Desire to Move to Lifetime Income Options -- Is It Real?

I read an article this morning that tells me, among other things, that two in ten defined contribution (DC) plan participants plan to use some portion of their plan assets to purchase lifetime income products. I don't dispute the research that was done, but I absolutely dispute that behaviors will be as the data imply.

Before you read on, I want to be clear. Any criticism that I have here is not of the author. The piece does an excellent job of explaining what the data say. My criticism is also not of the data collection. The Employee Benefit Research Institute (EBRI) asked legitimate questions and reported the answers that they received.

But, this is a case where I posit that a perfectly good interpretation of perfectly good data is likely to not be a good predictor of future behaviors, at least not as the law exists today. What we need to help these data to be a reliable predictor is a statute that is focused on retirement policy not on the assumption that small groups of people will abuse the Tax Code. And, once that statute works, we need plan designs that give well-meaning plan participants the ability to customize their individual retirement income streams to meet their own needs without worry that somehow they will fall prey to regulations that were written to stop abuse by a few. (For the retirement and tax geeks reading this, yes, sections like 401(a)(9), I mean you.)

Is this newfangled design DC? Maybe or maybe not. Is this newfangled design defined benefit (DB)? Maybe or maybe not. Why do we really need such a broad distinction?

I'll return to the design issues later, but first I am going to make a u-turn back to my comment about these data as predictors.

Yes, two in ten DC plan participants would like to get some lifetime income or longevity protection from their DC plans. But, what options are available? Generally speaking, whether they are in plan or out of plan, they are retail priced annuities (meaning they are priced favorably for the annuity provider and therefore unfavorably for the annuity buyer). There are traditional annuities and there are qualified longevity annuity contracts (QLACs). The experience in the marketplace thus far (anecdotally) is that participants will pay anywhere from 15% to 40% more for these annuities from DC plans than would be considered actuarially equivalent to a lump sum in a DB plan. Insurers need to be both risk-averse and profitable and therein lies a difference. DB plans, on the other hand, are intended, generally speaking, to provide optional forms on an agnostic basis.

So, how do we get there? As I said earlier, changing the statute to allow common-sense streams of income for participants is a great first step. Then we need a new type of design. To me, it probably doesn't fall into the current, common notion of DB or DC.

Let's call it the Plan of the Future.

And, once those common-sense options are available, my prediction is that far more than two in ten participants will want some amount of lifetime income whether it's from DC plans, DB plans, or just qualified retirement plans.

Overpaying PBGC Premiums -- Money You'll Never See Again

Earlier this week, October Three released what may have been the most comprehensive study ever on payment of PBGC premiums. The study analyzed premium payments of nearly every mid-sized or large defined benefit plan in the country over the period from plan years 2010 through 2015 (leaving out plans with fewer than 250 participants).

The key results were shocking:

• During that six-year period, companies overpaid variable rate premiums by more than $700 million in the aggregate. That is, using techniques designed to lessen variable rate premiums, they could have paid $700 million less.
• For the 2015 plan year, more than 65% of plans that paid variable rate premiums, and did not have their premiums limited by the so-called per participant cap, paid more than they needed to.

If we think about this particular pension expenditure, one could consider it among the worst of all sins. For example, if you contributed more than you needed to in 2015, then your future required contributions will be lower, your PBGC premiums may have been lower and your pension expense will have been lower. So, while you may have had other uses for the money, at least you got some benefit from those contributions.

On the other hand, suppose you paid a larger variable rate premium than you needed to. What benefit have you gotten or will you have gotten from that overpayment? Zero. Zilch. Nada. Nihil. Niets. Niente. Rien. They're all the same. You will have received absolutely no benefit from your overpayment and neither will your employees. In fact, the only beneficiary of your overpayment will have been the PBGC.

Don't get me wrong. There are some good people, some nice people at the PBGC. I have friends at the PBGC. But, that said, there is no reason to give them more money than you need to under the law.

If you've made it this far, I'm going to leave you with an analogy. PBGC premiums are a lot like taxes. You pay money to a quasi-governmental corporation (PBGC) as a condition of sponsoring a defined benefit plan. Similarly, you pay taxes to the federal government when your company turns a profit.

