A year ago, with the financial world feeling still very much on the precipice, and with the 2008 election results still ringing in our ears, I noted that “the impact on much-improved defined benefit plan funding levels—and on the confidence of retirement savings plan participants—has been severe, and potentially serious. We are all inclined to wonder (hope?) if, like 1987, the market will find its way back to solid footing before year-end—and worried that 1929 will be the better analogy.”
Well, as we head into 2010, it seems fair to say that this is not a repeat of 1987 and—not yet, anyway—a second Great Depression. Here’s a look at the trends that were on my mind this past year – and are just over the horizon.
Doctor Bill? Curing Health Care
Where we are: Aside from the financial crisis and unemployment, health care has been the great issue of the past year and remains so as we go to press. That the current system needs reform is scarcely an issue for debate anymore—but what constitutes “reform,” and whether or not it can (or should) be paid for, is another matter altogether.
What’s ahead: Even at this stage, it is nearly impossible to guess how this one turns out—and what it will mean for employers. It is still hard to believe that the Senate and House positions on any number of key issues can be reconciled—but then, there was a point in the summer of 2006 when many felt the same way about the Pension Protection Act. But if it does pass—or if it does not—it seems safe to say that the issue is not going away any time soon. What remains to be seen is if the “cure” is worse than what it aims to remedy.
Fee Fie? Revenue-Sharing Litigation
What we said: Deep pockets continue to be the apparent target of revenue-sharing litigation. The early signs have been promising for employers, with most jurisdictions holding that revenue-sharing, per se, was not a problem, and that disclosure of those arrangements to participants was not required.
Where we are: The courts have, by most measures, continued to be willing to give the employers the benefit of the doubt in nearly every case. A recent decision by Caterpillar to settle its litigation might be seen by some to be a crack in that otherwise unspoiled landscape, but that seems unlikely (Caterpillar was an unusual case in that an internal division actually managed money for the 401(k) for a number of years). Though a revenue-sharing case filed in June in a case involved a much smaller plan, the fact pattern seems unusual enough, and the contingent fees so limited, that it seems unlikely to portend a big shift in focus to smaller plans.
What’s ahead: Barring a smoking gun discovery among the cases already filed, it seems likely that the laws—and disclosures—will change before the litigation has any real impact. On the other hand, it is entirely possible that the mere existence of that litigation—and the ever-present litigation threat—will serve to reform the system in a way, and on a schedule, that would not otherwise have been possible.
Auto-Premonition—Doing It for Participants
What we said: It is entirely possible that an Obama administration will, as mentioned during the campaign (see “Political Pairings,” PLANSPONSOR, June 2008), advocate workplace automatic enrollment IRAs. More significantly, there is a growing suggestion that the automatic design—having been successfully deployed for enrollment and investing—might work equally well at distribution, forestalling the tendency of participants to take—and spend—those lump sums. .
Where we are: This has been a tough year for participants and plan sponsors alike, and among some 6,000 plan sponsor respondents to PLANSPONSOR’s annual Defined Contribution Survey, the pace of automatic enrollment basically flatlined, with just under a third having embraced the design (more than half of the largest plans have, however). More significantly, just 16.2% of respondents had embraced it in the past year, roughly half the pace in 2008. Meanwhile, though the appeal of the concept of a more broad-based automatic enrollment retirement savings initiative has been touted, including by those in the Obama Administration, those efforts have taken a back seat to other matters.
What’s Ahead: Automatic enrollment may have taken something of a “holiday,” but it seems unlikely to be “over” as a trend. Look for it to pick up the pace again in 2010—and for the Obama Administration to turn its attention to the issue in the next year (or two).
Default Lines—Targeting Target-Dates
What we said: We ended 2008 with a growing awareness that all date-based solutions are not created equal. In a very real sense, we are in the first year of a new generation of participants who have not only been defaulted “in,” they have been defaulted into these funds—and just in time for the most tumultuous market in memory. It will be interesting to see how participants—and plan sponsors—respond.
Where we are: Congress has held hearings, and the Department of Labor and Securities and Exchange Commission are not only on the case, they are on the case together. The market rebound has served to restore some of the damage, but the scars remain. However, the target-date manufacturers have become more explicit about their glide path designs, and the notion that a fund family is oriented to take you “to” or “through” retirement is now an open dialogue.
