Coronavirus and Your Retirement Prospects

If you're like most Americans, you probably plan to retire one of these days. If you're not in that category, you may be retired already. Assuming that you fall into that first group, I want to talk to you a little bit about how this pandemic is affecting you.

If you're like 10-20% of the workforce, you have lost your job, been furloughed, or had your work hours cut back. Even among the rest of the population, many of you will have trouble meeting your performance goals for the year. In any case, this is not shaping up to be a good year for retirement savings.

Despite the great performance in the last week or so, equity markets are down nearly 25% for the year. At the same time, prevailing interest rates are at or near historic lows. What that means to someone who had planned to retire in 2020 is that your ability to purchase lifetime income protection has declined.

How does that work? The higher the prevailing interest rates, the more money you or an insurer can earn on investments and therefore, the larger your lifetime income protection. So, while bond returns (investments in bonds) have been good in 2020, your falling portfolio balances combined with no place to get good and safe returns is a point of pain for people considering retirement.

How about those of you whose jobs have disappeared whether that be temporary or permanent? Your 401(k) deferrals have ceased. That means that you're not getting matching contributions either. And, you may be taking advantage of the relaxed rules in the CARES Act on hardship withdrawals or plan loans. But, where are those amounts coming from? Your retirement nest egg is being eaten up by the effects of the pandemic. Wasn't it intended for retirement? Oops, something got in the way.

As a consultant, I am hearing from real-world companies that they are looking for ways to cut back, at least for 2020, their expenditures on retirement benefits. Who does that decrease in expenditure affect? You, of course, and not in a good way.

Yes, this is filled with bad news. I can't sugar coat it. If your future retirement is dependent on a 401(k) plan (plus Social Security), you've been hit hard. And, you may be hearing it here first, but if your employer temporarily reduces the amount it is spending on your retirement benefits, that reduction may not be temporary.

Surely, not everyone is being hit that hard. Surely, there are employees who are faring just fine with respect to their retirement prospects as this pandemic wreaks havoc on the rest of them. But, is there a way we can label them?

There is. They are all participants in defined benefit plans. That means that their employers have made a commitment to them to provide lifetime income in the form of a pension. For those people, if they remain employed, they have that securiry. For them, their 401(k) is supplemental savings. Most of them are going to be just fine.

Yes, I know all of the stigma around pension plans. They're expensive ... well, they're only as expensive as the benefit they provide. They're volatile ... they don't have to be. They're a dinosaur ... only because people say they are.

But, employees in defined benefit plans have one giant reason to sleep better at night than those relying on their 401(k) only. They will get a pension.

So, when the dust settles from the pandemic, and it will, many companies will be looking to hire as people scramble to either return to their old jobs or to find new ones, where will you be?

Here's my little nugget: take the time now whether you are employed or looking. See which companies are providing ongoing pension plans. Check them out. They are likely employers of choice.

And, to companies trying to figure out how they will restock their workforces when the time comes, be that employer of choice. Be better thant the rest and offer a pension.

Fixing Retirement Inequality

Just last week, I suggested that retirement inequality is nearing an apocalypse. It's an awfully strong statement to make as both the US and the world have plenty of problems to deal with. Since this one is US-centric (I have nowhere near sufficient expertise nor do I have the requisite data to offer an informed opinion outside the US), I thought I would step up and make some suggestions.

First, the problem: according to the most optimistic data points I have seen, somewhere between 60 and 70 percent of working Americans are "on track" to retire. And, these studies, when they are nice enough to disclose their assumptions use pretty aggressive assumptions, e.g., 7 to 8 percent annual returns on assets (the same people who tout that these are achievable condemn pension plans that make the same assumptions) as well as no leakage (the adverse effects of job loss, plan loans, hardship withdrawals, and deferral or match reductions). The optimists don't make it easy for you by telling you that even their optimistic studies result in 30 to 40 percent of working Americans not being on track to retire (a horrible result). They also tend to pick and choose data to suit their arguments using means when they are advantageous, but medians when they are more so.

Yes, we do have a retirement crisis and as the Economic Policy Institute (EPI) study was good enough to make clear, it is severely biased against the average worker.

The EPI study presented data on account balances and similar issues. It did not get into interviewing actual workers (if it did, I missed that part and apologize to EPI). But, I did. I surveyed 25 people at random in the airline club at the largest hub airport of a major US-based airline. People who wait in those clubs at rush hour are not your typical American worker; they tend to be far better off. I asked them two questions (the second only if they answered yes to the first):

• Are you worried about being able to retire some day? 19 answered yes.
• Would you be more productive at work if you felt that you could retire comfortably? All 19 who answered yes to the first question answered yes to the second as well.

While I didn't ask further questions, many groused about fear of outliving their wealth. Some talked about issues that fall under leakage. A few, completely unprompted remarked that if they only had a pension ...

For at least the last 13 years and probably more than that, retirement policy inside the Beltway has been focused on improving 401(k) plans with the thought that pensions are or should be dead. Even the Pension Protection Act of 2006 (PPA) was more about making 401(k)s more attractive than about protecting pensions. Yet, 13 years later with an entire decade of booming equity markets, even the optimists say that one-third of American workers are not on track to retire.

We've given every break that Congress can come up with to make 401(k)s the be all and end all of US retirement policy. They've not succeeded. 

Think back though to when the cornerstone of the US retirement system was the pension plan. The people who had them are often the ones who are on track to retire. 

Yes, I know all the arguments against them and here are a few:

• Workers don't spend their careers at one company, so they need something account-based and or portable.
• Companies can't stand volatility in accounting charges and in cash contribution requirements.
• Nobody understands them.
• They are difficult to administer.

PPA took a step toward solving all of those problems, but by the time we had regulations to interpret those changes, the "Great Recession" had happened and the world had already changed. Despite now having new pension designs available that address not just one, but all four of the bullet points above, companies have been slow to adopt these solutions. To do so, they need perhaps as many as three pushes:

• A cry from employees that they want a modern pension in order to provide them with usable lifetime income solutions.
• A recognition from Congress and from the regulating agencies that such plans will be inherently appropriately funded and therefore (so long as companies do make required contributions on a timely basis) do not pose undue risk to companies, to the government, to employees, or to the Pension Benefit Guaranty Corporation (PBGC) (the governmental corporation that insures corporate pensions) and therefore should be encouraged not discouraged.
• Recognition from the accounting profession in the form of the Financial Accounting Standards Board (FASB) that plans that have an appropriate match between benefit obligations and plan assets do not need to be subjected to volatile swings in profit and loss.

Give us those three things and the pensions sanctioned by the Pension Protection Act can fix retirement for the future. As the EPI study points out, we'll make a huge dent in the retirement crisis and we'll do in a way that makes the problem far less unequal.

It's the right thing to do. It's right for all working Americans.

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.

