Monday, June 27, 2011

Do the Eyes Have It?

Leave it to an opthalmologist turned US Representative. Nan A. S. Hayworth (R-NY) introduced to the House Financial Services Committee HR 1062, the Burdensome Data Collection Relief Act (BDCRA).

I know, what in the world is that?

If you are a regular, or even occasional, reader of this blog, you know what I think of Section 953(b) (the pay ratio rule) of the Dodd-Frank Act. You have read that I think that it has some conceptual merits, but that it is poorly conceived and will not produce useful information.

Well, I have to give Dr. Hayworth a lot of credit. She has written a bill which is remarkable both for its good effect and for its brevity. I reproduce the bill in its entirety below:

To amend the Dodd-Frank Wall Street Reform and Consumer Protection Act to repeal certain additional disclosure requirements, and for other purposes.
    Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,


    This Act may be cited as the `Burdensome Data Collection Relief Act'.


    Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Public Law 111-203) is hereby repealed and any regulations issued pursuant to such subsection shall have no force or effect.

That's it. That's all there is to it. The good news is that it has been moved from Committee to the full House for consideration. If gambling were legal here, the betting line would be significantly in favor of the bill passing the full House. But, as you know, it then must make it through the Senate (still Democrat controlled) and be signed by the President. If, as I am, you are for repeal of 953(b). then while you hold out great hope for enactment of BDCRA, you don't expect it to happen before January, 2013, at the earliest.

We'll keep you informed here. In the meantime, unfortunately, prepare for the worst with regard to this one.

Customizing Target Date Funds

A recent study conducted by PlanSponsor and Janus Capital informed me that only about 1/3 of 401(k) plan sponsors (I think the actual number cited was 34%) think that Target Date Funds (TDFs) are the best Qualified Default Investment Alternative (QDIA) available. A year earlier, 57% were so enamored. That means that during a year that TDFs did not perform badly, approximately two-fifths of those who were on the TDF bandwagon fell off.

Why is that? Frankly, I'm not sure. The survey didn't ask them. Could it be that participant reactions to poor account performance come about a year in arrears? In other words, is there a natural time lag that occurs before the plan sponsor gets beaten up that goes something like this?

  • Account balances decrease meaningfully
  • Participant sees quarterly statement
  • Participant finds last quarterly statement and compares
  • Participant figures out which investment option he is in
  • Participant asks 10 best buddies who to complain to
  • Between them, they narrow down to the right person
  • Complaints start pouring in 
  • Plan sponsor sours on TDF as QDIA
Even in the best of years, however, one could question whether TDFs are an appropriate default investment vehicle. In the Pension Protection Act of 2006 (PPA), Congress came to a four-step conclusion:
  1. 401(k) plan Participants who don't make an affirmative election regarding their in-plan investments should be defaulted into an appropriate fund
  2. That fund should not be the same for all participants
  3. Instead, it generally should be appropriate and the same for all participants of the same age who think they will retire roughly at the same time
  4. It should be constructed in a way that is appropriate for a participant of that age
It left a few options out there. The investment manager who develops the TDF gets to decide what is an appropriate asset mix. A firm who is both a recordkeeper and an investment manager can nearly force a lot of money into their TDFs (some do this far more than others). A TDF can be 100% proprietary; that is, the TDF created by Really Powerful Investment Manager (RPIM) can be nothing but a mix of RPIM funds that already exist. TDFs need not take any parameters other than expected retirement year into account.

This cannot be the best answer. I repeat, this cannot be the best answer.

When I become President of the United States, a majority of both houses of Congress, and Secretary of Labor, it won't be the answer. Don't hold your breath waiting for any of that to happen. Even if I were an otherwise likely candidate for any of those positions, that I speak my mind freely in a forum like this would disqualify me.

So, consider this, the hint of the century (bonus points if you know who I stole that from, I'll tell you later). Not all 37 year olds who think they will retire in 2040 are similarly situated. Some have savings. Some don't. Some participate in defined benefit plans. Some don't. Some are homeowners. Some aren't. Some have kids. Some don't.

Let's just assume that the tie between recordkeepers and investment managers is not going to be broken. If that's the case, then proprietary TDFs will remain widespread. It may not be perfect, but I just can't see the whole industry losing its religion (that's a big hint, by the way). But, suppose that RBIM is the recordkeeper for the 401(k) plan that I participate in. And, suppose that the TDF family run by RBIM was the plan's QDIA.

