Wednesday, April 17, 2019

4 Problems at the Intersection of Finance and HR

They are two of the most visible departments in corporations even though neither directly produces revenue, but does require expenditures -- Finance and HR. Historically, they have been at odds neither particularly caring about the worries of the other despite being inextricably linked. This occurs in many ways, but I'm going to focus on four in the order that they seem to arise:

  1. Recruiting
  2. Cost control and stability
  3. Retention
  4. Workforce transition
Of course there are many more, but I have some thoughts that link all four of these together. In 2019, that's not always easy as there are constant pushes in Congress to tell employers how much they must pay, which benefits they must provide, and at what costs. How then does one company differentiate itself from another?

To the extent possible, every employer today seems to offer teleworking, flexible work hours, and paid time off banks. While they once were, those are no longer differentiators. After the Affordable Care Act took effect, the health plans at Company X started to look a lot like the health plans at Company Y.

I have a different idea and while I am probably biased by my consulting focus, I am also biased by research that I read. Employees are worried about retiring someday. They are worried about whether they will have enough money or even if they have any way of knowing if they will have enough money. They are worried about outliving their wealth (or lack thereof). They are worried about having the means to support their health in retirement.

I know -- you think I have veered horribly from my original thesis. We're coming back.

Today, most good-sized companies have 401(k) plans and in an awful lot of those cases, they are safe harbor plans. They are an expectation, so having one does not help you the employer in recruiting. While once they had pizzazz, today they are routine. 

Cost stability seems a given, but it's not. Common benchmarks for the success of a 401(k) plan including the percentage of employees that participate at various levels. You score better if your employees do participate and at higher levels. But, that costs more money.

If there's nothing about that program that sets you apart, it doesn't help you to retain your employees. And, as we all have learned, the cost of unwanted turnover is massive often exceeding a year's salary. In other words, if you lose a desirable employee earning $100,000 per year, it is estimated that the total true cost of replacing her is about $100,000. That would have paid for a lot of years of retirement plan costs for her.

There will come a time, however, that our desirable employee thinks it's time to retire. But, she's not certain if she is able. And, even if she works out that she is able, retirement is so sudden. One day, she's getting up and working all nine to five and the next, she has to fill that void. Wouldn't it be great to be able to transition her into retirement gradually while she transitions her skills and knowledge to her replacement?

You need a differentiator. You need something different, exciting, and better. You need to be the kid on the block that everyone else envies. 

You would be the envy of all the others if you won at recruiting, kept your costs level (as a percentage of payroll) and on budget, retained key employees, and had a vehicle that allows for that smooth transition.

I had a conversation with a key hiring executive earlier this month. He said he cannot get mid-career people to come to his organization from [and he mentioned another peer organization]. He was exasperated. He said, "We're better and everyone knows it, but their best people won't come over." I asked him why. He said, "It's that pension and I can't get one put in here." I asked him to tell me more and he explained it as one of those new-fangled cash balance plans with guaranteed return of principal -- i.e., no investment risk for participants, professionally managed assets, the ability to receive 401(k) rollovers, and the option to take a lump sum or various annuity options at retirement. He said that it's the "talk of the town over there" and that even though it seems mundane when you first hear about it, it's their differentiator and it wins for them.

We talked for a while. He wants one. He wants one for himself and he wants one to be as special as his competitor. He wants to be envied too. We talked more.

Stay tuned for their new market-based cash balance plan ... maybe. He and I hope that maybe becomes reality.

Thursday, March 7, 2019

Hospitals and a Sky is Falling Economic Prediction

The headline from today's CFO Journal published by the Wall Street Journal was stark: "Sour Economic Outlook Weighs on CFO Spending, Expansion Plans. Let's leave off the lack of expansion plans, but focus on spending.

Consider a low-margin industry that employs highly-skilled workers in short supply -- hospitals -- in particular. Talk to heads of HR in the hospital sector. Most have nearly identical top concerns: how do I attract and retain skilled professionals? What they are obviously referring to are physicians, nurse practitioners, nurses, technologists, and technicians. These are all careers that require very specific, often extensive, education. They are all in short supply and feeling burnout. What is there to keep them around?

Direct cash is not a good option. First, as the WSJ piece suggests, CFOs just won't part with the levels of cash necessary to attract and retain. Second, and while data demonstrating this phenomenon are difficult to find, people live to their levels of income. In other words, if you have a doctor earning $200,000 per year with annual savings in his 401(k) only, if you give him a $50,000 pay increase, his savings in many cases will remain 401(k) only.

