Tuesday, January 31, 2012

Preparing to be Competitive

Think back 30 or 35 years, or more if you like. To steal a term from Thomas Friedman, the world wasn't so flat then. There weren't as many global companies. The internet was thought to be a pipe dream of some MIT researchers. E-mail didn't exist for most of us. Fax machines existed, but most of us had never seen one. In short, we lived in a different world with a different economy.

The employment deal -- the written or unwritten agreements between employer and employee -- was very different as well. The concept of employees paying for benefits with pre-tax dollars was just coming into existence. As a result, most benefits were provided by the employer. Of course, there were fewer benefits, but many would argue that the ones we had were better.

In a fairly typical situation where an employee was starting a job with a large employer, here were some of the key components of the deal:

  • base pay
  • maybe a bonus, but base was certainly king
  • a pension plan designed so that the employee would spend his career with that company and have the opportunity to take normal retirement at age 65 or perhaps an earlier retirement as early as age 55
  • health care benefits for the employee and his family, paid by the employer
    • office visits
    • hospital care
    • major medical
  • vacation time
  • sick time
  • retiree medical benefits similar to those for active employees so that employees who retired early could live their retirements fairly worry-free
The world changed. Companies started to provide more and different benefits. They also started to charge employees for those benefits. And, in fact, the rate of increase in the employee cost of those benefits often increased far more rapidly than their pay. Companies began to understand the long-term commitment and cost of retiree medical plans. They started to go away. Similarly with pension plans, companies found that employees all wanted their 401(k) plans, but many of them just didn't get their pension plans.

And, the world continued to change. The newer age employee wanted different benefits. And, other companies provided for a far different deal. Take the auto industry, for example. When I was a kid, if your parents bought a car, they bought from GM, Ford, Chrysler, or American Motors, or maybe one of those funny looking Volkswagen Beetles. For the most part, they bought American. Global competition didn't really exist yet. So, those four American companies largely were competing with each other. Now, we have cars coming into the US from lots of different countries. Companies headquartered in those countries may pay less and provide fewer benefits. How do the US companies compete? Among other things, they have to consider lowering the cost of producing a car which means lowering the employee rewards structure.

Lots of industries that lead the economy now didn't even exist around 1980. Microsoft had been around for five years, but few people new of it. Apple was similar, although some of the geekier families had invested in the Apple II or its ill-fated brother, the Apple III, but most of the country just looked at it as a passing fad. How about Google? It wasn't even a dream. 

So, when companies were designing or re-designing rewards programs in 1980, they didn't care about what Microsoft or Apple or Google were doing, but what GM was doing may have made a difference.

Fast forward to 2012. If you are in corporate HR, or if even if you just work for a company that provides pay and benefits, you probably know something about your company's rewards program. Perhaps it works well today, perhaps it doesn't. 

But, will it work tomorrow?

We see lots of surveys. Heads of HR always want to know what their competitor companies have? How much are they providing? How much are they spending? Perhaps they want to be near the median, or a little above, or a little below. 

Shouldn't the questions really look more like this?
  • Who will our competitors be in 5-10 years?
  • What will they be providing in 5-10 years?
  • What will it take to compete for talent in 5-10 years?
  • Will attraction be important?
  • Will retention be important?
If you were analyzing a large company and that company didn't have a long-range plan, you would laugh at it. The CEO has one. The COO has one. Surely, the CFO has financial forecasts of at least the next five years. Does the head of HR?

Sadly, the answer is probably not. And, it would not surprise me if maybe without knowing it, this is one reason that Finance often looks askance at HR.

So, HR people, isn't it time to look into the future to see what the winning HR strategies might be. Your employees of the future would tell you "just saying."

Friday, January 27, 2012

Be Careful With COLI

Most of you are familiar with it. If you've ever been in corporate HR or Finance, someone has undoubtedly tried to sell it to you. It can look like the greatest thing since sliced bread, and frankly, before 1986, it probably was, but corporate-owned life insurance, commonly referred to as COLI, is not the be all and end all.

It has its uses. I have recommended in favor of it and I have recommended against it. But, understand that I have never sold it. I am not licensed to sell insurance products. I never have been. That makes me relatively agnostic to COLI. I don't make money from its sale. The work that I have done and do with respect to COLI is either analysis of its merits or performance, or helping a client unwind it if they decide they don't like it.