But, let's throw in a few changes. Let's throw in a modeler. Now, each 37 year old who thinks they are going to retire in 2040 is going to tell a computer model something about himself. And, the model is going to take all this information and build a more appropriate TDF for that participant. And RBIM will change the name of its company to Really Excellent Manager (REM). 

Oh, and if you are looking for the answer to the trivia question that popped up earlier, you already have it.

Wednesday, June 22, 2011

Surprise ... Hide the Children -- There's a Flaw in Health Care Reform

It took a while to find it, but ... sit tight ... hide the children ... put down your drink ... there is a costly glitch in health care reform (PPACA, if you prefer). It's hard to believe that it could happen in a law that was so carefully read by each member of Congress before they gave it a thumbs up or a thumbs down, but buried in the 2700+ pages, there is a provision that would allow retirees to ignore their income from Social Security in determining their eligibility for Medicaid.

In English, this means that as currently written (and remember it is the law), PPACA is a whole lot more expensive than the projections and forecasts have said it is.

How could that happen? The Republican Party has been informing me ad nauseam that they are flawless. Not to be outdone, the Democrat Party has assured me that the Republicans are mistaken, and the Democrats are flawless.

Oops, you mean neither one is flawless? Could it be that, in fact, they have no idea what they vote on? No! Hide the children even better. This is truly alarming.

At first, the White House responded by saying that this provision was always intended. Then, when they heard the cost, they admitted their might be a mistake. President Obama has assured us that this will be fixed.

Wait! We have a flustercluck here.

This can't be fixed by Executive Order. It will take a vote. Could this be one where one party will choose to hold the other party hostage? I can see it now. In the House (Republican controlled, by the way), a bill will be introduced to fix this provision ... by repealing PPACA. And, in the Senate (Democrat controlled), a bill will be introduced to fix this provision.

I believe that both need some education. There is a wonderful book out there that all of our elected representatives who engage in such foolhardiness should read. My kids were familiar with it when they were quite young. It was written by a wonderful author with the birth name of Theodore LeSieg. Some of you may know him by a different name, but in either case, check out the "Butter Battle Book." It makes far more sense than much of what goes on at Capitol Hill.

Tuesday, June 21, 2011

Employee Engagement Low -- No Surprise To Most

I read the results of another study today that said that levels of employee engagement are low. Do the authors expect their readers to be surprised? While there are notable exceptions out there, most companies do not appear to value individual employees. And, from my vantage point, the productivity of those disengaged employees is not particularly high.

Once upon a time in a faraway land called the United States of the 1960s, things looked more like this:

  • You worked for a company. If you had an hourly-paid job, you worked 40 hours per week and sometimes a little more. If you had a salary-paid job, you probably worked 45-50 hours per week.
  • If you were over the age of 30, this was likely the same company you had worked for when you were 25.
  • You may have had a manager who was asked to manage people. His manager title was not there to be a smokescreen.
  • You didn't get a wide variety of employee benefits. In fact, what you often did get was some vacation time, some sick time, some employer-paid health care, and a pension or profit-sharing plan.
  • If you did a good job, you got an annual pay raise that exceeded the increase in the cost of living.
  • Some day, you would retire from that same company and live a happy retirement.
  • You didn't spend your entire working lifetime worrying about when you would get laid off and how you would ever be able to retire.
Things sure have changed. In many respects, they are better. But, in some key respects, they are not. When employee engagement gets too low, the quality of goods and services declines. You know what, the successful companies understand this.

I spoke a couple of weeks ago to someone in an account management/sales role at a large consulting firm. They lamented to me that they hated their job because they were only going to be compensated well if they mis-served their clients. I was curious about this and pressed for an explanation. What I heard was a bit bothersome. Their firm had about 20 new services. The person I was talking to said that nobody had explained any of these new services to them. But, their incentive payout was not going to be at target (or higher) unless they could sell at least 5 of these new services to each of their clients. It didn't matter if the clients needed them or even if they were good for the clients. It didn't matter that they might be expanding the depth of those client relationships in other ways. It didn't matter if trying to sell those services aggravated this person's good clients.

So, what did this person tell me. They are looking for a new job. Until they have one, they are just going through the motions. Their clients now really dislike this consulting firm that they have worked with for many years.

Look what can happen when you have employees with all-time low levels of engagement. Think about it.

Friday, June 17, 2011

Pension Accounting Changes Yet Again

Yesterday, IFRS announced changes to IAS 19 -- Employee Benefits. For those of you who are not familiar, IFRS is the major international accounting board and through IASB, the International Accounting Standards Board, they issue international accounting standards and related material.

