funds with no track record.  They also allege that, over time, the white label funds have lagged performance of the funds they replaced.

Objective Evaluation

The white label fund concept has been further challenged in situations where the plan consultant now also serves as the manager of some or all of the white label funds.  In this situation, who oversees the fund manger when the consultant and fund manager are one and the same?  As you might have guessed, this very issue is one of the complaints included in a recent lawsuit.  If your consultant recommends investment options that are managed by them or one of their affiliates, the plan sponsor may be liable for failing to ensure that all investment options are objectively evaluated.

We have previously discussed this type of conflict in the February 5, 2014 article titled “Does Your Consultant Have a Conflict of Interest?”  This article may be found in the archives below.

White label funds will continue to be popular in large governmental defined contribution plans, and for good reasons.  However, the pitfalls identified above have emerged as legitimate concerns that could land plan sponsors and consultants in court.  Plan sponsors are encouraged to continue to objectively evaluate if white label funds are still your most prudent plan design option.  Or, has the market evolved to the point where other options are more appropriate?

If you conclude that white label funds are still best for your participants, then what steps can you take to remove the conflicts and potential liabilities discussed above?

May 18, 2018

Copyright Gregory Seller Consulting, LLC

The items discussed in this article are for educational and informational purposes only.  It is not tax or legal advice.  Parties contemplating action on this or other information should seek legal and tax advice from qualified professionals.



The Tax Man Cometh?

The GOP plans to introduce the much anticipated tax reform proposal this coming Wednesday. Regardless of where your loyalties lie on the political spectrum, a major reform of this magnitude will be provocative, to say the least.

Almost every American agrees that our tax code is woefully complex and loaded with provisions for special interests. In addition, American companies need a better government partner to compete with foreign companies, many of which are subsidized by their own governments or, in the case of China, where the government is part-owner.

One provision that will likely be a component of the initial tax proposal is a reduction or curtailment of tax-favored retirement plan contributions in both the public and private sector. While there are arguments on both sides as to whether or not pre-tax contributions to retirement plans have an impact on the amount Americans save for retirement, we need to be cautious. Americans are already not saving nearly enough for retirement, so tampering with any retirement plan provisions should be carefully examined.

The larger concern is that it has been decades since we have engaged in a serious examination of the overall issue of retirement in America. Washington has  been somewhat remiss in  more closely examining how we make Americans better prepared for retirement. Sadly, the possible changes to the current pre-tax provisions of existing law are not being made in the interests of prudent public pension policy. Rather, they are being considered for the sole purpose of raising tax revenue. That’s not a good place to start if you want to undertake efforts to improve the ability of Americans to provide for a comfortable and secure retirement.

As the debate over tax reform begins this week, let’s be mindful of the ultimate impact on working Americans,  who are already facing a number of obstacles to their ability to save and plan for a secure retirement.


Healthcare Reform May Harm Pension Plans

“American Health Care Act” May Drain Money From Retirement Savings

House Republicans introduced the “American Health Care Act” today,  following up on their campaign pledge to “repeal and replace Obamacare.”  I won’t opine on the provisions of the bill since I am not a healthcare  expert.

However, the bill does contain a provision which many retirement professionals believe will be damaging to retirement savings.  The bill eliminates many of the subsidies Obamacare provides for lower-income Americans to pay for health insurance.  To replace the subsidies, the bill provides for “tax credits” Americans may use to partially offset the cost of paying health insurance premiums.  And, since these tax credits will likely not provide for the same level of funding as current Obamacare subsidies, the bill encourages Americans to save for healthcare expenses in Healthcare Savings Accounts, or “HSA’s.”  This is a bad idea for many reasons:

  • First of all, we know that the vast majority of Americans aren’t saving enough for their retirement.  If they are now told they have to also start putting money aside for healthcare expenses, the combined burden may be impossible for most Americans.
  • As you would expect, many Americans can’t fully fund their retirement savings accounts AND their healthcare savings accounts.  So, they have to make a choice. Most retirement professionals agree that providing for current healthcare needs will outweigh the need for “down the road” retirement.  So, retirement savings rates will drop for many Americans so they can (try) to fund their healthcare needs.
  • While HSA’s have been promoted for decades as a way to provide for healthcare expenses, the fact of the matter is that they don’t work.  The vast majority of Americans don’t save the amount of money to cover expenses for “high deductible plans.”  For wealthy Americans, they are a viable option.  But for the majority of Americans HSA/high deductible plans  don’t work and we should stop pretending that they do, or will.