Here is where they diverge. Your company probably has a Tax Department. If it does, its primary function is to ensure that your company properly pays its taxes, but in as small amount as legally allowable. That is, their job is to reduce your tax burden.

Your Tax Department may be pretty big. How big is your PBGC Premium Department? Oh, you don't have a PBGC Premium Department? You know you could.

Analytics and Hiring

Can you use analytics to help you in your hiring process? The conventional wisdom says no. The big data proponents say yes.

Let's consider how this might work at a larger (undefined term) company. Suppose you asked each manager to list all of the characteristics of their best employees. Have them do it with no limits. They tend to be of a particular height, have a particular eye color, and speak loudly. Perhaps they tended to graduate from larger primary state colleges. And, they tended to major in one of three disciplines.

Among the key questions then becomes whether those particular data points are predictive or not. If they are, then depending on what they are, then either before an interview or after an interview, you should be able to put the characteristics of an applicant into your model and determine whether they would be a good hire for you.

You don't think it works, do you?

Let me challenge that. Is professional baseball a job? If you read or watched "Moneyball", you know that one of the early adopters of analytics (they call it sabermetrics in baseball) were the Oakland As under the leadership of their GM Billy Beane. Perhaps his leading disciple was Theo Epstein. Epstein is fairly unique in being the General Manager of the Red Sox who broke the curse of the Bambino and may turn out to be the Cubs GM who breaks the curse of the goat. In any event, Epstein has made highly controversial moves and made two struggling franchises into winners.

I know; that's baseball; it doesn't work in real jobs. Or does it?

Frankly, I don't know. I haven't tried it. But I know people with expertise who think it does.

Try it in your company.

Let me know how it goes.

Frightening Data on DC Plan Ownership

According to an article in this morning's News Dash from Plan Sponsor, fewer families had an individual account retirement plan (defined contribution or IRA) in 2013 than in 2010. However, on the bright side, average account balances have increased over the same period.

What do we learn from this? It's difficult to know for sure, but as is my wont on my blog, I'm going to take a shot at working it out.

Why are average account balances up? Well, the equity markets have performed pretty well over the last few years. Combine that with the fact that there has been time for additional contributions to those accounts and this makes sense. When we combine this, however, with my rationale for the prevalence of accounts decreasing, it may look troubling.

That the number of families with individual account retirement plans is decreasing suggests underlying issues with the economy. What I suspect is that many long-term unemployed or under-employed have had to liquidate accounts that they had a few years ago in order to survive. People laid off from jobs have taken distributions rather than rollovers to live on. I suspect that more often than not, these have been total distributions from smaller accounts. By eliminating some of the smaller account balances, the average and median accounts have grown in size.

That only about 50% of families have individual retirement accounts and only about 65% have any retirement plan at all is not good news for our future economy. How will the remaining 35% live? Moreover, among those 65%, will they have enough to survive in retirement?

The way it looks to me is that for people who are able to fully utilize their 401(k) or other retirement program for their entire working lifetimes, retirement may be comfortable. But this data suggests that this will be a substantial minority. For the rest, the retirement system is failing us.

30 years ago, defined benefit (DB) plans were the bulwark of the corporate retirement system. After years of Congressional meddling, many employers consider DB plans to be impractical. At the same time with further emphasis on individual responsibility, the burden of providing a retirement benefit has been shifted largely to employees.

If you are good at Googling or Binging, you can easily find projections from lots of smart people showing that a good 401(k) plan will be sufficient for responsible employees to retire on. In my opinion, most of these projections are deficient. You just don't see projections that consider leakage including:

• Unemployment for a meaningful period of time
• The necessity to take a job for a short or long time that does not have a savings plan
• Increased cost-shifting of all benefits to the employee which may reduce an employee's ability to save
• High-deductible health plans which force employees in many cases to pay significant amounts out-of-pocket for health care

This data is frightening. The retirement system is severely broken. Too many times, the public policy behind the retirement system has been abused by tax policy. We are left with retirement plans being a toy for Congress to make bills seemingly budget neutral. 

The ability to retire is part of the 21st century American Dream. This data suggests that the retirement part of the dream may be just that -- a dream.

Not pretty ...