According to the IFRS press release, the "IASB introduces improvements [emphasis added] to the accounting for post-employment benefits." In my opinion, this is very much a matter of opinion. Let's examine.

The most significant change that was made was eliminating deferred recognition of gains and losses. What exactly does this mean?

Most companies will measure their pension assets for IAS 19 purposes once each year, that occurring on the last day of the fiscal year. Under the new IAS 19, effective for fiscal years ending January 1, 2013 or later, actuarial gains and losses that occur during the year will be recognized in income immediately. Among the rationale for this is that this change will inhibit imprudent risk-taking.

I digress. When determining the obligations of a pension plan (IAS 19 calls this a defined benefit obligation or DBO), an actuary makes a myriad of assumptions (technically, the assumptions belong to the plan sponsor, but the sponsor typically defers to the actuary who is trained to make such assumptions) including, but not limited to, these:

  • Discount rate: the rate at which those obligations could effectively be settled on the measurement date
  • Salary increase rate: the rate(s) at which salaries are expected to increase
  • Mortality: the likelihood of an individual dying at a particular age assuming that they live through the immediately preceding age
  • Retirement: the likelihood of an individual retiring at particular age assuming that they remained in employment through the immediately preceding age
  • Termination: the likelihood of an individual terminating employment prior to retirement at a particular age assuming that they remained in employment through the immediately preceding age
Those are some tricky assumptions to make. And, while actuaries are highly trained, there are a few things that I can tell you with certainty about those assumptions. First, they are reasonable; in fact, in many countries, they are required to be the actuary's best estimate. However, most actuaries would tell you that with regard to any assumption, there is probably a range within which any assumption might be considered a best estimate by some qualified and ethical actuary. Stated differently, it is very reasonable that on a particular date, I think the best estimate discount rate for a particular obligation is 5.80% and another actuary thinks the best estimate is 5.90%. This happens all the time and it is fine. Second, the assumption will not be perfect. In all my years of practice, only once can I remember a single defined benefit plan assumption being perfect for a single year. Or, as a colleague of mine once put it to a client when presenting actuarial valuation results, "We know these answers are wrong, but they are as close to being correct as any result you would get from anyone else."

Why did I tell you all this? It was to point out that these actuarial gains and losses that must be reflected in income are estimates. Sometimes, the estimates are very good, and sometimes, despite the best honest and ethical efforts of all parties involved, they turn out to be pretty bad.

Now, let's switch to the asset side. As I noted earlier, our clients usually measure the assets and obligations of a plan once each year, on the measurement date. Suppose a plan's fair value of assets on December 30 is $1 billion. And, further suppose that due to the breakout of civil war in Grand Fenwick (Grand Fenwick was a mythical country in a book called "The Mouse That Roared"), the plan's fair value of assets drops to $975 million on December 31. And, then when the markets realize over the New Year's Day break that the Grand Fenwick civil war has already ended, the plan's assets rebound to $999 million on January 2. The plan sponsor still reports assets of $975 million and the company's income statement will have suffered a $25 million hit because of this silly event.

This is part of the slow rush to mark-to-market accounting. Does it make sense? Sometimes? I can argue either side and I often have. But, in this case, for an ongoing plan, this is a long-term obligation which means that the asset pool should be used to mitigate risks associated with a long-term obligation. But, the amended IAS 19 will cause plan sponsors to treat this as a short-term obligation. This, in turn will cause more sponsors to freeze or terminate their plans which will cause the obligation to be, in fact, a short-term obligation.

Prophetic, isn't it ...

Wednesday, June 15, 2011

Lost in Space?

Today, I start with a question: how did we get here? Where is here? I am referring to the current state of ERISA and the Internal Revenue Code with respect to employee benefit programs and compensation. Is this what the original framers intended? Are we better off now than we were back then? If we could start anew with perfect hindsight, would we create something that resembles what we have now?

I think the answer to each of those questions is a resounding no. The laws have been heavily influenced by successful lobbying efforts by special interest groups. Many have written to cure specific ills without any regard to the new ills that they might cause.

Recall what ERISA stands for -- the Employee Retirement Income Security Act. If there is one thing of which I am certain, that is not what ERISA has become. Perhaps a better name for the law would be PQCAETNE, but I'm not sure how you would pronounce that. In case you were wondering, PQCAETNE stands for Patchwork Quilt to Cure All Evils That Never Existed.

While I'm on today's rant, we can look at the names of some of the older pieces of legislation to perhaps explain how we got into the mess we are in today.