So, why am I writing this? While I have no insurance credentials, I do have a bunch of actuarial credentials. As such, I am held to a whole set of professional standards. They start with the Code of Conduct and include adherence to a set of Actuarial Standards of Practice (ASOPs). While adherence to all of this can feel annoying at times, I fully support that my profession has adopted this framework. If only all of the other professions that we deal with had as stringent a framework, in my opinion, the benefits world would be a more honest and straightforward place.

Let's go back to COLI. I looked at a COLI illustration this morning. It was based on a Variable Universal Life (VUL) product. Note the variable part. That means that the product invests typically in a mixture of equity and fixed income instruments, usually chosen (all or in part) by the policyholder. So, like a defined benefit trust or defined contribution account, it has a return of return that is closely linked to the rates of return on those instruments (there are often charges and or loads).

What was alarming? The cash value seemed to be building up really quickly. I did some analysis. The agent who produced those illustrations chose to assume a 10% rate of return inside the policy. I checked. That is legal in his state. It is in many states. But, as an actuary who has to make similar assumptions for defined benefit trusts, I would tell you that it's not reasonable. In fact, if I put in writing today in a Statement of Actuarial Opinion that a 10% rate were reasonable, I would expect to be reported to my profession's disciplinary body.

You know what, if you can get tax-favored asset build-up that has a geometric mean 10% long-term rate of return guaranteed, you should put all the money that you can afford to into the underlying instrument. And, you had better tell me about it so that I can invest in it as well. It's just not feasible, it's not reality, but it was in an illustration presented by an agent to a prospect.

So, the message is this. COLI has its uses. It has its purposes. But, the guy who has the goal of selling you COLI is not going to be unbiased, no matter how hard he tries to convince you. If you can do the analysis yourself, do it. Find out if the COLI product is, in fact, good for your company. If you can't, then find an unbiased third party to do it. And, if either you or a third party find that the illustrator thinks he can get you a 10% annual rate of return, run away from it as fast as you can.

Wednesday, January 25, 2012

Health Care Reform Year-by-Year

I've got no original material for you here, but I happened upon this government website that tells its readers what happens under the Patient Protection and Affordable Care Act year-by-year.

Here is the link.

Tuesday, January 24, 2012

A Case for Not Offshoring

Why do companies move certain functions offshore? Well, that's a pretty easy question.

  1. It saves money
  2. Labor laws are weaker if they exist, so they can often get people to work long hours with no premium
Obviously, there are more reasons, but those two are certainly pretty key. 

Since this is a benefits and compensation blog (usually), I want to focus on offshoring benefits or compensation administration. I'm going to make a pretty strong leap of faith here. If you are reading this and if you are employed, your benefits and your compensation are pretty important to you (if you disagree, you can stop reading). And, since they are pretty important, you really feel like your employer or the third party administrator that they choose should get this right.

From personal experience, I have dealt with call centers in the US and call centers in other places on the globe. In fact, this morning, I got to deal with a call center that was not in the US (I asked). Whether this was an HR issue or just general customer service with some company that I do business with in my personal life, I'll keep to myself, but I can tell you that I have had similar experiences with HR call centers in the past.

Here are my complaints about this call:

  • The rep that I spoke with had insufficient subject matter knowledge
  • The rep that I spoke with did not speak clear enough English that I could understand her without significant difficulty on my part
  • The rep that I spoke with could not answer my questions
  • The rep that I spoke with could not find me a supervisor
  • The rep that I spoke with promised me a call back within 5-7 business days
Now, let's suppose that this was a call about my healthcare benefits (I think that most of my readers would consider this to be an important benefit). How would I be at the end of this call?

  • I would feel like my employer (I don't know whether or not this is outsourced if I am a random employee) doesn't understand the benefit programs it sponsors
  • I would feel like my employer doesn't care about me
  • I might tell my co-workers about my experience
  • I would feel that 30 minutes of my time (thus far) had been wasted
  • I would be less productive that day and probably for several thereafter because of this
  • After I told my co-workers, some of them would be less productive
Perhaps this attitude change brought on by the call center would wind up showing itself to one of my clients or one of my co-worker's clients. Maybe that client is one that is already teetering on the edge of keeping us or firing us. Could this push them over the edge? Yes, it could.