On Surveys, Data, and Other Common Misconceptions

Every so often, I feel the need to talk about things that are wrong. Well, perhaps I do that more than every so often, but I do it to varying degrees. Here I am going to focus mostly on surveys and their data. I'm not going to cite anything in particular, though, so you'll just have to trust me that  I am not making it up.

I have seen the data from lots of surveys that purport to tell us what are the most important elements to making a job desirable. I have read all sorts of things about mentoring, how green the workplace is, whether the health benefits are good, and the amount of focus put on learning and development among other things. These are all very important, but ...

When someone leaves a job voluntarily, ask them why they left. I have very rarely heard someone say they are leaving to go elsewhere because the new company has a great mentoring program, they are a green company, the health benefits are better, or the focus is on learning and development. Far more often, I have heard one of these:

• I got a big pay raise
• I hated my boss and I had to get away
• I hated my job and or the company I was working for
• I was in a dead end job
• I don't have to travel as much
• I get to travel more

What this tells me is that something about the surveys is just wrong. And, I don't think it is the inability of the people who report the results to accurately compile or report the data. I think it falls under GIGO.

GIGO, you say? What is that?

Garbage in, garbage out!

Surveys as a group, are horribly constructed. Correction, it would be an improvement on most surveys if they were horribly constructed. Most are worse than that.

If we consider job/pay/benefits related surveys, what would you think of a question like this: "How important to you are your health benefits?" Well, of course, they are very important.

So, since everyone says they are important, this gets construed as being one of the keys to hiring and keeping good employees. But, you rarely hear about employees choosing a particular employer or failing to because of the particular health benefits. The question has always been whether they offer health benefits. Very few people ask specifically what they are, how much they will pay for them, or what is included or excluded.

We could say similar things about retirement benefits. You need to have a 401(k) plan to compete. But, if it's a bad plan, nobody ever leaves specifically because of that. Yet, if you were to read survey data and reports, you would think that the quality of a 401(k) plan was a top 3 attraction and retention tool. I will say, however, that employees will think twice before leaving a company with a great retirement program, especially if they have a defined benefit pension plan. It is a retention tool and it is a differentiator.

Okay, rant over for the day. 

Don't Overestimate the Value of Survey Data

I saw some interesting data this morning. According to their quarterly Retirement Pulse Survey, Charles Schwab found that 35% of investors consider protecting their retirement assets more important than increasing them. Conversely, 8% believe that increasing them is more important than protecting them. What about the other 57%?

Unfortunately, the write-up that I saw has only sparse data (not a Schwab write-up, so I am specifically not placing blame on Schwab).

In any event, the headline from the Plan Sponsor News Dash was "Americans Most Want to Protect Retirement Assets From Risk." While that may be true, the data is not conclusive to this. 57% gave some other answer and I don't know what those answers are.

One can easily rationalize. Older plan participants probably fall into 3 categories:

• Those who feel their assets are or will be sufficient to retire
• Those who think they are close to where they will have sufficient assets to retire
• Those who either think or know that their assets will not be sufficient to retire

That final group needs to increase their assets. There are exactly two ways to do this: save more and get better returns. Being risk-averse just won't cut it. This is not me advising them, this is common sense. 

The News Dash write-up suggests to me that younger plan participants are more risk-averse. Could this be because they have not seen the big market booms in their investing lifetimes. As an investor, even in good times, the 2000s have not been pleasant. While there have been lots of good months, there have been lots of bad months. At this point in my life, volatility is not my friend.

So, going back to the data, taken in chunks, it could be misleading. I would hope that without closer review that plan sponsors don't put too much credence in the headline.

However, would it not be worth it for a large plan sponsor to learn the attitudes of its own plan participants? Are they risk-averse? Or, are they risk-takers? Shouldn't the fund lineup be commensurate with the goals of plan participants? If it's stability they want, shouldn't the plan's Committee have a lineup with a higher propensity of lower volatility options? Conversely, if the company has a bunch of natural risk takers, is it not appropriate that the find lineup be reflective of that?

Perhaps? What is the role of the Committee? Ultimately, they are to act in the best interests of plan participants. Nobody knows exactly what that means. But, it seems to me that meeting the needs or perceived needs of plan participants is not contrary to that role.

So, don't overestimate the value of broadly available data. I suggest you collect your own.