This is not good. Some day that physician is going to burn out. He may tire of a profession that has changed from being highly personal to largely impersonal. He may tire of insurers telling him how to practice medicine. He may tire of government intervention.

In any event, if he tires, he is going to do so without being prepared for retirement.

Therein may lie the key.

Prepare your skilled staff for retirement. Do it not by increasing your costs, but by reallocating your labor costs.

Most people live to (or above regardless of pay or nearly to) their paychecks. And, they want pensions.

Give them what they want. Give them a pension that checks all the boxes:


  • Secure
  • Lifetime Income Options Without Subsidizing the Profits of Large Insurers
  • Portability
  • Easy to Understand
  • Professionally Managed Investments
  • Stable, Predictable, and Manageable Costs
The time is now. Act while the economy is still strong and prepare yourselves and your employees for when it's not.

Tuesday, February 19, 2019

More Evidence Supporting the Value of Second Opinions

I was reading this morning's Wall Street Journal "CFO Journal" newsletter. One headline jumped out at me -- "Finance Professionals Lack Confidence They Can Spot Errors."

Here were some of my key takeaways:

  • Nearly 70% of finance professionals believe their company has made significant business decisions based on bad financial data.
  • The survey found that ... 55% of professionals lack confidence  in their ability to spot financial errors before reporting results.
  • Roughly one-fourth said they were concerned about errors they know to exist, but hadn't identified.
What does that tell me? It tells me that in-house financial professionals don't trust their own numbers. It also implies that they may not trust externally-produced numbers, but they are not doing anything about it.

Doesn't that scream that you need a second opinion? Thinking about this as an actuary, it tells me that companies that sponsor pension plans whether they are traditional or cash balance, ongoing or frozen, well-funded or not, could really benefit from an actuarial second opinion.

With required contributions annually in the millions or even hundreds of millions or billions of dollars for many longer-term plans, the cost-value trade-off of a second opinion seems clear. If a plan sponsor got meaningful value one year in ten from such a second opinion, they will have paid for all ten of them many times over.

Are you in a long-term relationship with your actuary? If so, has the relationship gotten complacent to the point that they are going through the motions. Think of your desire for a second opinion like a seven-year itch.

Has the actuarial firm that you use recently changed or significantly modified its team that serves you? Did they come back to you with findings from when they reviewed the work that has been done recently? If not, might they have found something they don't want to tell you about? Perhaps not ... maybe so?

Does the actuarial firm that is serving your plan do periodic reviews where national leaders come in and audit the work of the team? Have they done such an audit recently? Did the team tell you about the results of the audit.

And, returning to the theme of the WSJ tidbit, do you want to be one of those seven in ten companies that makes significant business decisions on bad financial data? Isn't it time to think about an actuarial second opinion?

Tuesday, February 5, 2019

Eliminating the Phone-A-Friend Retirement Plan

I read an article earlier this morning informing me that employees don't really understand 401(k) plans. News Flash: that's not news. In fact, looking at behavior of employees and overhearing casual conversations between otherwise intelligent 401(k) participants about the value of their 401 plans, their 201k (when they are underperforming expectations), their 501k (when they are overperforming expectations), and the ways that they choose investment options, this sounds like a statement from Captain Obvious.

How did 401(k) plans get this way? In their earlier incarnations, typical 401(k) plans gave employees an option to defer. In most plans, employees that did choose to defer got a match from their employers. Employees could then invest those assets within the plan in usually about five to eight options.

I recall a conversation back in the early 1990s with an individual who is now on every list of the great minds of the 401(k) world and the great innovators in the 401(k) world. This individual told me that no defined contribution plan needs more than six investment options ... ever .. and that any plan sponsor with more than six should be lined up with their adviser before a firing squad (the words are not precise, so no quotation marks, but they are pretty darned close). The same individual later became one of the leading proponents of a 'full menu' of options with at least one and often more than one from each asset class and each investment style within that asset class.

How exactly do employees benefit from such choices? They don't.

Suppose I choose three highly rated large cap funds from US News's report:

  • T Rowe Price Institutional Large Cap Core Growth Fund
  • Fidelity Blue Chip Growth Fund
  • JP Morgan Intrepid Growth Fund
Let's imagine that they are all in my fund's lineup. How do I choose?

Intrepid sounds like a cool name. Maybe I should pick that. Blue Chip? My grandfather told me to invest in blue chips. I wonder if that's still true today. And, that long name? If it does all those things, it must be really good, too.