Could this happen with a US call center? It could, but in my personal experience, it happens far more often with call center services that are offshored as compared to those that stay in the US. 

The perceptions of your employees matter. Happy employees are more productive. Happy employees treat their clients better. Offshoring HR administration doesn't do that.

Tuesday, January 17, 2012

Do You Have a Top-Hat Plan?

Recently, the 6th Circuit Court of Appeals ruled in a top-hat plan case, Daft v Advest, Inc. This case adds to the litany of top-hat decisions rendered by different appeals courts. Most of them are similar in their conclusions. No two are the same.

The good news is that I have two potential remedies: 1) The US Supreme Court could hear one of these cases and give us a litmus test to live by in determining who is eligible to participate in a top-hat plan; or 2) More than 37 years later, the Department of Labor could write regulations on the topic.

We might not like either one, but at the very least, we would have some certainty. People making business decisions like certainty. As a consultant, and I'm sure it's the same for an attorney, it's not a good client relationship technique to tell a client that their eligibility criteria are probably okay, or that they seem to comport with the current law in the circuits in which they operate. Should be and seem to are horrible consulting words. Since I can't give a legal opinion, though, they may be the best I can do.

So, at least in the 6th Circuit (Kentucky, Michigan, Ohio, and Tennessee), Daft gives us a four-prong test (sort of):

  1. What percentage of the workforce is covered by the plan? 
  2. What is the nature of employment duties of the participants covered by the plan?
  3. What is the compensation disparity between members of the plan and non-members of the plan?
  4. What does the plan language say?
Unfortunately, or perhaps fortunately, Daft does not give us a bright-line test for any of 1, 2, 3, or 4. In fact, Daft doesn't even give us a hint. 

Think back to your school days. One of your friends is good enough to steal the test questions from the teacher (I do not condone this) and give them to you. The problem is that every question is subjective and you don't know the teacher's thoughts.

Alas ...

401kWire's Most Influential People in DC

Each year, the 401kWire publishes a list of its 100 Most Influential People in Defined Contribution. I'm pleased to tell you that CRG President Dan Cassidy has been nominated.

You can vote here:

Wednesday, January 11, 2012

Another Sub-Par Year for Target Date Funds -- What to do Now

The S&P 500 gained about 2% during 2011. The Barclay's Aggregate Bond Index had an increase in the neighborhood of 8% for 2011. According to a Morningstar survey as reported by the Wall Street Journal, the average 2015 Target Date Fund (TDF) lost nearly 1/2 of one percent during 2011. To state the obvious, that's not good. At the end of this article, I'll give you one take on a solution. Until then, we look at the problem.

What's going on here? Shouldn't a plan participant within five years of retirement expect to do better? Or, are the funds in the 2015 TDFs allocated so as to avoid any significant losses at the risk of giving up the upside?

I am not in a position to analyze the contents of every 2015 TDF out there. I know about a few of them from having looked at prospectuses, in some cases because I had the opportunity to invest in them myself. But, I have also discussed the makeup of some of these funds with people who either sell them or manage the investments.

DISCLAIMER: What I am discussing below here are purely generalities about the TDF market. I am neither condemning nor endorsing any particular TDF. Further, my comments don't reflect information about any particular TDF. What you read into what I say is at your own peril.

Whew, it feels good to get rid of that disclaimer. I hate those things. On the other hand, I don't want to get sued for making an innocent statement that gets taken the wrong way.

First off, most of the large TDFs are proprietary funds of proprietary funds. What does this mean? Well, suppose you are invested in a TDF offered and managed by WSWAARGIC (that's We Say We Are A Really Good Investment Company for anybody who was wondering where the firm got its name that just rolls off the tongue). We will call them WSW for short. Take a look inside the WSW TDFs. Each one uses WSW equity funds and WSW fixed income funds. In fact, 100% of the assets in the TDFs are actually in WSW funds.