Time to Revisit the Work Relationship

I read an article the other day highlighting some findings from a Willis Towers Watson survey. Quoting from the article:

Yet only 25% rank contributing to a health savings account (HSA) as a top current financial priority, falling below saving for retirement in a 401(k), paying for essential day-to-day expenses and paying off debt. The survey found the majority of employees (69%) who didn't enroll in an HSA said they chose not to because they didn't see the benefit, understand HSAs, or take the time to understand them.

Let's think about the hidden part of what is being said there. The relationship between employers and employees has changed. As two factions battle for dominance in what that relationship should look like -- those who preach self-reliance think that employers should provide availability of savings options only and those who preach mandated pay and benefits think that the only differentiators should be things like office gyms and juice bars -- we are left in a world where creativity is encouraged, but not in any determination of how employees are rewarded.

If you were to take a survey of which benefits employees find the most important (many have, but I can't put my hands on one right now), I suspect that numbers one and two would be their health benefits and their 401(k). Why? The data that I cite above shows that most don't understand their health benefits and having worked in the retirement space for more than half my life, I can tell you that the large majority don't understand their 401(k) either. Many understand what it is, but relatively few understand what it's not.

So much for the people who preach self-reliance as in 2018, those are two benefit types that are the epitome of self-reliance.

Let's turn for a moment to another side of the equation -- pay. The other side of the spectrum would have us believe that as an employer, you are not particularly entitled to differentiate between employees based on much of anything because if the data suggests that any two employees are paid any differently from each other and it is even remotely possible that maybe someone in their wildest dreams could divine that those differences in pay are based on something that the law doesn't or shouldn't, in their opinion, allow, the company is in trouble.

Suppose we were to scrap the current system. Suppose different companies offered different benefits that their employees could understand. Suppose they paid employees based on the value they brought to those companies (yes, I know that value is nigh impossible to measure).

In the thought to be antiquated employer-employee relationship that existed 30-35 years ago, consider what we had:

• Companies were generally nicely profitable;
• Employees tended to stay with the companies that they worked for at age 35 until they retired;
• Those employees, generally speaking, lived as well as or better in retirement than they did while they were working;
• Health benefits were such that employees didn't go into debt to pay their share of them from every paychecks; and 
• Neither the country nor its citizens were reeling in debt.

I also see data that tells me that more than half (usually about 55%) are on track to retire. Translated, that means that nearly half are woefully behind. That's not a success. That is an utter failure.

The experiments of employee self-reliance and of paying everyone the same because you're not allowed to pay them differently have been failures. More likely than not, they will remain failures. 

Perhaps it's time to see what was right about the employer-employee relationship in the 80s and bring it back. Let's aim for 100% of employees being on track to retire. Let's aim for benefits that employees use because they do understand them. Let's pay people that deliver value in the workplace. It is time to revisit the work relationship.

Fitting a Square Retirement Peg Into a Round Hole

I just don't get it. We knew what they were and honestly, they may have been well defined before then, but in 1974, Congress saw fit to codify defined benefit plans (DB) and defined contribution plans (DC) in ERISA. At the time, there was no Section 401(k) in the Internal Revenue Code.

It was also pretty clear back then. Pension plans were required to offer annuity options. Plans that were not pension plans (mostly profit sharing plans) were not required to offer annuity options. And ERISA said it was good.

In a profit sharing plan, a participant's accrued benefit was his or her account balance, generally. In a pension plan, generally, a participant's accrued benefit was the amount of his or her annuity. And ERISA said it was good.

But, time went by and despite ERISA saying things were good, Congress decided to tinker. And, as a group, Congress has few tools in its bag of tricks that exceed its ability to tinker. It usually works like this. Representative A introduces a bill and she has just enough votes locked up that she can almost get it through the House. And, Representative B comes to her with an idea and says that if you'll just add this one [stupid] provision, I'll vote with you and I can drag C, D, E, F, G, and H along.

That's how the sausage is made in the tinkering factory.

So, once upon a time, we had this round retirement hole (the structure that ERISA gave us) and it was good. It worked pretty well. The evidence of that is that people who spent a good part of their careers under the structure developed in ERISA have generally retired and if they planned at all well, their retirements are not at all bad compared to their working lifetimes.

But, as Congress saw fit to tinker with the rules, it found ways, among others, through bills known as Pension Protection Act[s] to convince employers to get rid of pensions. That's right, Pension Protection Acts killed pensions.

Irony.

So, through Pension Protection Acts, workers were suddenly left with nothing but account balances and through improved awareness of health risks and better medical care, they were also left with longer life spans. Those account balances that were perfectly sufficient to get them to the age 75 or so that was their life expectancy at birth had no chance of getting them to their new life expectancy that was closer to 85.

Now what?

The hue and cry was for annuities. And, thus Congress began to tinker again. How could they possibly fit this square account balance peg into the round annuity hole. So, Congress explored ideas for annuities in DC plans.

But, you see that if you offer actuarially equivalent annuities from a DC plan, then you have gains and losses and that would essentially be a DB plan. If you offer insurance company provided annuities (and recall that insurance companies are in business to make money), then you have too small of an annuity.

Oh the ignominy of the square peg.

We had a perfectly good system. It came with perfectly good benefits and for most plans, perfectly good actuarial assumptions and methods.

And Congress broke it. And after all these years, despite taking file and rasp and hammer to the square peg, the round hole remains empty.

Congress, there are smart people who do not sit in your chambers. Give us your objectives and let us find you a solution. We'll make that peg round and Americans will be able to look forward to their golden years again.

ERISA will once again say it is good.

Are You Better Off than You Were 20 Years Ago?

Nearly 40 years ago, Ronald Reagan asked voters if they were better off than they were four years earlier. And, that was the beginning of the end for Jimmy Carter's reelection hopes. So, without trying to end anything for you, I ask if you are better off from a retirement standpoint than you were 20 years ago.

For Americans as a group, I think the answer is a clear no. Our retirement system has been broken by the momentum that has gathered around the 401(k) plan. After all, when Section 401(k) was added to the Internal Revenue Code in the Revenue Act of 1978, it was never intended to be a primary retirement vehicle. In fact, it was a throw in that even among those who were there, there doesn't seem to be much agreement on why it was thrown into the Act.

When it was, however, defined benefit (DB) pension plans were in their heyday. People who were fortunate enough to be in those plans then are now retired and an awful lot of them are living very well in retirement. On the other hand, people who are now retiring having been in 401(k) plans only have their retirement fates scattered all over the place. Some are very well off, bit others are essentially living off of Social Security.

Let's consider where those people went wrong. For many, when they first had the opportunity to defer, they chose not to. They had bills to pay and they just couldn't make ends meet if they didn't take that current income. By the time they realized that they should have been saving all along, they couldn't catch up.

For others, they were doing well until they lost a job. Where could they get current income? They took a 401(k) distribution.

Yes, I am very well aware that the models show that people who are auto-enrolled and auto-escalated in a 401(k) plan with a safe harbor match will fare quite well. Those models all assume no disruptions and constant returns on account balances of usually around 7%.

