Thursday, April 23, 2015

Despite the Best Efforts of the Government ...

Despite the best efforts of the federal government and of governmental agencies, most Americans in the workforce today really have no idea how they are going to retire or if they are going to be able to retire. Disclosures are much more comprehensive than they were in earlier years. Opportunities for tax-favored savings have grown. Plan designs that truly encourage savings have become common.

So, where did things go wrong?

To consider this, let's look at a brief history of retirement plans -- very brief in this case.

In the beginning (Genesis in this case is known as ERISA), most American workers who were fortunate enough to have company-provided retirement plans were in defined benefit plans. In fact, Section 401(k) had not yet been added to the Internal Revenue Code. So, while some industries tended to favor thrift plans (after-tax savings plans that often also provided for an employer match), university systems and certain other tax-exempt organizations tended to have 403(b)s, and professional corporations often had money purchase and profit sharing combinations, lots of workers had DB plans as their backbones.

And, the workforce model fit with DB plans. Likely, the company that you worked for at age 30 would be the one you would retire from. As a retention device, there were lots of goodies that came with staying with that company until at least age (usually) 55. Another wonderful device known as subsidized early retirement, sometimes combined with early retirement windows, allowed companies to manage their workforces without the need for layoffs. In DB plans, there is no such thing as leakage if you stay with the same company.

So, a worker really didn't have to know all that much. What they did know is that when they retired, they would have a combination of their pension and their Social Security and that between them, that felt like enough to live on.

As the Old Testament evolved, so did the landscape change. Gradually, DB plans were replaced by 401(k) plans until we were faced with the New (world) Testament where the bulk of American workers were no longer accruing defined benefits. And, in a 401(k) plan, as we all know, it's really difficult for a participant to figure out exactly what he can buy for the rest of his life with an account balance.

And then there were disclosures.

Now, we get disclosures about the level of fees being charged against our accounts in a plan. I'm in this business. I can't read them. While the wording is not bad, those disclosures are so boring that even if I try, I am unlikely to make it through the first paragraph.

And, there are proposals that will require my employer (through a TPA) to tell me just what my 401(k) may grow to and how much per year that will be worth in my retirement. But, those all use assumptions.

I can understand those assumptions. If you are reading this, it's likely that you can as well. But, how about the poor participant who doesn't know if 6% annual investment return is reasonable? How about the poor participant who doesn't know whether retiring two years later is worth very much in terms of leading to a more comfortable retirement?

Savings plans are a good supplement, but with the current level of communications, to me, they are not the answer. Computer-based models might help, but even then, they would be dependent upon the assumptions underlying the modeling. If plan sponsors choose them, those assumptions might be reasonable in the aggregate, but very rarely for any given individual. If participants choose them, then they need more education than they can ever expect to get on those selections.

From where I sit, there is no easy answer.

Perhaps it's time to return to Genesis. When plans were funded responsibly, costs were controllable and participants who retired under a DB system with some amount of voluntary savings are generally doing pretty well in retirement.

But, will you?

Thursday, April 9, 2015

When Did We Stop Being Inquisitive?

I can still remember much of my childhood, so most of my readers should be able to remember theirs, as well. Childhood has its phases. There is the "no" phase which usually occurs somewhere around age 2 or 3 in which it doesn't matter what our parents say, we answer "no." A bit later on, there is the "why" phase in which in doesn't matter what our parents tell us to do, we ask "why?"

At the time, I'm certain that all of those whys were very annoying to our parents and for those of us who have been parents in our own right, they were annoying to us too.

Sometimes.

Sometimes, asking why is a good thing, perhaps not to the extent that a 5-year old might do it, but oftentimes asking why gives us perspective into what we really need to do.

This extends itself into the benefits world as well.

Let's consider a not particularly made up hypothetical situation. A client informs their consultant that they want to change their 401(k) plan to make it a safe harbor or to make target date funds their QDIA. Or, on a different topic, they say that they need to move to a high-deductible health plan. If we, as consultants don't ask, but the client chooses to volunteer some information, we might learn that they read about the increasing popularity of whichever of these that it was or they heard about them at a conference.

There are several approaches that a consultant can take to that request. Sadly, the one that we often jump at is 'we can help you with that' as we salivate knowing that we just sold a new project. So, we're going to do what the client asked us to do not what the client needs us to do.

Let's suppose.

Let's suppose that we asked why.

Why do you want a safe harbor plan? Why do you want to use target date funds? Why do you want a high-deductible health plan (HDHP)?

Perhaps upon hearing the client's answer, we'll know that they are headed in the right direction. On the other hand, perhaps they are not. Because everyone else is doing it is not always a good reason.

Suppose we focus for a moment on the high-deductible health plan (I haven't written about health care for a while). When we ask why, the client tells us that her company's health care expenses have increased to rapidly and that they need to reduce that cost. Introducing an element of consumerism, she tells us, will make employees part of the buying and spending decisions and save the company money.