Now, we all know that WSW is a good money manager. We know this because our employer wouldn't have chosen them if they weren't really good. Just how good is WSW, though? In looking a little bit deeper, we see that the WSW 2015 Fund is invested in 7 distinct asset classes through 7 WSW funds. Of those 7 funds, 4 have been top quartile over the last 5 years. That's pretty good. Another 2 have been in the second quartile over that period. That's not bad. But, the seventh fund has been in the bottom quartile. It's the so-called Core Bond Fund and it makes up a good portion of the allocation for the 2015 Fund. The problem is that WSW doesn't really have a fund to replace it in the TDF and WSW insists that this is a short-term blip and the Core Bond Fund will improve.

As someone who plans to retire in three or four years, how do you feel about this? I'd bet that you wish they had worked out the Core Bond Fund problems outside of the TDF and replaced it with some other company's core bond fund.

But, most TDFs don't work that way. The managers tend to look for what they think are the best available investment options WITHIN the proprietary group of funds. Some observers think that they may not even be looking for the best, but just the most expensive, but I'll leave that for the reader to decide.

I'm going to go under the assumption that if you as a plan sponsor are using a TDF as your qualified default investment alternative (QDIA) that you think it's the right choice as a QDIA. Even so, are you in the right TDF? Suppose that instead of a proprietary TDF, you had a custom TDF consisting of (we'll use 7 as the number again) seven funds in seven asset classes where all seven funds were relatively low-cost, yet historically high-performing funds that have not had recent manager changes or other disruptions. These funds exist. Morningstar might call them 5-star funds. With this TDF, you would need someone to help you set it up, manage it and rebalance it, but all that can be done. From a participant standpoint, they would get better funds for lower fees ... and isn't that what a 401(k) plan is supposed to provide?

Monday, January 9, 2012

Cassidy Retirement Group Expands Westward

Cassidy Retirement Group is pleased to announce our newest consultant, David Kershner. David, a Fellow of the Society of Actuaries and an Enrolled Actuary is located in sunny Phoenix, AZ. He can be reached at david@cassidyretirement.com or (480)577-4665.

We look forward to David helping us expand our presence in the western part of the country.

Friday, January 6, 2012

What Does it Mean to Review Something?

I've had a fairly long career in consulting to this point, and I don't expect it's real close to its end. Over the course of that career, I've had lots of work reviewed and often reviewed the work of others. The question that I would ask is this: "When someone asks you to review their work or when a client asks a third party (you may be the third party) to review your work or the work of another, what should that entail?"

Clearly, step one is to make sure that the work that was done is correct. Other important tasks for the reviewer are to make sure that the work product is appropriate for its intended use and appropriate for its intended audience.

How about checking to make sure that a document or report is well-written? I think that is part of a review as well. But, where does that start and where does it end?

If the original author will be the signatory, does that give the reviewer license to alter the author's style? In my opinion, it does only if the original style detracts from the intended purpose. On the other hand, it does not, in my opinion, give the reviewer license to re-style a piece solely because he or she has a different style than the original author.

How about word usage? Should the reviewer express their own opinion by making word changes where the two words have identical purpose? This one is a little bit trickier. Suppose the author has used the word "will" and the reviewer changes it to "shall." What do you think? I think the reviewer is making a change for the sake of looking important. On the other hand, the reviewer does need to consider the intended audience. If the original author, for instance, has used the term phonetic syzygy (I was grasping for something fairly obscure), would the reviewer be within his license to change that to alliteration. I think he would, because most audiences (I don't think) have any idea what phonetic syzygy is, so the word change would make the document more readable.

When the whole concept gets really sticky is when you are a third party reviewer being compensated to do that review. If you don't make many changes, are you earning your keep? Is it okay that you are saying that the author did a good job?

I think most of us struggle in this regard. If we are asked to do a review, most of us seem to feel as if we have come up short when we return the document in a less than bloody state. As an author, I despise this. When I'm a reviewer, I hope that my original authors hate it when I do the same.

Many of you had the fortune or misfortune (it's your opinion) of reading the works of very different authors during your schooling. Consider, for example, Messrs. Faulkner and Hemingway, widely considered two of the great American novelists. You may have an opinion as to which of the two was better. I do, but my opinion here doesn't really matter. The point is that if Faulkner had been asked to review Hemingway's work or conversely, and the reviewer had pushed their style upon the work of the other, then America would have been short one style of writing.

At the end of the day, if you are asked to review, do your job. Doing more than your job is probably not your job.