Let's return to reality. The reality is that young workers are (likely because of all the campaigns telling them to do so) deferring liberally when they start in the workforce. The problem is, and I get this anecdotally from young workers, that more of them than not reach a point where they just can't defer at those levels any more. They get married, buy a house, and have kids, and the financial equation doesn't work. So, they cut back on deferrals. I know a number who have gutted one or more of their 401(k) plans in order to buy a house. The fact is that it's not easy to defer, for example, 10% of your pay into your 401(k), another 5% into your health savings account (HSA), and save money for a down payment on a house.

Where were we 20 years ago? For many Americans, they were about to be getting those notices that their DB plans were getting frozen. Congress killed those DB plans. The FASB killed those DB plans.

When I got into this business in 1985, most (not all) corporate pension plans were being funded responsibly. And, this status was helped, albeit for only a year or two by the Tax Reform Act of 1986 (shortening amortization periods). One of the big keys, and this will be understood largely by actuaries, is that we had choices of actuarial cost methods. My favorite then and it would be now as well for traditional DB plans is known as the entry age normal (EAN) method. The reason for this is that under EAN, the current (or normal) cost of a plan was either a level cost per participant (for non pay-related plans) or a level percentage of payroll for pay-related plans. Put yourself in the position of a CFO -- that makes it really easy to budget for.

But Congress and the FASB knew better. In the Pension Protection Act of 1987 (often referred to OBRA 87 because it was one title of the Omnibus Budget Reconciliation Act), we had it imposed on us that we must perform a Unit Credit (another actuarial cost method) valuation for all DB plans. And, in doing that Unit Credit (UC) valuation, we were given prescribed discount rates. At about the same time (most companies adopted what was then called FAS 87 and is now part of ASC 715), DB plan sponsors also had to start doing a separate accounting valuation using the Projected Unit Credit (PUC)  (Unit Credit for non-pay related plans) actuarial cost method. Most of those sponsors found that their fees would be less if they just used these various unit credit methods for their regular valuations as well and we were off and running ... in the wrong direction.

You see, PUC generally produced lower funding requirements than EAN and the arbitrary limits on funding put in place by that second funding regime known as current liability (the UC valuation) and most DB plans had what is known as a $0 full funding limit. In other words, they could not make deductible contributions to their DB plans during much of the 1990s. And, it stayed that way until prescribed discount rates plummeted and there were a few years of investment losses.

What happened then?

CFOs balked. They had gotten used to running these plans for free. Suddenly they had to contribute to them and because the funding rules were entirely broken, the amounts that they had to contribute were volatile and unpredictable. That's a bad combination.

So, one after another, sponsors began to freeze those DB plans. And, they did it at just the time that their workers could least afford it.

For all the data and models that tell us that it should be otherwise, more people than ever before are working into their 70s, generally, in my opinion, because they have to, not because they want to. As a population, we're not better off in this regard than we were 20 years ago In fact we are far worse off.

Even for those people who did accumulate large account balances, many of them don't know how to handle that money in retirement and they don't have longevity protection.

We need a fresh start. We need funding rules that makes sense and we need a plan of the future. It shouldn't be that difficult. I'd like to think that my actuarial brethren are smart people and that they can design that cadre of plans. They'll be understandable, they'll be portable as people change jobs, they'll have lump sum options and annuity options , and they'll even have longevity insurance. They'll allow participants the ability to combine all those in, for example, taking 30% of their benefit as a lump sum, using 55% for an annuity from the plan beginning at retirement, and 15% to "buy" cost-of-living protection from the plan.

That's great, isn't it? Even most of the 535 people in Congress would probably tell you that it is.

But those same 535 people don't really understand a lick about DB plans or generally about retirement plans (there are a few exceptions, but very few). In order to get that fresh start, we need laws that will allow those designs to work.

We surely don't have them now.

Over the years, Congress has punished the many plan sponsors because of a few bad actors. If 95% of DB plans were being funded responsibly, then Congress changed the funding rules for 100% of plans to be more punitive because of the other 5%.

Isn't it time to go back to the future to get this all fixed?

Let's kill the 401(k) as a primary retirement plan and develop the plan of the future. It could be here much sooner than you think.

Wake Up and See the Light, Congress!

Congress has a once-in-a-generation opportunity. Since its first major overhaul in 1922, Congress has seen fir to make earth-shaking changes to the Internal Revenue Code (Code) once every 32 years. 1922. 1954. 1986. And, while it seems that they may be one year early this time, they are pitching tax reform once again.

The concept of qualified retirement plans as we know them today comes from the Employee Retirement Income Security Act of 1974 (ERISA) signed into law that Labor Day in 1974. Since that time, there have been relatively few changes to the Code affecting retirement plan design. And, frankly, most of them have come on the 401(k) side. In fact, Section 401(k) was added to the Code after ERISA and since then, we have been blessed with safe harbor plans, auto-enrollment, auto-escalation,Roth, and qualified default investment alternatives (QDIAs). Over the same period, little has been codified or regulated to help in propagating the defined benefit plan -- you know, that plan design that has helped many born in the 40s and early 50s to retire comfortably.

Isn't this the time? Surely, it can be done with little, if any, effective revenue effects.

Since ERISA, there have been really significant changes in defined benefit (DB) plan design including the now popular traditional cash balance plan, the even better market return cash balance plan, pension equity plan, and less used other hybrid plans. And, DB plans have lots of features that should make them more popular than DC plans, especially 401(k) plans.

• Participants can get annuity payouts directly from the plan, thereby paying wholesale rather than the retail prices they would pay from insurers for a DC account balance.
• Participants who prefer a lump sum can take one and if they choose, roll that amount over to an IRA.
• Assets are professionally invested and since employers have more leverage than do individuals, the invested management fees are better negotiated.
• In the event of corporate insolvency, the benefits are secure up to limits.
• Plan assets are invested by the plan sponsor so that participants don't have to focus on investment decisions for which they are woefully under-prepared.
• Participants don't have to contribute in order to benefit.

But, they could be better. Isn't it time that we allowed benefits to be taken in a mixed format, e.g., 50% lump sum, 25% immediate annuity, 25% annuity deferred to age 85? Isn't it time that these benefits should be as portable as participants might like? Isn't it time to get rid of some of the absolutely foolish administrative burdens put on plan sponsors by Congress -- those burdens that Congress thought would make DB plans more understandable, but actually just create more paperwork, more plan freezes, and more plan terminations?

Thus far, however, Congress seems to be missing this golden opportunity. And, in doing so, Congress cites the praise of the 401(k) system by people whose modeling never considers that many who are eligible for 401(k) plans just don't have the means to defer enough to make those models relevant to their situations.

Sadly, Congress prefers to keep its collective blinders on rather than waking up and seeing the light. Shame on them ...

Perhaps Employees Just Don't Want HSAs

I read an interesting article this morning whose focus is to tell the reader that health savings accounts (HSAs) would be more popular if people only understood them The article was based on research from Fidelity that shows that most eligible Americans (those enrolled in a high-deductible health plan (HDHP)) don't understand the benefits of HSAs. In fact, that part of that research is likely correct.

But, despite that research, I think the answer goes deeper than that.