ERISA: Every Ridiculous Idea Since Adam
TEFRA: Things ERISA Forgot, Reagan Added

Thanks for reading. I'll try to be more informative next time.

Thursday, June 9, 2011

Something to do During the Lazy Hazy Crazy Benefits Days of Summer

In my experience as a consultant, summer tends to be a time for corporate HR departments to regroup. There are lots of vacations. Government filings aren't due yet. It's not quite time to panic to prepare next year's budget. Open enrollment is far enough away that you may not have started your communications process. And, in this economy, most companies aren't doing a whole lot of hiring, so there is not much new employee orientation to do.

So, this is your opportunity to sit back and chill, right?

Well, it could be, but I have another idea. If my war stories are anything like yours, then this will resonate. Assuming all plans and fiscal years are calendar year, you may have these deadlines (among others) on the retirement side coming up:

  • FY 2012 budgets in July or August
  • Forms 5500 by October 15
  • Nondiscrimination testing by the time Form 5500 is filed
Consider this. Most every company has the same deadlines. And, most every company gets their requests in to their consultants at about the same time -- at the last minute. Now, that's fine for you, as you are a really important client (everybody knows they are, though), but think about the other side of it. If your consultant is doing 10 tests at once, helping with 10 budgets at once, and assisting with 50 Forms 5500 at once, here is a likely outcome:
  • They work less efficiently as they are jumping from one assignment to another
  • Staffing is not ideal, and unwittingly, you might be the one who gets the inexperienced person assigned to your account
  • The outcome may not be as you hope, but you don't really leave time to fix it
Kudos to a company whose VP-Finance and Administration called me yesterday. Their qualified plan nondiscrimination testing is due October 15. They want to start next week. Past history tells us that their process is complex, Hopefully, they will pass, but you never know with this particular company. If they do not pass, though, they will have time to evaluate their options and develop the optimal solution, instead of panicking and grabbing any old solution.

It's not just testing, though, it could relate to all of these projects. If you start now, you will have eager consultants. They will jump on the work. They will let you know right away if something is missing, or if there are any complications. Your life, ultimately, will be easier.

You think I am wrong that your consultants will jump on this work? If that's the case, call us; we'll work with you to make your life easier.

Friday, June 3, 2011

Fee Disclosure Rules Get Postponed Effective Date

On Wednesday, the Employee Benefits Security Security Administration (EBSA) of the Department of Labor (DOL) published a proposed rule (it's really kind of silly that this has to be a proposed rule as nobody is going to object to an extension) to delay the effective date of the 408(b)(2) (fiduciary-level fee disclosure) and 404(a)(5) (participant-level fee disclosure) regulations. For those who are not sure, those sections are parts of ERISA, not the Internal Revenue Code.

Under the proposal, calendar year plans will have until April 30, 2012 to issue their initial disclosures. The first quarterly disclosures of fees deducted will be due not later than May 15, 2012 for calendar year plans.

We shall see if there is further extension later in the year. It would not surprise me.

Thursday, June 2, 2011

The Health Care Reform Debate Gets Stranger

Music mavens may remember the classic album put out by the Mamas and the Papas, "If You Can Believe Your Eyes and Ears." If you read through this and you still can, then perhaps you are "California Dreaming" (which was on that album).

Leave it to the debate over health care reform, or PPACA (The Patient Protection and Affordable Care Act), if you prefer, to bring forth some of the more interesting legal arguments that the world may ever see. Truth is stranger than fiction and listening to the audio of this testimony has proven it once again.

What am I talking about? The 6th Circuit Court of Appeals is now getting its chance to weigh in on PPACA. Specifically, the issue seems to be whether Congress has the right to enforce the so-called individual mandate. Proponents rely on the broad powers of Congress under the Commerce Clause (and yes those powers have historically been construed extremely broadly).

For those who would rather listen for themselves than read my verbosity, here is where you can click.

Back to the readers of the world. Understand that the 3-judge panel in this case consists of two republican-appointed judge (Judge Sutton and another) and one democrat-appointed judge. What we focus on is the testimony of Neal Kumar Katyal, Acting Solicitor General of the United States. Mr. Katyal ascended to this role when Elena Kagan was confirmed by the Senate to her appointment to the US Supreme Court.

In any event, the aforementioned Judge Sutton asked Mr. Katyal if he could name one case heard by the Supreme Court which considered the same question as that posed with respect to the individual mandate. Mr. Katyal conceded that it had never been considered exactly, but did bring up Heart of Atlanta Motel (you can read Justice Black's opinion here if you like).