There may be merits to portions of the healthcare bill introduced today, but the inclusion of HSA’s is not one of them.  There is the old adage that “retirement depends on savings”, and “healthcare depends on premiums.”  Let’s keep it that way.



The Many Virtues of “Benchmarking”


Plan sponsors in the public sector use the Request for Proposal (RFP) process as an easy (though time-consuming) and reliable way to obtain market information.   A well-constructed RFP and evaluation process can be invaluable. It permits the plan sponsor to make decisions on plan design, administrative services, investments, fees and participant services on a regular basis. It also helps in fulfilling some, but not all, fiduciary obligations.

As helpful as the RFP process is, it is not the only tool a fiduciary should use to gauge the effectiveness of their defined contribution plan. For one thing, the RFP process is usually conducted once every few years. In the current environment, the market changes nearly daily, so an RFP process every five to seven years simply doesn’t keep up with what is going on in the market. However, it would be inefficient to use an RFP process more frequently because the process itself is time consuming and, depending on local or state bid or procurement rules, entails a lot of extra work to obtain basic information for comparative purposes. So, the RFP process is a necessary and important tool that should be used every five to seven years; but it must not be your only measurement tool.

In between the regular RFP cycle, there are other options that should be used by plan sponsors to be certain they are fulfilling their fiduciary duties. One such tool was discussed in this column last November. A regular “Due Diligence” process is an excellent tool to use every couple of years to supplement the RFP activity. This provides an easy and informative way to obtain information on what other plan sponsors are doing, and how their program compares to your program.  [See article on this topic below or under archives for November, 2016].

Another tool is a simple Benchmarking Study. Information from your most recent RFP and your most recent Due Diligence study can easily be placed into a spreadsheet and updated regularly. The items you would want to benchmark are:

  • Administrative Fees
  • Investment Management Fees
  • Participation
  • Average Deferral Rates or Amounts
  • Auto-Enrollment and Auto-Escalation details
  • Default Options
  • Year Over Year Investment Performance (of Asset Classes) Opposite Benchmarks

Once you have identified the “similarly situated” plan sponsors in your Due Diligence study, it is easy to record and update these critical measures (and others) to demonstrate whether your plan is improving over time compared to benchmarks, or going backwards. Benchmarks can be measurements you pick as objective, and/or are those of similarly situated plans you have identified as part of your peer group. Consistent and accurate measurement of features for your plan, compared to your peer group are very important. If you plan is not improving when compared to your peer group over time, you may have a problem.

Benchmarking key items, and keeping them updated, is an excellent way to demonstrate to participants that you are fulfilling your fiduciary duties by continually monitoring key items and improving your plan. It is easy to lift benchmarking data from the Fund Performance Review prepared by you or your consultant and put it in the Benchmarking Study. The key is to keep the Benchmarking Study simple and current. Be sure to measure the relevant items that you have determined to be important measures of “good plan governance.”

The RFP process, Due Diligence Study, and Benchmarking are all key tools that make fulfilling your fiduciary obligation easier and more effective in the long run.  Don’t make the mistake of just relying on the RFP process alone to fulfill your fiduciary obligations to plan participants and their beneficiaries.



Due Diligence Study Just as Important as an RFP Process


Most public plan sponsors are very diligent about conducting public bids for their defined contribution pension plans on a regular basis. Depending upon local laws or customs, most public plan sponsors conduct a formal Request for Proposal (RFP) every five to seven years.

While the formal public bid process is an important activity for every fiduciary, it is not the only way to fulfill your obligations to plan participants and beneficiaries. Every plan sponsor should conduct a “due diligence” process annually. The purpose of a due diligence study is different from an RFP process in the following ways:

  • A due diligence study compares your plan to other “similarly situated” plans in your geographic area, and to other similar plans on a national basis. This is a “plan sponsor to plan sponsor” comparison, or benchmarking, as opposed to formal responses to an RFP from vendors.
  • Due diligence studies are less formal than an RFP process, and dialogue with other plan sponsors, stakeholders, and vendors is encouraged. The RFP process is more rigid, and therefore more meaningful if it is preceded by a due diligence study. A due diligence study can help educate board members in advance of the more formal RFP process.
  • A well-executed due diligence study can be more enlightening than the RFP process because it permits a direct comparison of plan features, plan design, fees, and services with other similar plans. A formal RFP process tells you what vendors can offer in regard to these services, but it won’t tell you all the “best practices” your fellow plan sponsors are using.
  • Finally, a due diligence study permits other plan sponsors to comment on your particular plan, and to offer observations and experience with the same or similar issues.