Before digging in, let's review some of the key features of HSAs:

• The money in your HSA can be used to pay qualified medical expenses.
• Money in your HSA that is not used in a calendar year simply stays in the account, unlike in a Flexible Spending Account (FSA).
• The account is yours. It goes with you if you change employers, are unemployed, retire, or just don't feel like deferring anymore.
• You can generally defer to an HSA in a year that you participate in an HDHP.
• There is a triple tax benefit from HSAs: money goes in tax-free, assets grow tax-free, money coming out for qualified medical expenses comes out tax-free.

So, what's the problem then? Which of those bullets do people not understand?

In my opinion, it;s more than that. I've done exhaustive -- well maybe not exhaustive -- research by just talking to people about HDHPs and HSAs. I don't ask them to rattle off the benefits of them, but I do ask them why they don't choose to use them. Here are some typical answers.

• People don't like high-deductible health plans. When we consider that most Americans do not have enough in savings to get them through a 2-month work stoppage, they certainly don't want health insurance that may not cover them for the first one or two months of pay's worth of medical expenses.
• When we consider that a typical employee's paycheck is already being "raided" by federal income taxes, state income taxes, FICA taxes, health benefit costs, 401(k) deferrals, and other benefit costs, there may not be enough left over for the day-to-day costs of living let alone HSA deferrals.

HDHPs and HSAs were put into place as part of a move toward health consumerism. In other words, patients will be more conscious of how they spend their dollars if the money for other than catastrophic health expenses is coming out of their accounts.

Let's think about what has happened because of this. An HDHP participant gets an annoying cold. He doesn't seek medical treatment because he is being a "smart consumer" of health services. Wait, it's not just a cold. It's bronchitis or influenza and suddenly, the costs are higher and his condition has spread as he has infected family members. That's not a good outcome.

Here's another plausible scenario. Another HDHP participant watches his daughter limp off the field during a youth soccer game. Her keen home-grown injury detection skills don't think there is anything broken, so they just decide to ice down the injury because experience has told them that the cost of a medical examination of it might be several hundred to even a thousand dollars. Oops, the injury turns out to be more serious than anyone thought. Our heroine should have taken her daughter to the doctor because now there are complications.

I'm not saying that the Fidelity research was flat out wrong. But, there's something more than people not understanding the benefits of HSAs. My conclusion is this:

People don't want to understand the benefits of HSAs. If participation in an HDHP is an entrance requirement, your average participant just doesn't care about the possible benefits of a health savings account.

The HSA experiment is now almost 15 years old. The concept of health consumerism is far older than that. Theoretically, it works. Theory and reality don't always agree.

Fact or Fiction in the Retirement Wellness Media

Sometimes you just have to wonder. Well, maybe you don't have to wonder, but I can speak for myself -- I certainly do have to wonder. The data that I read about simply cannot coexist. We cannot have record numbers of people deferring to 401(k) plans at record rates and yet still have almost universally low-five figure account balances, on average. At least we cannot unless we also have record amounts of leakage via plan loans, withdrawals, and both deferral and work stoppages.

I'm not going to cite a bunch of data here because I don't have it at my fingertips. I'm on the road and it's 5:30 AM, so think of this as your favorite (or not favorite) blogger ranting. I'm allowed, or at least I'm pretty sure I'm allowed.

Once upon a time (no, this is not the start of a fairy tale or one of Aesop's fables), American workers almost uniformly looked forward to the day when they could retire. They did that, in large part, on the backs of their corporate-sponsored defined benefit plans.

As we knew back then, defined benefit plans had many things about them that worked well toward this goal including (but definitely not limited to):

• Ability to generate lifetime income
• Lifetime income that could be compared to retirement expenses to understand what other resources might be needed
• Workforce management ability for plan sponsors using tools like retirement subsidies and early retirement windows

Since then, we've seen changes ... many changes. Initially, they were design and structure changes. With the growth of 401(k) plans and Congress' constant tinkering with defined benefit plans in a supposed effort to save them, there was first a move toward what we now know as hybrid plans (largely cash balance) and then toward freezing and sometimes terminating those defined benefit plans. Thinking back, the most common complaint I heard from corporate finance executives was the financial accounting volatility. Later on, funding volatility became perhaps a bigger issue.

I'll come back to this part of my rant later, but first it's time to return to my original topic.

According to an article that I read yesterday, 74% of respondents to a question said that lifetime income is important, but only 25% thought they had a way to generate it. So, in a tribute to the recently departed Adam West (the "real" Batman), riddle me this fine readers: "How does this comport with all the other articles telling me how well the 401(k) system is working?" Clearly something must be rotten in the state of Gotham.

We can do all of the modeling that we want and honestly, that modeling is in fact valid if, and that's a big if, participants can follow those models for their entire careers.If a person starts deferring at a reasonable level to their 401(k) when they are, say, 25 years old and continue to defer until some reasonable retirement age, all the while getting reasonable returns, that person will be able to retire and likely not outlive their resources.

They can do that, however, if they can use those balances to generate a steady stream of lifetime income. 

But, having reached the holy grail of retirement, these same people now want to do all the things they dreamed of while working. They wanted to retire to the beach or the mountains. They want to travel the world. They want to spoil their grandchildren. 

There is a problem with all of that. Those expenses are pretty front-loaded. That is, they are going to be very expensive in the first years of retirement. That will in turn deplete account balances that can be used to generate lifetime income. In other words, lifetime income may not be what you thought it was going to be. Or, said differently, the retirement wellness data must have a lot of fiction in it.

Once upon a time, that focus was on defined benefit plans. They focused on the employee who typically retired from a company in their 50s or 60s having worked for that company for 30 years or so. We all know that the current workforce doesn't tend to work 30 years for the same company, so that plan may be wrong.

But a defined benefit plan can still be right. Let it take a different form. Defined benefit plans have evolved to the point where they can look and feel like defined contribution plans, but critically still operate as defined benefit plans.

Why is this so critical? If the large majority of people think lifetime income is important, then we need plans that promote it. Yes, those people can get lifetime income from their 401(k), but if they are doing it through a commercial annuity, they have to purchase that annuity at "retail" rates. On the other hand, if they have a defined benefit plan, they can get better lifetime income from the same amount of money because they are getting the annuity at wholesale rates.

Now, there's a way to generate retirement wellness.

Holy Happiness, Batman.

Laws Affecting Benefits and Compensation Nearly Always Failures

I suspect that the authors of every law that affects employee benefits and compensation have good intentions when they draft those laws. As T.S. Eliot said however, "Most of the evil in this world is done by people with good intentions."

Where do these laws go wrong? To understand this, it's helpful to understand the process.

Usually, bills are drafted by Congressional staffers perhaps with the assistance of outside experts, often lobbyists. From there, bills are introduced and then haggled over by 435 people with no subject matter expertise in one chamber of Congress and then by 100 people with a similar lack of subject matter expertise in the other chamber. Once the sausage has been ground sufficiently, a bill may be approved and passed to the President for signature.