I could read the prospectuses. I could do research on performance history. I could look at investment styles and drift whatever all that means. I could phone a friend.

The simple fact is that for most of us, it's a crap shoot ... plain and simple. 

Because of that, despite all the forecasts in the world from 401(k) lovers, this should not ever be a primary plan for employees. As it was intended back in the late 70s and early 80s, this should be a supplemental savings plan -- an addition to what you get in your primary plan.

Your primary plan should be just that. It should be employer-provided. It should not be confusing. There should be no need for a phone a friend option. 

I don't care what kind it is although I have my biases. My bias is that the plan should provide for the ability for participants to take distributions in lump sums or wholesale-priced annuities (my term for annuities on a fair actuarial basis without middle men making profits at your expense). My bias is that the determination of your benefits in the plan should be simple. My bias is that assets should be professionally managed. 

I don't care what label you give to such a plan. I don't even care what label ERISA or the Internal Revenue Code gives to such a plan. What I do care about is that you not lose sleep over whether Intrepid is better than Blue Chip or conversely. What I do care about is that if you choose to annuitize your account balance that you get an annuity that is 100% of what you deserve not some number closer to 80%. 

And, for your supplemental savings, you can have your Phone-A-Friend ... oops, I meant 401(k) plan.

Thursday, November 29, 2018

Surprise -- Employees Want Pensions

I read an article yesterday highlighting, as the author pointed out, that employees value benefits more than a raise. Some of the findings were predictable -- the two most important were health insurance and a 401(k) match and they were followed by paid time off. But, just barely trailing those were pension benefits with flexible work hours and the ability to work remotely far behind.

Let's put some numbers behind the ordering:

  • Health insurance -- 56%
  • 401(k) match -- 56%
  • Paid time off -- 33%
  • Pension -- 31%
  • Flexible work hours -- 21%
  • Working remotely -- 15%
What I found remarkable about this is that five of those six get constant attention. In today's workplace, however, as compared to one generation ago, pensions get little, if any, attention yet nearly one-third of workers would rather have pensions than a raise.

Why is this the case? Neither the survey nor the article got into any analysis as to the reasons, so I get to way in here entirely unencumbered by nasty things like facts. I get to express my opinions.

Ask a worker what they fear. I think they will tell you that two of their biggest fears are losing their health and outliving their savings. The second, of course, can be mitigated by guaranteed lifetime income.

Workers are beginning to realize that 401(k) plans are exactly what Congress intended them to be -- supplemental tax-favored savings plans. In fact, generating lifetime income from those 401(k)s is beyond what a typical worker is able to do. Their options for doing so, generally speaking, are to self-annuitize (when you run out of money, however, the guarantee goes away) or to purchase an annuity in the free market. 

That, too, comes with a problem. While that purchase is easy to do and does come with a lifetime income guarantee, it also comes with overhead costs (insurance company risk mitigation and profits plus the earnings of a broker). Roughly speaking, a retiree may be paying 20% of their savings to others in order to annuitize. That's a high price. Is it worth it? Is that why workers want pensions despite often not really knowing what they are?

Pensions are not for everybody; they're also not for every company. But, this survey strongly suggests that companies that provide pensions may become employers of choice. In the battle for talent, that's really important.

Many companies exited the pension world because the rules made those pensions too cumbersome. But, the rules have gotten better. They've put in writing the legality of plans that many employers wanted to adopt 15 to 20 years ago, but feared doing something largely untried. And, there is bipartisan language floating around in Congress that would make such plans more accessible for more employers.

Designed properly, those plans will check all the boxes for both the employer and the employees. It seems time to take another look.