Strictly with respect to the health care plan, I expect that she is correct. In total, she may be correct. But, if cost is the issue, isn't it important that she understands the secondary and tertiary savings and costs?

Some data on HDHPs suggests that employees in those designs are more likely to skip certain medical procedures. In some cases, that's good. The procedure might not be necessary and not having it performed will save money at no personal risk to the employee. On the other hand, the procedure might truly be advisable. But, since the first $5,000 of cost may be borne by the employee, he may decided that is not money that he wants to spend. He chooses to forgo the procedure.

What are the non-primary effects of that decision? Here are a few potential ones:


  • The employee should have had the procedure and develops a more severe condition later on that is far more expensive to treat.
  • The employee, when that more expensive procedure becomes absolutely necessary, will be out of work for an extended period of time generating another significant cost to the company.
  • The employee may become disgruntled with the employer because this new plan design "forced" him to not have his advisable procedure. Disgruntled employees are usually either less productive or they quit, or both.
These are all meaningful costs, but they are not ones that we can truly predict. We know that some of them will occur, but, in my opinion, the best that we can do is to model some scenarios and see where they might fall out. Perhaps understanding the full picture will help our client to better understand the decision she is considering.

But, we'll never know how to paint that picture if we're not inquisitive.

Don't forget to ask why.

Thursday, April 2, 2015

The Best 401(k) Communication Ever

A little over a week, I heard a talk about the best 401(k) communication campaign to employees ever. It didn't have that title. The speaker who was instrumental in developing the campaign didn't claim it was the best ever. But, I think it is.

In 30 years in this business, few things have remained constant. Rules have changed, employee and employer attitudes have changed, benefits programs have changed, and cost sharing has changed.

One thing has not changed.

In 1985, I saw the results of a survey of employees in a variety of companies nationwide. The question that I focused on asked these employees how they liked to receive their communications. The winners in the survey by a large margin were from either their supervisors or from their peers. In my opinion, and I feel pretty strongly about this one, that hasn't changed.

Generally, you think about people like that as being like you. HR is often thought of as just being part of that corporate ivory tower. The recordkeeper/TPA is viewed as having something to sell. External professional communicators rarely understand the culture of the organization, and even if they do, they are often going with glitz and glam in an effort to justify the fees they are charging.

Suppose you keep it simple.

Suppose you use your own employees to keep it simple.

The company that I heard about has a fairly traditional 401(k) plan. Its employees are diverse. Many do not speak English well or at all. While the company compensates its employees well for their jobs and geography, these are generally what most of us would think of as pretty low-paid workers. They don't have discretionary income. Most of them are shift workers as the manufacturing company runs 24 hours per day.

So, what did the company do? What did the young Manager of Employee Services do? She found employees who would support the 401(k) plan. She developed communications around the 401(k) plan. And, she scheduled employee meetings catering to both English and Spanish speakers, catering to first, second, and third shifts, and catering to lower paid line workers and to higher paid engineers.

She didn't run the meetings. She is corporate. The message needed to hit closer to home.

She found employees in the workforce who she thought would be well-suited to deliver the right messages. She found people who could come across as credible in their peer groups. They would be her communications team and she trained them to deliver the message.

The results were astounding. Employees took an interest in their plan. Levels of participation increased. Levels of deferrals increased. Employees believed the message from people they work with. They stayed after work to hear the messages. In many cases, their spouses joined them. They are now in a better place on being on the road to retirement some day.

The company kept it simple. The company kept it credible. And, the company didn't have to spend a bunch of money on this campaign.

Effective communication doesn't need to be complicated. In fact, more often than not, it shouldn't be.

P.S.: This was the speaker's first time presenting at a conference. She was pretty nervous about it. I told her that after I heard it that I would give her honest and constructive feedback. The only feedback that I could give her was this: "I would hire you ... in a heartbeat."

Wednesday, March 25, 2015

Qualified Retirement Plans Are Not a Congressional Toy

I was at the Southern Employee Benefits Conference Annual Educational event yesterday. One of the speakers had just returned from a conference in Washington where there were a number of presenters who are staffers on The (Capitol) Hill. Reports are that staffers from both parties strongly implied that tax-favored status of 401(k) and other qualified retirement plans may be in jeopardy.

In short, this is bad -- really bad.

The eventual ability of many Americans to retire in the recently traditional sense is already in jeopardy. Various surveys that I have seen say that the majority of Americans in the workforce have no savings outside of their qualified retirement plans and for most, those are 401(k) plans only. If Congress were to eliminate some or all of the tax breaks associated with them, I fear that those savings would disappear as well for many people. All but those who had the ability and foresight to save and invest on their own would be left to find sources of income until they reached their deathbeds.

That is bad -- really bad.

I don't think I have ranted too much for a while, but this topic is always good for one.

When Congress looks at issues that have tax effects, they break them into two categories -- tax revenues and tax expenditures. Anything that causes the government to collect less money in taxes is a tax expenditure.