You don’t necessarily need to hire a consultant to conduct your own due diligence study. A consultant may guide you in organizing your questions for other plan sponsors, but it is very useful for board members and staff to actually conduct the due diligence interviews on their own. A “peer to peer” discussion with other plan sponsors can be extremely useful. And, the other plan sponsors participating in your study can reciprocate by using your information for their own due diligence study.

And don’t forget vendors. Consult them on “best practices” as well. You will likely find those conversations very enlightening, especially if they are with a vendor who opted not to bid on your program the last time you issued an RFP. I recently had a call from a large public plan sponsor who was disturbed that their last RFP garnered only one response- from their current vendor. All other vendors opted to decline. I asked the plan sponsor if they had conducted a due diligence study before the RFP, and the answer was “no.” After I encouraged a few phone calls to key people in the market, this particular plan sponsor learned of three requirements in their RFP that motivated most vendors to decline. These three requirements could have been easily modified if the plan sponsor had discussions with other similarly situated plan sponsors before drafting the RFP.

There is no mandatory format for a due diligence study. Talk to others and be creative. The important thing is to have an ongoing due diligence process that is conducted annually. If you’ve not done it before, you will be surprised at what you will learn by doing so.

Gregory Seller Consulting, LLC

All rights reserved. May not be reprinted in whole or in part without written permission. Provided for information only and is not legal or investment advice. Plan sponsors should seek their own legal counsel on these issues.

Economic Issues Confront State-Sponsored Retirement Plans for the Private Sector

At last count, 17 states have considered legislation to establish retirement plans for private sector employees that would be operated by state governments. Four states (California, Illinois, Oregon and Massachusetts) have actually enacted legislation creating such plans, subject to a variety of organizational and implementation steps.

There remain a number of regulatory and legal concerns, not the least of which is obtaining an exemption from ERISA (Employee Retirement Security Act of 1974) that otherwise applies to retirement programs established for private sector employers. Without this exemption, operating such plans could create potentially onerous obligations for governments and the taxpayers in the affected states.

While the ERISA exemption has been the primary focus of most public debate on this creation of such plans, there is another looming issue that could be just as significant.

Who Takes the Financial Risk of Operating These Plans?

Thus far, the legislation in the affected states requires that these plans be self-sufficient, and not require any taxpayer subsidy to create and operate plans. While this sounds like a reasonable requirement, the economic facts of creating a new plan are formidable:

  • Record keeping costs are relatively fixed. It costs about the same to maintain a million dollar 401(k) account as it does one with just a few thousand dollars in it. Since most of these plans would be created with no existing assets, the upfront costs of establishing the record keeping and administrative functions could not be borne by the participants unless a significant portion of these costs were deferred or subsidized in the early years. So, the first question is who pays to establish the infrastructure of these plans until they can be “self-supporting”?
  • Since these plans would be created (primarily) to serve very small employers, the operational expenses will be far grater than plans established for medium-sized to larger plan sponsors. Small employers tend to have very manual operations and it could prove difficult to rely on automated systems for contributions, benefit payments and other routine functions of daily plan governance.
  • Small employers do not have the Human Relations (HR) or Benefits Department apparatus that exists in most other companies of even relatively modest size. With no HR or Benefits department in these small employer operations, the state-run system is going to have to assume virtually all the functions of enrollment, monitoring and communication that would otherwise be handled by or shared with the employer.
  • Participant service functions (call centers, etc.) are much more costly for small plans where the employer may have a work force that is not used to self-service benefit arrangements handled on-line. As any retirement vendor will tell you, servicing small and micro-plans is very costly, not only with respect to routine administrative functions, but for participant service functions as well.

It remains to be seen how all of these upfront costs will be paid for if these plans are to be “self-sufficient” when there are no assets to begin with. New plans, without any rollover assets, can take years to accumulate enough in assets to fund operational and communication expenses through a reasonable asset fee.