What could possibly go wrong?

Assuming that nothing could go wrong up until that point, these bills that by this point in the process have become laws leave it up to the various government agencies to create regulations that help to implement these laws. Some of the regulations make sense, and then there are the others.

Looking at this as someone who doesn't work for one of those agencies, it strikes me that each of them seeks to assert their power where possible. After all, if a government agency cannot show that it has power, why should it not simply cease to exist?

Further, if between Congress and the various government agencies, a bill and then law has not been messed up, there is still the court system to fall back on.

As an example, let's consider Internal Revenue Code Section 401(k). Essentially, it was added to the Code by the Revenue Act of 1978. And, while it was a throw-in, as we all know, once 401(k) plans were truly discovered, they took off in their popularity.

There are several things that we know about 401(k) plans. They are qualified retirement plans, thus governed by ERISA. They provide tax deductions and are thus also governed by the Internal Revenue Code. They have become very popular, so the amount of plan assets in many 401(k) plans is massive.

So now, let's look at the evolution of a current nightmare.

401(k) plans were created by the Revenue Act of 1978. They provided employees with an opportunity to save money for retirement on a tax-favored basis. Employers have the ability to match those employee deferrals and receive a tax deduction for those matching contributions. The Investment Committee (or some similar name) for the plan or its designee is responsible for selecting and monitoring investments in the plan. In that role, the Committee must act in the best interests of plan participants and in a fiduciary manner.

What does that mean?

The old regulations were very vague. Vagary has led to different courts imparting their wisdom in different ways. To be acting in the BEST interest of plan participants, what does a committee need to do? Does it need to find the LEAST expensive investment options? Does it need to find the HIGHEST returning investment options? If not, then how close to that optimum? Where is the bright line?

So, now we have new Department of Labor (DOL) fiduciary regulations. What they do more of than anything else is make more people fiduciaries of the plans than were before. Or, if they don't, then they certainly make clearer who the fiduciaries are and establish that there are, in fact, a lot of fiduciaries out there. Does this mean that more people will  be sued for fiduciary breaches?

Looking back, Section 401(k) should have been a great addition to the Code. And, weighing everything, perhaps it was (although regular readers of this blog will know my opinion that the addition of Section 401(k), more than anything else, probably ruined the American retirement system). But, over time, through this process, the 401(k) plan has become a mess. Each government agency thinks it has turf to protect. Employers feel that they have to offer a 401(k) plan, but few are equipped to handle one according to the current state of regulation and litigation.

The good news is that 401(k) plans through the Revenue Act of 1978 don't represent the only benefits or compensation law that is broken. Yes, that's also the bad news.

Consider these:

• The Pension Protection Act of 1987 and the Pension Protection Act of 2006 have probably done more to drive down the number of US pension plans than any other laws.
• A provision in the Multiemployer Pension Reform Act of 2014  that was intended to address the problem of serious underfunding in plans such as the Central States Teamsters Plan was dealt its first major setback specifically with respect to the Central States Teamsters Plan.
• The million dollar pay cap in Code Section 162(m) that was designed to limit executive compensation has done more to increase executive compensation than probably all other legislation combined.
• The Affordable Care Act of 2010 as we are seeing with announcements of 2017 exchange premiums is making health care anything but affordable.
• The Pension Benefits Guaranty Corporation's (PBGC) shortsightedness in addressing its self-determined shortfall has taken millions of participants out of the pension system thus increasing the PBGC's shortfall.

I could go, but you get the picture.

Benefits and Compensation After the Elections

Suppose there was a presidential election this year. Just suppose. And, further, suppose that election had a winner. Just suppose.

It is extremely likely that the winner will be someone nominated by either the Democratic Party or by the Republican Party. And, it is not at all unlikely that the party of the winner will keep or gain control of both houses of Congress.

From the standpoint of tax policy, and by extension, benefits and compensation policy, what will this mean for you, the employer or employee? Should you care?

I don't think we're far enough along to do a candidate-by-candidate analysis, but I do think that we are aided by the fact (at least I think it's a fact) that the remaining viable candidates fall generally into a few small buckets from these standpoints (yes, Carly Fiorina will give us a 3-page tax code (no idea what it might say) and Gary Johnson who has declared for the nomination of the Libertarian Party is a Fair Tax proponent). In fact, I think there are at most four such buckets remaining.

Let's identify them from left to right (that is how we usually read):

• The Democratic Socialist (DS) Bucket whose main component, Senator Bernie Sanders (I-VT, but caucuses with the Democrats and running for the Democratic nomination) has recently told us, "Yes, your taxes will go up."
• The Mainstream Democratic (MD) Bucket whose main component, former Secretary of State Hillary Clinton will, according to her website today (it did say something somewhat different on this topic at the end of last year), lower taxes for the middle class (and by extension the lower class) and raise taxes on the wealthy including big business.
• The Traditional Republican (TD) Bucket that includes the likes of [alphabetically] Chris Christie, governor of New Jersey; John Kasich, governor of Ohio; Marco Rubio, junior Senator from Florida; and Donald Trump (yes he is mainstream for this purpose), businessman from New York, which generally would lower tax brackets and flatten, or make less progressive, the tax code.
• The Conservative Republican (CR) Bucket that includes Ben Carson, retired physician from Maryland, and Ted Cruz, junior Senator from Texas which would replace the current income tax structure with a flat tax.

I'm going to make things a little tougher on you here Rather than reiterating these buckets, I'll comment on how different philosophies might affect things.

We all know the health care debate. Sanders wants to move to a single-payer system. Clinton likes the status quo under the Affordable Care Act (ACA). The Republicans with the exception of Kasich want to repeal the ACA and start over again. Kasich, on the other hand, thinks that this is an impractical solution and would keep some portions of the ACA and change others.

On the pension side, Republicans as a group are in favor of self-reliance. This would tend toward a world of nothing but 401(k) (and similar) plans. Their philosophy is that prudent Americans should be able to save enough for their own retirements, especially with the benefits of an employer match. Of course, many of them will be dismayed WHEN they read my blog to know that I disagree with that.

Clinton is much tougher to figure out on this. But, we can look to her stated tax policy and work our way back. When taxes on high earners and large corporations increase, so does the value of tax deductions. So, under a Clinton presidency, we might expect to see more high earners and profitable corporations accelerate contributions to benefit plans in order to accelerate tax deductions. Could this result in somewhat of a rebirth of defined benefit (DB) plans? Theoretically, it should, but in practice, I would expect that even if that rebirth occurs, it will be very limited.

Sanders would prefer to see a single government-run retirement system for everyone; that is, we would have expanded Social Security and Medicare with smaller benefits and less availability for those who have been the highest earners. In this scenario, although I personally don't see Congress going along with it, the prevalence of employer-provided retirement plans could decline significantly. On the other hand, it would not be antithetical to his philosophy to see a DB requirement in much the same way that the ACA leaves employers with a health care requirement. Could we see pay or play here?