Therein lies the rub. Most things that Congress can do for the country cost money. If Congress chooses to send a bill to the President that provides for some improvement that was not previously planned, it needs to pay for those costs. It often chooses to do so through reductions in tax expenditures.

According to IRS publications, the two largest current tax expenditures are for employer-provided health insurance and for employer-provided retirement plans. Health insurance is a sacred cow. It's not going away unless or until we have a single-payer system. Retirement does not appear to be so sacred.

And, retirement always seems to be a good revenue raiser, at least the way that the Congressional Budget Office (CBO) scores bills. The CBO looks at 10-year costs or revenues. So, Congress needs money to pay for a highway bill -- they reduce required contributions to defined benefit plans. That cuts tax expenditures ... in the short run.

As I have said many times, Congress should not intermingle tax policy and public policy. Ever!

Sadly, Congress does not listen to me. All of my readers know that Congress should listen to me, at least on these issues, but alas, they are not so wise.

So, we are left with a Congress that makes changes to employee benefit plans in the most interesting places. Here are a few that will either refresh your memory or leave you scratching your head or both:


  • The Uruguay Round Agreements that led to the formation of the World Trade Organization
  • HATFA, the 2014 highway funding bill
  • Several defense appropriations acts
  • Any number of omnibus budget reconciliation acts (OBRAs)
  • KETRA, the Katrina Emergency Tax Relief Act of 2005
  • SBJPA, the Small Business Jobs Protection Act
If Congress wants to eliminate the tax breaks for qualified plans, it should do so by eliminating the federal income tax. If Congress chooses not to do that, don't mess with them.

Thursday, March 12, 2015

Proxy Hysteria Arrives -- I Was Right

I told you it would happen, didn't I? I said that companies whose executives participate in defined benefit (DB) pension plans, especially nonqualified plans were going to report massive increases in CEO compensation. I said that there would be a big name company for which the increase in CEO compensation due in large part to the amount from pensions would create hysteria.

It has happened. Bloomberg reported in a video and an article that GE CEO Jeffrey Immelt was rewarded with an 88% increase in compensation despite sluggish performance. The company attributed the compensation increase to his reshaping of the company and to an increase in the value of his pension.

In my opinion, this could have been handled better. They could have focused on the message from my January 7 post. It said right there what was going to happen. I wouldn't lie to you and I wouldn't lie to GE.

Let's digress for a moment and think about how executive compensation is disclosed for the named executive officers (NEOs), including the CEO, at a public company. The company discloses compensation generally in the Summary Compensation Table (SCT) of the proxy. In the Compensation Discussion and Analysis section (CD&A), the company is afforded the opportunity to discuss its compensation practices, procedures, and policies. As the CD&A is a narrative, the company is required to discuss its rationale for its policies, but it is certainly not precluded from explaining changes. In fact, this is a great place for the company to explain what happened.

According to the Bloomberg article, Immelt's total compensation was approximately $37.3 million. I am neither condoning nor condemning that level of compensation here; that's not my point. Bloomberg says that that amount represents an 88% increase in compensation. Using that figure suggests that Immelt's compensation in the previous year was approximately $19.8 million. Further, Bloomberg says that GE noted that without the pension increase, Immelt's 2014 compensation would have been $18.9 million.

Opportunity knocked, but nobody opened the door. Apparently, GE did give Immelt a roughly 6% increase in base pay apparently from $3.2 million to $3.4 million. There appear to have been no other changes in compensation structure or policy with regard to the CEO.

Suppose GE took the step of explaining the pension increase. The pension plans in which Immelt participates did not change. He wasn't granted a massive benefit increase resulting in his total compensation doubling. What happened was that his 2014 compensation replaced his 2009 compensation (remember 2009 was a horrible year for the US and global economies) in a 5-year average, pension discount rates dropped (this increases the present value of pension benefits), and the Society of Actuaries released a new mortality table (I suspect GE adopted it) reflecting longer life expectancies in general.

What could GE have controlled in an effort to keep Immelt's disclosed compensation relatively steady? They could not have controlled discount rates as they are based largely on the high-quality corporate bond market. They could have chosen, subject to the approval of their external auditors, to not update the mortality table to use for the calculations, but that would only have been obfuscating the issue and frankly, the updated table is likely more appropriate for them. Finally, 2009 happened in 2009. It can't be undone. Incentives paid out more in 2014 than they did in 2009. That's true for almost all companies. What it is reflective of, that corporate performance has improved, is true for many companies and it's a good thing.

So, GE and Immelt didn't do anything evil. Their crime, so to speak, was not an error of commission, so much as it appears to have been one of omission.

GE had to know that this "increase in compensation" would set off alarms. Bloomberg appears to have received or at least heard statements from GE. Why did GE not prepare its spokesperson to address this? The fault was not in changes to their compensation program; the fault was in their lack having a prepared message.

I don't expect that they will be the only company to face this issue. I can help you craft the message. Get out ahead of this problem.

You'll thank me later.