What About Competition?

No service provider, state-run or otherwise, is immune from the impact of competition. Just because the micro-market is not well served today does not mean it will forever be a “market orphan”.   As other entities (private and public) find creative ways to serve the micro-market, state-run plans will have to determine how they protect plan participants and plan sponsors from the impact of diminished assets that could result from competing plans in the future. In the private sector, this risk is mitigated by the capital a company is prepared to devote to supporting the business. In state-run plans that are “self-supporting”, what happens when costs rise or assets are depleted, or both, due to competition? How can participants be protected from having their fees increase due to a shrinking pool of assets with fixed administrative and operational costs?

Prudent Study and Modeling 

Most legislation appears to require a series of prudent steps in order to implement these plans. The economic issues noted above, and ways to mitigate expense risk to participants will likely be a larger issue than the ERISA exemption. With careful planning and modeling, such solutions may be possible, but they won’t be easy. Not unless someone, like the taxpayer, is ultimately on the hook for the risk.


Recent NAGDCA Agenda Shows Creativity Still Alive in Government DC Market

Following my attendance at the 2014 NAGDCA Conference I posted an article about how disappointing it was that the conference agenda contained so little fresh and new.   This year’s Indianapolis conference agenda was much more innovative and refreshing.

My favorite session was titled “The What, Why and How of Structuring Investment Menus: Contrasting Case Studies.” All of the speakers had something significant to contribute. The session was moderated by Richard Davies of AB (AllianceBernstein), and the panelists were Steven Montagna, City of Los Angeles, Jeffrey Cable, Colorado PERA, and Cindy Rehmeier of the Missouri Employees Retirement System (MOSERS).

Different Solutions, But Equally Successful

What I liked best about this session is that it presented three very distinct and different ways of structuring plan investment menus. Each of these plans is very successful, and highly regarded. Yet each one has chosen a different way of designing their investment array, and how they are offered to plan participants.

MOSERS is to be commended for using auto-enrollment and voluntary auto-escalation. Custom asset allocation funds are the default option, and MOSERS has done a great job moving participants from a confusing array of 31 investment options in 2009 to a more streamlined and contemporary design of funds that are segmented into three major categories. The custom target date funds are designed for the majority of participants who don’t want to make investment decisions. A second tier offers a stable income option, and an opportunity to participate in the commingled pool used to fund the defined benefit plan. For active investors, there is a self-directed brokerage option. Auto-enrollment is a tremendous idea more plans should adopt. Unitization of the defined benefit fund as an investment option for the defined contribution plan is an innovative idea. Whether it will catch on with most participants is unknown, and is administratively complex, but it shows creative thinking.

Colorado PERA uses a thoughtful “three tier” approach with an excellent focus on low cost institutional funds. The basic tier includes PERA target date funds, with a second tier offering seven custom asset class funds. These funds permit participants to set their own asset allocations, instead of having someone do it for them in the target date funds. A third tier includes the self-directed brokerage account for participants who think they always know better than anyone else. The Colorado program has devised a simple way for participants to customize their own asset allocations without having to select from expensive retail funds. This creative design serves three different plans (457, 401(k) and a DC Choice plan alternative to the state defined benefit plan).

The City of Los Angeles program is perhaps the most different of all from the “conventional” design of defined contribution plans. For starters, the City of Los Angeles plan does not offer target date funds. Instead, the plan offers five risk-based funds (ultra-conservative, conservative, moderate, aggressive, and ultra-aggressive). All funds are institutionally priced with very low fees.   The second tier offers more savvy investors a choice of seven “white label” funds constructed around asset classes (core bond, core large-cap, etc). This allows participants to design their own custom asset allocation rather than use one of the risk-based asset allocation funds. And, like the other plans there is a self-directed brokerage option for that small percentage of participants who think they always know investments better than anyone else.

Refreshing and Creative

It is very refreshing to see the way each of these plans tailored their investment array to their own participants, without using “easy way out” options like offering only target date funds.   I have long felt that the rush to target date funds was not the panacea many plan sponsors thought they were. There are many plan sponsors who raised their hands in an “alleluia” moment, thinking that target date funds are the ultimate solution for their participants, and that nothing else would come after that. All three of these plan sponsors have “evolved” beyond just offering target date funds, and that is great idea.

