Monthly Archives: September 2014

A Chasm of Good Intentions

September 29, 2014

Having just returned form the 2014 Annual Meeting of NAGDCA (National Association of Government Defined Contribution Administrators) in San Antonio, I am struck by how little has really changed in the government market in the past 35 years.

I have a soft spot in my heart for NAGDCA. I attended both of the original formation meetings in Chicago in 1980 and 1981, and attended the first Annual Meeting in Biloxi, Mississippi in 1982. I also helped create, and served on, the first Industry Board. I’ve attended all the Annual Meetings except two.

While not unique to NAGDCA, it seems that most pension conferences just keep having the same sessions on the “retirement crisis” in America; too many people saving too little. Every year, there’s another public figure, academic or media personality telling us how bad the crisis is. But we know all that. We’ve known that for over three decades.

What we need to focus on is what to do about it.

It’s time to stop diagnosing the problem and focus on the cure:

  1.  Automatic Enrollment and Automatic Escalation

Every government defined contribution plan in American should be compulsory when you are hired. Period.

Employees are free to opt-out, but we know that only a fraction will. Every plan sponsor should be actively implementing this. If your state has garnishment or other laws that prohibit automatic enrollment, you need to focus on changing the law. Go to your state capitol and explain the issue. Be sure your local city council or county commissioners pass a resolution endorsing a change in the law. Get legislative and vendor sponsors, and get your public employee unions on board.

In my nearly 40 years in the public sector pension market, I’ve seen providers and plan sponsors spend hundreds of millions of dollars over decades to improve enrollment. Advertising campaigns, videos, splashy brochures; yet we have barely moved the needle on “voluntary” enrollment. It’s time to stop wasting money on things that don’t work and focus on making automatic enrollment and automatic escalation our number one priority. Don’t take “no” for an answer. We all know that the inertia of automatic enrollment really works in the long run so let’s just get that done for every governmental defined contribution plan in America.

  1. Scrap The Individual Fund Selection Process

If the “people aren’t saving enough” theme is the number one recurring topic at pension conferences, a close second is the “people are poor investors” sessions. Ok, we get it. So let’s do something about it.

Enroll everyone in managed accounts, target date funds, or risk-based asset allocation funds. Discourage participants from individual fund selection. Make them sign a form that they are a “knowledgeable investor” before they pick their own funds in an alternate core line up or brokerage account.

Most of the evidence points to managed accounts as the best way to structure a portfolio that takes into account your defined benefit plan, the pension plan of a participant’s spouse or partner, and other factors such as social security or personal savings. Target date funds can’t and don’t do that. While it is true that portfolios in managed account programs may be similar to those in target date programs, the big difference is that managed accounts put the participant into the fund that is right for them, based on their unique set of circumstances (of which age is only one of the factors). Target date funds can never measure up to that degree of customization. They just aren’t designed to operate that way.

However, if you can’t offer managed accounts for a reasonable fee, then opt for target date funds. They are far from perfect. The “off the shelf” target date funds are often tailored for the corporate 401(k) market, and many are loaded with proprietary funds of the investment manager. Custom target date funds are great for jumbo plans but they carry added fiduciary risk and are really only economically feasible for very large plans. Nonetheless, anything is better than asking your participants to pick from an investment menu of mutual funds. So if you don’t opt to put your participants in managed accounts, target date funds are a good second option.

Risk-based funds are also another option. Given the issues with target date funds (one size fits all for people in a certain age bracket) the risk-based alternative at least permits some degree of customization if the participant has other retirement plans and/or personal savings or a spouse/partner with another retirement plan. However, most participants will need help selecting a risk-based fund so if you can’t easily offer that, then stick with managed accounts or target date funds.

The important thing is to scrap individual fund selection. Only a small minority of participants really do it well, and most plan sponsors spend way too much money and time “monitoring, hiring and firing” specific fund managers for asset classes that most participants don’t understand or use wisely. For the very small percentage of people who are capable of constructing their own portfolio, let them do it in the brokerage account. There’s no need for the plan sponsor to “select or edit” core funds for knowledgeable investors, so just scrap individual funds. Think of the time and money you will save when you end this practice that is really of little long- term value to the bulk of your participants.

       3.  It’s Time to Reallocate Your Plan Governance Dollars

Once you have all of your employees in the plan, and safely tucked into a managed account, target date, or risk-based fund default option, it’s time to spend your consulting fees and investment advisory fees in a more creative manner.

Providing your plan participants with projected future income statements is a great starting place. Ideally, you should include all future sources of retirement income; your defined benefit pension plan, the defined contribution plan, personal savings, retirement income from a spouse/partner and even social security, if applicable. This tool would a far better way to spend plan-level funds instead of wasting money on individual fund selection and monitoring.

Once you no longer have to worry about enrolling participants and helping them select investment options, your plan vendor (record keeper) can devote resources to counseling sessions with participants and their spouse/partner to help them understand their retirement income projection statement. All of those boring and repetitive “enrollment meetings” would be replaced with personal counseling sessions (every two years, at least), where the focus would be on the projected retirement income statement, and not on plan investments or other topics that simply confuse the bulk of participants.

No One Ever Complained About Having Too Much Money in Retirement

 It’s highly unlikely any participant is going to be angry at their employer for making them save too much money for retirement. It’s time we really focus on what actions we can take that truly help our employees. Unfortunately, it takes a bit of courage to step over a chasm of good intentions and make decisions that really have a profound and positive impact on the financial well being of employees. It is far easier to stick with the status quo, even if it isn’t working well.

The deck is stacked against this type of transformative change. The existing infrastructure of the government defined contribution plan market (and to a degree the DB market as well) is loaded in favor of the government and private entities that benefit from the existing and inefficient plan architecture. But this change will occur, because there are leaders in the market, both in the public and private sector who know these are the changes that need to be made. They are prepared to step over the chasm to make these important changes happen, and transformative change will ultimately occur. Your choice is to be a leader, or one of the followers.

Gregory Seller Consulting, LLC

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