With regard to executive compensation (nobody is saying much about broad-based compensation other than to say that under their Presidency, there will be more and better jobs and pay will increase rapidly), we have another large rift between the candidates. Here, one of the biggest elements is the view of what has probably been President Obama's second signature bill, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank). (Why couldn't they have given the law a short name like Fred so that I don't have to test my typing skills every time I cite the law?) 

Sanders is a huge fan of Dodd-Frank. That said, he doesn't think the law has gone far enough. He has said many times that the reinstatement of Glass-Steagall should have been part of Dodd-Frank. Sanders, much like Senator Warren (D-MA) as well as former Senator Dodd (D-CT) and former Representative Frank (D-MA) believes that one of the most important parts of Dodd-Frank is Title IX, the section on executive compensation. Sanders is a huge proponent of tieing levels of executive compensation to that of the rank and file and of their companies as well as generally limiting executive compensation. Under a Sanders presidency, do not be surprised to see a presidential proposal that would limit CEO compensation for example to a pay ratio as defined in Section 953(b) of Dodd-Frank to something like 10.

Clinton is also a Dodd-Frank fan. But, there is a big difference here. Secretary Clinton has long had both ties and obligations to the large Wall Street banks. She periodically invokes Glass-Steagall, but knows that its repeal allowed Goldman Sachs, for example, to grow into the financial giant that it has. At the same time, though, Clinton, who I believe is still far more likely than not to be the Democratic nominee, knows that the Democratic platform will be influenced by the likes of Sanders and Warren. Expect that the compromise will be in the form of promises to scale back executive compensation. As broad-based plans in which executives participate tend to be exempt from similar scrutiny, those higher-paid individuals may look to solutions that have been proposed over time in this blog.

On executive compensation, Republicans are fairly united. All, that I am aware, would push for the repeal of Dodd-Frank and for no more (or fewer) restrictions on executive compensation. As free market proponents, they would tell us to let the fair markets determine how top executives should be paid. All that said, proposals like that will be anathema to most (perhaps all) Democrats and unless the GOP were to gain a filibuster-proof majority in the Senate, such proposals are not likely to become law. However, as Republicans without exception are looking to lower the top marginal tax rates as well as corporate tax rates, look for more emphasis on current compensation and perhaps less emphasis on deferral opportunities.

As the 2016 election process matures and there are fewer candidates, we'll be able to dig deeper. In the meantime, you have my opinion. What's yours?

And, if you think my opinions have any merit, let me help you address what will be coming with the 2016 elections.

The Fallacy of the Participant Outcomes Mantra

I read about them virtually every day. One fund manager/defined contribution recordkeeper (vendor for purposes of the rest of this post) or another is concerned about participant outcomes. In other words, the reason that a plan sponsor should choose that particular company is because if they do, employees of that company will be prepared to retire someday.

Balderdash! Fiddlesticks!

Almost all of those vendors are preaching the same things:

• Automatic enrollment
• Automatic escalation
• Target date funds
• Retirement education

These are all great concepts, but they are not actually preparing people for retirement. Let's consider Abigail Assistant who works for Zipper Zoomers. Abby just recently started with ZZ. ZZ has hired Abby with cash compensation of $30,000 per year, based on an hourly rate of about $14.50 per hour. When she interviewed, she asked ZZ if they had medical benefits and a 401 plan (yes, she left off the "k" part). When she learned that they do, she didn't ask about details.

It turns out that ZZ does provide health benefits, but they don't pay as large a percentage of the cost as many other companies do, and their plan is a high-deductible plan. Abby and her husband Anson had already decided that 2016 would be a good year for the Assistant family to have their first child and a quick scan of her Facebook page shows that she will, in fact, be delivering Archibald Assistant later on this year. We also learn from her Facebook page that she plans to take 6 weeks off and then put dear little Archie in daycare.

Abby and Anson are going to have really high health care costs in 2016. But, when she started with ZZ, she got all this paperwork and didn't know what to do with it. She accepted her auto-enrollment at 3% of pay ($900 if she didn't take maternity leave). She also accepted her auto-escalation that will kick her up to a 4%  deferral next year. With ZZ's 2% budget for pay raises, her 2017 pay is expected to be $30,600 resulting a deferral of $1224. So her take home pay reflecting only the deductions for the 401(k) plan has only increased by $276 (600 minus 324) or less than 1%. But Abby and Anson's expenses have gone up far more than that. How will they cope?

Always resourceful, Abby and Anson have the answers. They have credit cards with hefty credit limits. That's a source of funds to pay the bills with. And, they learned that they can borrow against Abby's 401(k) account.

Okay, you all know where this is headed. The Assistants are not on the right track and unless they can get off of it, they will never be prepared for retirement. But, how does this make their vendor wrong?

Auto-enrollment and auto-escalation work for those who can afford it. It doesn't work for those who are living day to day, and sadly today, that seems to be the majority of American families.

In the Pension Protection Act of 2006, Congress claims to have intended to protected pensions. They did take some very positive steps while they were at it though by statutorily legalizing what are known as hybrid plans (cash balance, pension equity, variable annuity, etc.) and while they were at it, statutorily legalizing market return hybrid plans.

If you really want to help to prepare your employees for retirement, these are better vehicles. With modern designs and investment strategies, you can control costs. In fact, you can budget your costs better than you can in a 401(k) plan where the amount of matching contributions that you have to make is dependent on the amount that employees choose to defer.

I've seen all the illustrations and projections. Yes, Polly and Peter Professional who both came out of college and got higher paying jobs and who don't plan to have kids until they have been in the workforce for 10 or more years, bought a house and saved both inside and outside their 401(k) plans will be well-prepared, but for all the Abby and Anson's of the world, the participant outcomes will defy what the vendors are saying.

It's not pretty.

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.

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.

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. 

Why Working With Actuaries is Desirable, In My Humble Opinion

Actuaries often get a bad rap. In my thirtieth year in the profession, I feel like I have heard it all. We are nerds. We are numbers geeks. We can't think outside the proverbial box. We are literal. outgoing actuaries look at YOUR shoes when they talk to you.

Despite all that, there is much to be said that is positive about the profession. An employee (not an actuary) of the US Department of the Treasury once said to me that actuaries were the single most honest and ethical profession that he has dealt with.

Many of us majored in college in something like actuarial science, risk management, math, or economics. Probably, a large number of us thought about a career in academia. I have a number of friends who have remained in academia and that I can think of, every one of them to my knowledge is an honest and ethical person. But, generally, that is because of who they are, not what their professions require them to be. For much of academia, codes of conduct tend to relate to embarrassing the college or university that employs them. In my personal experience, those codes of conduct are not overly stringent, at least not if we compare to the actuarial Professional Code of Conduct.

Recently, much has been in the news, or at the very least, the conservative news of a particular Professor of Economics at MIT, Jonathan Gruber. Dr. Gruber is highly regarded by his peers as one of the preeminent health care economists that we could find. Dr. Gruber also developed many of the econometric models put forth with the Affordable Care Act (ACA, PPACA, ObamaCare). He has been engaged by either or both of the United States Congress or the current presidential administration for his expertise as well as by a number of the states to consult on the economics of the ACA. By his own admission, he helped to deceive the public about the ACA and its costs and sources of revenues. Paraphrasing Dr. Gruber, he justifies this as being for the greater good. That is, he has proclaimed that the ACA was a good and necessary law to pass and that the goodness of the law justifies any deception.