For those who choose not to read this decision, I summarize. Heart of Atlanta Motel had a commercial restaurant that purposefully discriminated in choosing its customers on the basis of race (this was prior to the passage of the Civil Rights Act). The Supreme Court ruled that Congress could use its Commerce Clause power to bar discrimination in such commercial establishments.

You may wonder what the connection to health care reform is. I certainly did. But, as they say on late-night TV, "Wait, there's more!"

Judge Sutton said that the motel was in the business. Congress (and the Supreme Court) told them that if they didn't want to follow the law, they could exit the business. He pointed out that individuals are not given the option of 'exiting the business.' They can't just opt out of the individual mandate provision without financial penalty.

Wait, there's more! Mr. Katyal was prepared with an answer.

Individuals can avoid the individual mandate. As some readers undoubtedly know, individuals are exempt from the mandate if they cannot purchase health insurance for less than 8% of their income. So, Mr. Katyal explained to the 6th Circuit that an individual who wanted to 'exit' the individual mandate could simply earn less money and therefore exempt himself.

You have read correctly. Finis!

Wednesday, June 1, 2011

How Do You Design Your Benefits Programs?

When I first got into this business, sometime during Anno Domini, benefits design and redesign assignments were fairly common. The commonality was not just in the frequency either, but in the underlying themes. Almost without exception, the focus was on one or more of these:

  • Recruitment -- making sure that those elements that would appeal to potential new employees were there
  • Retention -- making sure there were sufficient handcuffs to retain existing employees
  • Competitiveness -- ensuring that the program in total fared well against the programs of comparator companies, and sometimes getting even more granular and doing this on a component-by-component basis
  • Being leading edge -- being the first kid on the block, so to speak, to have a particular type of new program
To the naked eye, each of these seems to make sense. As we all know, the costs of recruiting the best and the brightest are high. And, while studies that have attempted to quantify the cost have provided disparate results, many that I have read have suggested that the cost of replacing talent that leaves when you would prefer they stay can range from one-half to more than three times pay with multiples tending to increase as levels of pay increase.

So, of course, as time has gone by, and we have all gotten smarter, the focus is on these same elements even more, isn't it? Well, no it's not. In 2011, a meaningfully larger part of Anno Domini than when I began this segment of my working lifetime, the trends are very different. What's important now? Consider these:
  • Recruiting -- with a rare exception, figuring out which benefits are absolutely needed to play and offering just those ... in other words, offer health care, paid time off, and flexible work options such as telecommuting and customizable work schedules
  • Retention -- providing oftentimes deceptive communications to make adverse benefit changes not look so bad
  • Competitiveness -- it's no longer about being competitive with your peer group, it's about not looking too uncompetitive
  • Leading edge -- will you be the first kid on your block to find a new benefits reduction technique to save money without appearing to miserly to your employees
Wow! If I were an employee of a large company that thinks that way, I would not be happy. But, the fact is that I am a benefits professional and I can see through changes like this when they are made. But, to the average employee, the change from a final average pay pension plan to a cash balance plan may not seem like much. They still have a pension, don't they? And, their new pension is easier to understand. Later, the cash balance plan with, say, 5% of pay employer allocations (pay credits) gets replaced by an enhanced 401(k) plan match (less than 5% of pay). But, nobody talks about pension anymore. On the other hand, lots of people talk about these wonderful plans with their neighbors (401(k), 401k, 401, 201k, 101k, 4OK). Yes, I've heard them all, and if an employee thinks they have a good 401(k) plan, they may think they have a good deal. Sometimes, just having a 401(k) plan without an employer match seems to be enough.

Many of the most admired companies do things differently. They still offer benefits and other similar programs to their employees that they can't get elsewhere in town. They spend more on their benefits programs and they are, in my opinion, rewarded for it. How does this work?
  • Employees figure it out when they get something better
  • Employees that get something better are happier
  • That happiness translates to higher productivity
  • That happiness also translates to better customer service ... the smiles come through in person, on the phone, and in those little conversations with neighbors
  • Profitability is higher because of that better customer service and higher productivity
  • Rewards are passed on to employees
  • Unwanted turnover is negligible
  • The world is saved
Well, that last one may be a bit foolhardy, but the rest of them are not far-fetched. I know that you can't just up and change your miserly benefits program to rich one, but when you are making long-term plans, consider how you can gradually make changes where you spend money to improve the bottom line.

I know, it's a new concept. Nobody will ever do it. Go ahead. Buck the trend. Blame it on me.