Thinking Beyond Target Date Funds

Though target date funds have been widely trumpeted as the best way to “bundle” participants into logical groupings, many of us have always had trouble buying the whole concept of everyone the same age having exactly the same asset allocation needs. To me, it just never made sense. If you take everyone age 50, or whatever age, there is simply no way that everyone in that age group has the same needs. People of the same age have different risk tolerances, different family issues, different sources of future and current income, and different desires for post-retirement income and legacy planning. In my own situation during my working career, I opted out of target date funds and selected managed accounts because I didn’t feel the asset allocation in the target date fund for my age group made any sense for my personal circumstances. I know of many other retirement professionals who did the same thing, many of whom opted for risk-based funds instead of age-based funds.

The Thinking on Target Date Funds is Evolving

There has been much written on this topic over the past ten years or so, and I am glad to see that the defined contribution industry is finally moving beyond target date funds being the “ultimate” solution. I like the City of Los Angeles approach in particular because it doesn’t even pretend that risk tolerance is age-related. The fact that no target date funds are offered is refreshing. It takes a bit of courage to do what Los Angeles did, and I like that. Of course, Los Angeles is my hometown and I readily admit that people in California think a bit differently. The Los Angeles approach may not work well in other places, but I think it is refreshingly honest to have an investment array that emphasizes individual relationship to risk (asset allocation funds) rather than the easier alternative of lumping participants by age group. In that regard, both Colorado PERA and MOSERS offer creative options to the conventional target date fund design. Los Angeles just goes one step further and shows that a highly successful plan with impressive characteristics does not necessarily have to offer target date funds.

Grouping by Zodiac Sign May Make More Sense Than Age Grouping!

While I am not opposed to target date funds, I don’t think they are the great solution many people think they are. You can easily make an argument that asset allocation funds based on your zodiac sign would be better than age! Yes, I think it is plausible that you could design an asset allocation fund suited to Libra’s that is better tailored to their characteristics than a single fund for everyone who is between the ages of 45 and 50! While that is a humorous idea, it makes a point.  And, if a plan sets up funds based on your zodiac sign, it will most certainly be done first in California!

I commend each of these three plan sponsors for thinking “outside the box” in their plan design. I think this is truly one of NAGDCA’s best sessions and it offers three very intriguing ways to think about your plan investment menu. Whether any of these three creative approaches work for you and your participants isn’t the point. The point is that the government defined contribution market is still evolving, thank goodness, and so is the wisdom surrounding the design of the investment menu.

Great Work by the Annual Conference Committee

In addition to the speakers recognized above, I would like to thank the 2015 NAGDCA Annual Conference Committee, chaired by Polly Scott of Wyoming. The other members were Kathleen Wilson, Jim Link, John Bourne, John Eckhardt, Regina Hilbert, Erin Sheridan, and Rey Guillen. Thank your for an informative conference agenda, and in particular, for this very creative and energizing session.


“Code of Conduct for Public Pension Service Providers” Should be a Two-Way Street


According to a recent article in PLANSPONSOR® (May 6, 2015), the National Conference on Public Employee Retirement Systems (NCPERS) has developed a 10-point voluntary “Code of Conduct” for service providers to public employee pension programs.

According to the article, the plan requires service providers to:

  • Act in a professional and ethical manner at all times in dealings with public plan clients;
  • Act for the benefit of public plan clients;
  • Act with independence and objectivity;
  • Fully disclose to public plan clients conflicts of interest that arise that may impair the ability to act independently or objectively;
  • Act with reasonable care, skill, competence, and diligence when engaging in professional activities;
  • Communicate with public plan clients in a timely and accurate manner;
  • Uphold the applicable law, rules, and regulations governing their sector and profession;
  • Fully disclose to public plan clients all fees and charged for the products or services provided to said client;
  • Not advocate for the diminishment of public defined benefit plans, and;
  • Fully disclose all contributions made to entities enumerated in Schedule A that advocate for the diminishment of public defined benefit plans.