Dr. Gruber may be right about that. Or, he may not be. You may have an opinion on whether he is right. I'm not here to express mine on that particular issue.

There are many actuaries who are qualified, given the appropriate data and choices of assumptions and methods, to project health care costs or the costs of a health care plan or plans. Those who fit that bill have attained initial qualification through examination and maintained it through continuing education. While this process has a different rigor than does the process of attaining a Ph.D., it has created a relatively small community of individuals who work in the field.

Actuaries tend not to be political animals. Part of the reason for that may lie in our Code of Conduct. Quoting directly,

An actuary shall act honestly, with integrity and competence, and in a manner to fulfill the profession's responsibility to the public and to uphold the reputation of the actuarial profession. [Precept 1] 

An actuary shall not engage in any professional conduct involving dishonesty, fraud, deceit, or misrepresentation or commit any act that reflects adversely on the actuarial profession. [Annotation 1-4]

Those are two strong statements. Actuaries who have failed to abide by the Code of Conduct have been counseled, censured, suspended, or even expelled from the profession. Many of those cases have been for violation of Precept 1 (and its annotations) among others.

So, while jokes have been told about actuaries regarding the variety of answers that we might provide, I suggest it is because ours is not an exact science. We use our experience to make sound professional judgments. But, we have a duty of honesty and of integrity. We have a duty to not misrepresent or deceive.

To me, this is laudable. It makes me proud to be a part of the profession. It's why there would not have been an attempt by actuaries to deceive the public had actuaries been used by the government to model the costs under the Affordable Care Act. It makes it desirable to work with actuaries.

 

Pensions: Are They Just a Toy For Congress to Play With?

In 1963, Studebaker, once a large and proud American auto maker closed its doors in the US for the last time. With that door closing, as legend has it, New York Senator Jacob Javitz had the idea that the retirement income promised to employees needed more security. So was born in his mind the law that in 1974 became the Employee Retirement Income Security Act (ERISA). While it did far more than take steps to make pensions more secure, that was purportedly its primary purpose.

ERISA provided a framework for corporate retirement plans. And, in 1974, before paragraph (k) had been added to Section 401 of the Internal Revenue Code, the predominant employer-provided retirement income came from defined benefit (DB) plans. Unions bargained for them, and what the unions got, management wanted. Also, back in 1974, it was not unusual that if there was a company that an employee worked for in their mid-to-late 20s that that employee would eventually retire from that company. If you, as an employer, promised that employee a pension, you could expect 30 or more years of loyalty from that employee.

So, ERISA set up a minimum funding regime regime for DB plans. If you were using what is known as an immediate gain (or loss) actuarial cost method (if you know what that means, you don't need an explanation and if you don't know what it means, you don't want an explanation), then your minimum funding requirement for the year was the sum of these elements:

• The normal cost or the actuarial present value of benefits accruing during the year
• Amortization over 30 (or 40) years of the unfunded liability remaining from inception of the plan or transition to ERISA
• Amortization over 30 years of the actuarial liability emerging due to changes in plan provisions, the thought likely being that you got 30 years of value from the amendment
• Amortization over 30 years of the actuarial liability emerging due to changes in actuarial assumptions
• Amortization over 15 years of the actuarial liability emerging due to actuarial gains and losses (deviations from the expected)
• A few other elements that rarely came up

By the mid-1980s, DB plans were generally pretty well funded, and most of those that were not yet fully funded were getting much closer than they had been. The exceptions, for the most part, were plans sponsored by companies in dire financial straits that often convinced their actuaries to use fairly aggressive actuarial assumptions, or companies that frequently provided large benefit increases that had not yet been funded.

In 1986, we were graced with the Tax Reform Act (TRA86), a massive and sweeping change to the entire Internal Revenue Code -- so massive, in fact, that the Code was renamed from the Internal Revenue Code of 1954 to the Internal Revenue Code of 1986, a moniker it keeps to this day. A not insignificant portion of TRA86 included changes to pension funding rules. Amortization periods were shortened. For the most part, this increased required contributions for underfunded plans, which in turn increased corporate tax deductions.

Those new rules were revamped quickly. Just a year later, embedded in the Omnibus Budget Reconciliation Act of 1987 (OBRA87) was the Pension Protection Act of 1987. OBRA87 was the annual budget bill. And, has become the trend, each powerful legislator had his own pet spending project. To pay for all that pork, either a revenue generator or a decrease in tax expenditures (a fancy name for deductions) was needed. OBRA87 found a useful tool in DB pension plans. How is that? Just change the funding rules to decrease required contributions and tax deductions will go down which in a backhanded sort of way increases revenue for the government. of course, this was thinly veiled in a complex set of new requirements that applied only to underfunded plans.

A star was born!

Congress needs a revenue raiser? Change the funding rules. Cut the maximum benefit limitations. Change required interest rates. 

With this new toy, Congress looked at changes in pension rules at least every other year. It created uncertainty for employers. Yes, they could plan and budget based on current rules, but they lived in fear that the rules would change. That's a tough way to run a business. Many of those plan sponsors froze their pension plans. Many of them wanted to terminate their plans, but interest rates were so low that the cost of terminating those plans was too high. 

Fast forward to 2006. Coming out of the economic malaise and stock market tumble at the beginning of the decade, many plans were underfunded on an accrued benefit basis using market-based discount rates. It was time to protect pensions yet again. Thus was born the Pension Protection Act of 2006 (PPA), the most sweeping change to corporate pensions since ERISA. It provided a regime that essentially ensured that underfunded plans would be fully funded within 7 years. Employees would get their pensions. 

But, those extra contributions from employers are tax deductible. That's an extra burden on the government. And, it was just one year later (falling from its October 11, 2007 peak) that the markets crashed yet again. Employers couldn't afford these new levels of required contributions. But. Congress had an agenda to help those employers and help themselves. 

Welcome pension smoothing in the form of several laws since then. PPA brought us 7-year funding based on "fair market" conditions and assumptions. Pension smoothing undid that and then undid it again and undid it again as Congress invoked its favorite toy at least 3 times in the period following the signing of PPA. Employers had funding relief. Congress had its decrease in tax expenditures. Employees in pension plans had less funded benefits and the rules got so complex that almost nobody wanted to sponsor a pension plan anymore.

And, the places that pension funding relief gets buried are just amusing. I think the 2014 relief is my favorite -- the Highway and Transportation Funding Act of 2014 (HATFA). That's right. Congress decided it was time to improve our roadway system, but new roads don't come for free. So, to help pay for this, Congress invoked its favorite tax toy, pension funding relief.

Shame on them!