Thursday, November 8, 2018

When the American Academy of Actuaries has no Clothes


We're all familiar with the Hans Christian Andersen tale, "The Emperor's New Clothes," about two weavers who promise an emperor a new suit of clothes that they say is invisible to those who are unfit for their positions, stupid, or incompetent – while in reality, they make no clothes at all, making everyone believe the clothes are invisible to them. When the emperor parades before his subjects in his new "clothes", no one dares to say that they do not see any suit of clothes on him for fear that they will be seen as stupid. Finally, a child cries out, "But he isn't wearing anything at all!"  
Such appears to be the current position of the American Academy of Actuaries. They have opened voting on two amendments to their bylaws which voting will close November 9 just before midnight. Amendment 1 would take away most rights of Members not on the Board of Directors while Amendment 2 would ensure transparency to the processes of the Actuarial Standards Board (paralleling what we see in other professions such as accounting).
Tuesday, a group of 9 Presidents of the Academy (current, future, and 7 former) sent an email to all members of the Academy urging Members to vote in favor of Amendment 1 and against Amendment 2. They preached transparency and independence. They offer neither.
In fact, were Amendment 1 to pass, in order for a member-driven bylaws amendment to have even a chance to be brought to a vote, it would take a petition of 15% of the membership. Think about that for a moment. 15%. Since no member has a distribution list of contact information for Academy members, gathering signatures of 15% of members would be a herculean task, nigh impossible. And, even if 15% were gathered, the Academy Board could by 2/3 vote of Board members refuse to bring such bylaws amendment to a vote of members.
On the other hand, Amendment 2, the supposedly uppity, disruptive Amendment 2, would have its greatest effect by making meetings of the Actuarial Standards Board -- the professional standards setting organization for US actuaries -- open.
Quel dommage.
Meetings of the ASB should be open. They should be open because we are now at the point where members of the Actuarial Standards Board are chosen in significant part by the Academy's Board (actually, they are chosen by a Selection Committee chaired by the Academy President and having 1/3 of its votes from the Academy, but if the proposed SOA-CAS merger takes effect, that 1/3 will increase to 1/2).
The 9 presidents tell us how important this is for the Academy and for the profession. They talk about the independence of the Academy. They talk about the transparency of the Academy. They expect that the masses -- the sheeple -- to chant in agreement.
So, I urge you to vote NO on Amendment 1 and to vote YES on Amendment 2.
Be like the little boy. Tell the 9 presidents. Tell the Academy. Tell them that the Academy wears no clothes.

Thursday, October 11, 2018

The Big Surprise Gotcha in the Million Dollar Pay Cap

Even those of us who have been hiding under rocks know that late last year, the President signed into law the Tax Cuts and Jobs Act. And, as part of that Act, there was language that amended Code Section 162(m) also known as the million dollar pay cap. After Treasury gave us guidance on those changes in Notice 2018-68, some observers were surprised by a few of the interpretations that the regulators took. One in particular, however, that they didn't quite spell out, meets my criteria for a big surprise gotcha.

I'll come back to that and consider how an employer might get around it, but first some background. Under the old 162(m), deductions for reasonable compensation under Section 162 were limited to $1,000,000 per year for the CEO and the four other highest compensated employees of, generally speaking, publicly traded companies. However, most performance-based compensation was exempt from that calculation and was deductible as it would have been before the cap came into being.

Under the new 162(m), the definition of covered employee has been changed to be the CEO, CFO, and the three other highest paid employees. But, once you become a covered employee, you remain a covered employee. So, by 2030, for example, a company could easily have 25 covered employees. [Hats off to the cynics who know this is a silly example because no law stays in place unchanged for 13 years anymore.] Further, performance-based compensation is no longer exempt.

Like most law changes that affect compensation and benefits, this one, too, has a grandfather provision. Here, the new rules are not to apply to remuneration paid pursuant to a binding contract that was in effect on November 2, 2017, and which has not been materially modified after that date. The keys then relate to what is compensation for these purposes, what sort of modifications might be material, and what constitutes a binding contract.

Compensation is essentially any compensation that would be deductible were it not for the million dollar pay cap. Whether a modification is material remains a bit subjective, but the guidance does specify that cost-of-living increases in compensation are not material, but that those that meaningfully exceed cost-of-living are.

The binding contract issue is the really sneaky one. Your read and your counsel's read may be different, but my read is that if the employer has the ability to unilaterally change the contract, it's not binding. That is problematic.

Consider a nonqualified retirement plan be it a defined benefit (DB) SERP or a traditional nonqualified deferred compensation (NQDC) plan. In my experience, it's fairly common (completely undefined term) to see language that gives an employer the unilateral right to amend said plan, subject to any employment agreements that may overrule. Well, if the company can amend the plan, there would seem to be no binding agreement. And, that means that when that nonqualified plan is paid out to the employee, perhaps none of a large payout will be deductible for the employer. I'm aware of some payouts well into nine figures.

When it's a nine-figure payout, there really aren't great solutions. But, for the typical nonqualified plan, whether it's DB or DC, qualifying some of the benefits changes the treatment. If the benefits can be qualified in a DB plan using a QSERP device, employer funding will be deductible if it is deductible under Section 404. That's far more forgiving and, in fact, it is not at all unlikely that the deductions will already have been taken before the covered employee retires.

Yes, it's still a big surprise gotcha, but don't you prefer a surprise gotcha when it has a surprise solution.