Most public and private pension professionals would certainly agree that most of the points above should be expected of any professional entity operating in the public pension arena. And it should not apply just to “service providers”. It should also apply to the conduct of public retirement systems as well.   Perhaps that was the intention of NCPERS, but if so, it doesn’t say that. To make it clear that both parties are bound by this conduct, some modifications are in order:

  1. Public pension systems also have an obligation to fully disclose the facts, including a more realistic measurement of potential costs to all stakeholders. The public deserves to know what the implications are if the assumed rate of return for the public retirement system fails to materialize.   What would be the impact on the system and on stakeholders? A study by Cheiron for a state retirement system in 2013 calculated that there was only a 40% chance the retirement system would achieve it’s assumed rate of return of 7.5% over the next 20 years. Studies like that need to be conducted by every public retirement system, and the results need to be shared with all stakeholders. Public retirement systems also need to act with “independence and objectivity” in developing alternative plans of action if the assumptions turn out to be wrong. And, those alternatives should be openly debated by all stakeholders.    In January of 2014, The Nelson A. Rockefeller Institute of Government issued a report   titled “Strengthening the Security of Public Sector Defined Benefit Plans”. The report makes a compelling argument that the proper rate for valuing pension liabilities on financial statements is separate from the question of what pension funds assume they will earn on their investments. This report, and others like it argue that the public sector is not doing all it could to fairly and objectively estimate the potential long-term costs of their system. Some retirement systems deal with this better than others, of course. However, there remains a prevailing “circle the wagons” mentality in too many public systems where there is reluctance to deal openly and honestly with stakeholders about the potential cost of funding current benefit obligations.
  1. This brings to the last two points in the “Code of Conduct”. Service providers must:
  • Not advocate for the diminishment of public defined benefit plans, and;
  • Fully disclose all contributions made to entities enumerated in Schedule A that advocate for the diminishment of public defined benefit plans.

Any public entity that relies entirely on taxpayer funds should not try to stifle free speech. Penalizing taxpayers and other stakeholders for engaging in a public debate is just bad government. There is never an acceptable excuse to limit or restrict free speech, yet this is what these two points seem to imply. It could be argued that, in some jurisdictions, it may even be illegal to use a public contract for services to muzzle any discussion about a public entity that could be deemed “diminishing”[1]. I’m not a lawyer, so I will leave that discussion to others.

This is not the first time these types of provisions have been used by public retirement systems and/or boards that oversee public pensions. At least one state government has a clause in their contract with their service provider that prohibits them from saying anything negative about the defined benefit plan, or engaging in any public discussion that may appear threatening to the policies of the Board.

A city in California has a clause in their contract that permits them to fire their vendor if any staff member (including employees who live in that city) speak to the city council about any issues they have with plan governance. In other words, don’t bring any possible missteps to the attention of the elected officials on the city council. If you do, you’re fired and not eligible to bid on the plan again. While it is unlikely that any court would agree that a public entity can prohibit taxpayers from speaking with their public officials, the vendor (in this case) signed the agreement for fear of losing the contract.

There are other examples besides those above. The point that is lost on so many public retirement systems is that any public discussion of retirement plans, funding alternatives, benefits, and yes, even alternative plan designs, is a healthy exercise. Many individuals, companies, and research organizations are, in fact, trying to encourage steps that would shore up these systems and make them more sustainable in the long-term.  Not everyone who shares an opinion is an enemy lurking around the corner. When any pubic entity sees public commentary as an enemy, it diminishes the ability to craft creative solutions to pension system problems.

It is this type of behavior, and the failure to engage in honest and objective discussions of defined benefit plans that is feeding taxpayer angst about public sector pension plans. Voters in cities like San Diego and San Jose may have felt differently about their ballot initiatives if they had confidence in the integrity, objectivity and cost assumptions used by their public pension officials.

Entities that are fully taxpayer supported (by individual and corporate taxpayers alike) are only creating suspicion and mistrust when a code of conduct is “one-sided” and punishes any free speech the system finds “diminishing” (however defined) to the system.

Gregory Seller

Gregory Seller Consulting, LLC

Gregg is an independent consultant specializing in public and private pension advocacy, plan architecture and design, and thought leadership for public pension policy. His practice is fostering debate on improving public and private pensions in the United States, and on the more efficient delivery of secure pension benefits to plan participants.

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Provided for information only and is not legal or investment advice. Plan sponsors should seek their own legal counsel on theses and other matters regarding their fiduciary responsibility.

[1] There are several definitions for “diminishment”. One of them is “The act of reducing in size, quantity or quality.” Merriam Webster® defines it as (among others)  “To become or to cause (something) to be less in size, importance, etc.”