If We Only Knew What 401(k) Participants Really Want

I read an article this morning called "What Participants Really Want From Their Bond Fund." It was written by a gentleman named Chip Castille. Mr. Castille is the head of the BlackRock US Retirement Group. As such, Mr. Castille is likely a participant in a 401(k) plan, although to be truthful, I don't even know if BlackRock offers a 401(k) plan to its employees.

More to the point, the article tells us what participants really want in a 401(k) plan and specifically in a bond fund in such a plan. While I could not find where the author cited any survey data, either he has some on which he is basing his conclusions or he is divining the answers because he seems to really know better from my read of the article (more on that later).

The author implies that participants are looking for safety, return or retirement income. That is a pretty broad spectrum. But, he doesn't dig into it enough for us to know how a plan sponsor or an investment professional would decide. What he does do is point out that an investment manager in a bond fund looks at how closely his fund is tracking a benchmark while participants look at whether the fund has gained or lost money or it will produce sufficient income.

I don't mean to demean what any professional says. But, here I beg to differ with the author. Participants get a lot of junk in the mail these days (not that these days are really any different from any other days in that regard). If the participants to whom he is referring are anything like the ones that I know, they don't look at individual fund performance very often. In fact, in the case of most that I know, "not very often" is spelled N-E-V-E-R. That's right; they don't look at individual fund performance. They look to see how their total account is doing. They judge (that's spelled G-U-E-S-S) whether it's a good day to be in equities or a good day to be in fixed income and periodically move their money around because they think they know.

Typically, participants don't like losses in their accounts. In fact, I would say that if you were to rank account balance events in order of importance, my guess would be that far more participants would say that they would like to avoid meaningful losses perhaps at the expense of a few big gains than the number who would say they would like to go for big gains at the potential expense of taking some very large losses.

But, I'm just guessing. I don't really know. And, frankly, the author of the article doesn't know any of this either. Face it, he hangs around with investment professionals. Investment professionals are not representative of your average garden variety 401(k) participants.

I happen to be an equal opportunity dumper, however. While I cannot find data that the author is using to draw his conclusions from, I will also take this opportunity to dump on many authors who do use data, usually from surveys.

Let me show you why with an example. Suppose a survey question is worded like this:

What do you want from your 401(k) bond fund?

1. Safety
2. Return
3. Retirement income
4. Guacamole
5. Health care

I've never posed this question this way, so I get to guess at hypothetical results. Some number of people will answer with 4 or 5. Among those who don't, that is, they answer with 1, 2, or 3, or they just skip the question entirely, do they know what I mean by each of 1, 2, and 3? My guess is that they don't. Safety has lots of meanings in life. To an investment professional, it means one thing. To a plan participant, it might mean NEVER losing money. You and I know that is essentially impossible in a bond fund, but the average participant may not.

Some firm out there that wants to prove their own point will have a survey question like this one. They will ask about 1,000 random selected people to answer the questions and some smart people in the proverbial back room will analyze the answers so that the author of the next great white paper will have the definitive solution. 

Suppose the potential answers were flip-flopped (that is, health care was at the top followed by guacamole with safety last), would that change the results? What does a participant do if they wanted to answer none of the above? Or, suppose they don't understand one of the answers. Or, perhaps, in their mind, it's a tie between two answers. Or, maybe last week they would have answered return, but after they got their most recent statement and saw a 10% decline in their account balance, they suddenly place significant value on safety.

Let's face it, none of us know what the average participant wants in a 401(k) bond fund. We don't even know what an average participant is. 

Remember the two words that I capitalized -- NEVER and GUESS. That should tell you something.

It May Not be Politically Correct, but There are Gender Differences

It shouldn't come as a surprise to us that men and women are physiologically different. Come on now, I know my readers are smart. All of you worked this out before I said anything. But, lots of people have been surprised by this article and the FDA recommendations in it.

The FDA, for the first time, is recommending a different drug dosage for women than for men, although they go on to say that perhaps the reduced dosage is appropriate for men as well.  What surprises me is not that this happened, but that it took so long to happen.

Let's consider why.

Before drugs go on the market in the US, the FDA requires that they go through extensive research and clinical trials. Those are done almost exclusively on men. Why? To quote an FDA official whose name I cannot remember, "Women are hormonally inconvenient." In other words, because women monthly have significant hormonal swings, it is much more difficult to filter out the noise in the data.

Unfortunately, this means that much of the data that we actually have collected on drug efficacy and drug interaction may be somewhat accurate for men, but it's probably less accurate for women. And, as long as I am being politically incorrect, I would hypothesize that the same efficacy and interaction deficiencies that result from gender specific studies also result from the fact that studies have generally not been filtered by data such as ethnicity and blood type.

I've not done the research, so I am just guessing. But, my guess would be that people of different ethnicities and people of different blood types (among other differences) handle different drugs differently. It just makes sense.

So, what's in the future?

I don't really know, but this is my blog, so I get to hazard a guess.

Today, one of the current trends is genome mapping. Without having any particular expertise in the field, I understand that each of us has our own individual genetic map (perhaps monozygotic twins (identical) have the same genetic map, I just don't know). Surely then, the ideal medical treatment of each of us for a specific condition is different than for anyone else and those differences are based on our genetic maps. The data to develop these new medical plans of action will be here soon. Are we going to let hormonal inconveniences get in the way of better treatment plans?

AOL Reacts to Media and Employee Pressure

AOL had made a decision to follow in what many were calling the IBM mold. Rather than providing matching contributions in its 401(k) plan on a payroll period basis, it had decided to make single matching contributions after the end of the plan year. Therefore, employees who left during the year would not receive matching contributions.

The media were up in arms. Employees were up in arms. AOL gave in and is returning to its former policy of matching on a payroll period by payroll period basis.

And, this is big news!?

What really got to me about the media coverage was the spin that they managed to put on it. Employees could be losing out on the massive run-up on the matching contributions. Not said was that those balances could lose money as well. It's not fair that employees who leave during the year won't get matching contributions. What makes this fair or unfair? If you know the rules up front and you are evaluating leaving during the year, this should be one of your considerations.

How bad is it really? I'm going to oversimplify my example so that the math doesn't strain my brain. Suppose Employee Z has wages of $100,000 per year and a company matches 50 cents on the dollar on the first 6% of pay contributed. This is not an unusual design. Further suppose (and this is not quite right) that matching contributions are usually made on average exactly halfway through the year. Also assume that under the IBM design that matching contributions are made on the January 1 after the end of the year. Finally, assume that balances earn, on average, 10% returns (I want that investment adviser).

Suppose Z does not leave the company during the year. Then the difference during that year is is approximately 5% of $3,000. In other words, under the more traditional design, Z will have an account balance that is $150 larger. Yes, there are the effects of compounding, but this is really not as big a deal as the media made it out to be.

Surely, AOL has already determined how much money it plans to spend on its employees. if it spends more on the 401(k) plan, rest assured it will spend less somewhere else. It all comes out in the wash. But, it sure does make for an exciting story when a bunch of reporters, many of who think the plan is called a 401 [without the (k)], get a hold of it.

Really, it isn't.