The Wild Ride

In these five years since the inception of PLANADVISER magazine, our industry has been riddled with change—some anticipated, but some thrust upon us with no warning at all! Following are what I consider three themes that have shaped each of us and our practices over the last five years:

Fiduciary Responsibility: Fiduciary responsibility has been present, if not accounted for, since the day ERISA was passed in the early 1970s. The fundamentals of have not changed. What has changed is how compliance departments dance around the term fiduciary, how regulators make a career out of a single word, and how courts interpret the term. During the last five years, plan advisers have experienced a heightened awareness by many interested parties of the term “fiduciary responsibility” and, to this day, there remains very little uniformity in its interpretation and/or delivery.

Income Generation: The science of investing in participant­-directed retirement plans traditionally has been driven primarily, if not exclusively, by the asset. The entire objective was to have an asset at retirement that could help you accomplish your dreams. It was all about achieving a number (in some cases, a very specific number) and then living your life on a yacht, in the mountains, or in a planned community adjacent to a golf course.

Today, we are in an environment where the absolute size of that retirement plan asset has been supplanted by a focus on the amount of ongoing income one can regularly (monthly, annually, etc.) generate (sounds to me like a traditional defined benefit plan!).

Risk-Based Investing: The “how” participants invest has, today, come under the microscope. Calendar year 2008 was a watershed year and a pivotal point for every retirement-plan investor. During a very brief period, equity investors, some fixed-income investors, 401(k) participants, and U.S. homeowners received a crash course in markets about downsize capture, volatility, and liquidity.

A Look Forward

Looking out over the next five years (and writing about what will be) is always exciting. As for the things that will frame, if not shape, future developments:

Regulation. Whether it be internal or external, adviser or representative, state or national, process- or product-driven, regulation plays a looming and ever-increasing role in how we manage and react in our business, and it will continue to be an ongoing reality for advisers. The unscrupulous few, the greedy overchargers and the lazy advisers, help to bolster the case that regulation is needed. So, accepting that regulation is here to stay, the question becomes: How much should plan participants pay for regulation?

Yes, you read that correctly, what amount of assets should plan participants forfeit to the regulators for their oversight? After all, everything paid to regulators ultimately comes from the plan participant, by way of adviser fees, investor fees, or taxpayer receipts. If it were any other entity or service, the cry from on high would be, “Are they adding value?” “Is the plan participant being fairly charged and serviced?”

Personally, I struggle with that thought when attempting to justify “dueling regulators” in the ring of the fiduciary standard showdown. How many basis points of performance­ has been added to defined contribution participant plan account balances as the result of the fiduciary standard showdown heretofore? Sensible regulation does add value to participant accounts. Operating inefficiencies not corrected result in uncontrollable overhead. Get behind and support sensible regulation.

Income. It will not be until equity markets run up and compound at the rates of the 1990s, before plan participants are again able to think and fantasize in terms of building an asset base over income. Building an income stream remains vitally important, and it will remain a topic of discussion for some time to come. Getting participants to think of their savings as what they will provide in terms of an income stream is sobering, but necessary.

A Social Decision Around Social Security. The decision­ to “do nothing” to (for or with) Social Security is no longer an option. Funding, distributions, and time will have “caught up” with the asset well before 2016. There will be two more presidential elections by then; and each presidential candidate over these next two elections will need to have not only a plan for “funding the program” but also a plan that addresses distributions from the program. There will be “no winners” in these debates and every American will most likely be forced into accepting less than they have been promised and were expecting.

We need to keep an open mind here because this is not a simple fix!

Steff C. Chalk is CEO of the Fiduciary Consulting Group, a fee-only fiduciary consulting practice ­serving corporations and nonprofits. A judge for the PLANSPONSOR Retirement ­Plan Adviser of the Year award, and a faculty member of the PLANSPONSOR Institute, he is also the ­co-author of How to Build a Successful 401(k) and Retirement Plan Advisory Business.