What’s ahead: We don’t know yet what regulators may try to do to help ensure that investors—particularly near-retirees—are not misled by the simplicity of a fund title and marketing pitch. Plan sponsors are on notice that there are differences here, and with luck, will continue to ask pointed questions. Because, after all, when you’re selling “you don’t have to worry about it”, somebody has to.
Conflicts of Interests—Advice Regulations
Where we are: One of the last acts of the outgoing Bush Administration was the publishing of a set of final rules governing the provision of investment advice to participants—regulations for which the foundation was laid in the Pension Protection Act (PPA), but whose origins can be found in a series of legislative initiatives championed by Congressman John Boehner (R-Ohio) for more than a decade. Proponents had long said that participants clearly needed (and wanted) the advice, but that there needed to be a way in which advisers could be paid enough to want to take on the task. Opponents were just as concerned that the provision merely seemed to codify the provision of “conflicted” advice by setting out terms by which advisers could receive compensation that varied depending on the funds recommended.
Experts have long expressed amazement that the provisions survived the conference committee’s reconciliation of the PPA—but there they were. However, the controversy swirling around those regulations never subsided—and, thus, it was no huge surprise when the incoming Administration tabled, postponed, postponed again, and then officially withdrew the proposed final regulations, as it announced its intention to publish separately a proposed rule that it believes more closely conforms to the Pension Protection Act statutory exemption relating to investment advice.
What’s ahead: Will we ever get final advice regulations? Almost certainly, though almost certainly regulations very different from the ones put forth a year ago. Or perhaps they will not come until after the concepts embodied in the PPA have been recrafted by legislators, such as Congressman Rob Andrews (D-New Jersey), who has already introduced legislation (the aptly named “The Conflicted Investment Advice Prohibition Act of 2009”) that would do just that. Between now and then, participants will continue to get advice the way they always have—or have not.
Stop Gaps: Closing the Pension Funding Gap
What we said last year: The market’s tumult has taken its toll on pension portfolios and, in remarkably short order, managed to undo what had been a diligent, steady progress toward restoring the funding health of many programs. Of course, it also has served to favorably impact liability calculations, somewhat muting the damage. All in all, those workers covered by the promises represented by those programs must surely appreciate their position vis-à-vis those solely depending on defined contribution plans—but how will employers feel about those promises?
Where we are: Pension portfolios took their lumps from the investment markets last year, to put it mildly. That they were better diversified—and likely more insulated—from those travails than most defined contribution portfolios was surely a matter of some comfort, as has been their steady recovery in 2009. Still, there was a lot of damage to be undone, and for most it is still a work in progress—even as the press of more restrictive accounting and funding rules takes its toll. Fortunately, Congress has been receptive to calls for extensions that have provided some much-needed breathing room for these programs.
What’s ahead: It remains more expensive—and complicated—to walk away from pension commitments than most realize, though many employers remain committed to their pension plans for reasons that transcend those financial considerations. Still, it seems likely that freezes, both hard and soft, will continue to be applied, certainly in the private sector. The public sector’s commitment to pensions remains largely unabated—and yet, a sense remains that it may only be a matter of time before fiscal realities bring about a different result.
Tying Up “Loose” Ends—Full Disclosures
What we said: There’s little question that our industry would benefit from better disclosure about the fees paid for the services rendered to retirement plans and their beneficiaries. The proposal to expand/enhance reporting to plan fiduciaries, if imperfect, still seems to be headed in the right direction. Doubtless, some providers will adopt different business models to “duck” those disclosures just a little bit longer, but it seems clear that plan sponsors will want—and deserve—a full and fair accounting. It is less clear that participants will be as well served by an incomplete, and perhaps unbalanced, reporting of fees paid in their accounts—particularly if, as is currently proposed, the disclosures could add a dozen pages (and millions in expense across the industry) to their annual statements. It is also unclear just how much of this the current Administration will be able and willing to press into service in the short time remaining.
Where we are: In just a few short months, the 2009 Form 5500 will escort in a whole new level of plan sponsor fee disclosure, though the proposed participant disclosures are not yet on the radar screen.
What’s ahead: It is nearly impossible to argue against the critical importance of full fee disclosure, certainly to plan fiduciaries. Whether the current requirements truly constitute “full” disclosure remains a matter of some debate—but it is a start. On the participant side, the short-term implications are less clear; but then, we have some time—and a new Administration—to work through those issues.
What do YOU think? What's not on our list? Email me at firstname.lastname@example.org.