Investment Fraud and the Role of Trust

This article entitled “Investment Fraud and the Role of Trust” by Dr. Susan Mangiero was originally published on April 19, 2017 in The Fraud Examiner, a publication of the Association of Certified Fraud Examiners that is distributed to some 65,000 fraud professionals.

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Investment fraud can happen to anyone, and unfortunately, there is no shortage of investment fraud possibilities. Affinity fraud, pyramid schemes, pump-and-dump security trading, high-return or risk-free investments, and pre-IPO scams are only a few of a long-list of schemes that could separate investors from their hard-earned money. 

Investors can find themselves the victims of fraud when they don’t do enough due diligence or put too much faith in the people selling or managing a fund. Investors around the world would be wise to grasp fundamentals of the financial services industry, especially since results from a 2016 survey conducted by the National Association of Retirement Plan Participants show that only one in 10 persons express confidence in financial institutions. Financial advisers are similarly viewed with doubt. This is problematic.

Due in part to these concerns, very few people are adequately saving for retirement and those with money frequently invest in riskier assets in hopes of high returns. Following the 2008 credit crisis, people are changing the kinds of assets allocated in their pension plans and foundation portfolios. Taking more risks isn’t necessarily bad as long as investors sufficiently understand what is being offered to them and have assurances that sufficient safeguards are in place. Moreover, savers urgently need reliable help. Fragile confidence in the intentions of financial service providers creates a friction that can discourage investors from getting the input they need.

But investment fraud isn’t just a problem for individuals. When it occurs, it taints the financial services industry and the professionals who operate with high integrity and put customers first. Low trust of an entire industry can invite additional regulation. The net effect can be unfair penalties that diligent investment stewards must pay for the trespasses of fraudsters.

Increasing Investor Confidence

Although there is no such thing as a risk-free investment, investors can take action to detect red flags and hopefully avoid problems. With the Madoff Ponzi scheme, there were some who seriously questioned whether the touted strategy was legitimate, let alone viable, and did not invest. Regarding Enron, some investors looked askance at the energy company’s reliance on a complex web of special purpose vehicles. One lesson learned from the Bayou hedge fund scandal is to verify whether auditors are independent and well respected.

In its guide for seniors, the U.S. Securities and Exchange Commission urges the use of publicly available databases to check the disciplinary history of brokers and advisors, warning that investors should “never judge a person’s integrity by how he or she sounds.” The guide also says to avoid those who use fear tactics and to thoroughly review documents. The Financial Industry Regulatory Authority cautions investors not to be pressured or to believe that a “once in a lifetime” opportunity will be lost without immediate action.

To help combat investment fraud, the North American Securities Administrators Association teamed up with the Canadian Securities Administrators to create an online quiz that anyone can take to enhance awareness of what to avoid.

Although there are organizations that formally grade companies on their trustworthiness, investors should not rely on a single metric alone. Instead they should study whether a financial service provider has a good reputation in the marketplace and what the company is doing to manage its economic and operational risks.

Financial service companies likewise have responsibilities to be trustworthy and ensure that adequate protections are put in place. Some of these critical action steps include:

  • Setting up controls to prevent rogue trading
  • Appropriately compensating salespersons to minimize conflicts
  • Providing existing and potential customers with clear and understandable investment documents
  • Regularly communicating what the organization does well to lower risks for its customers
  • Calling out questionable activities of its competitors and working with industry organizations to improve risk management and fraud prevention techniques.

Disclaimer: The information provided by this article should not be construed as financial or legal advice. The reader should consult with his or her own advisors.

How to Sell Investment Services

As I understand, the term "consultative selling" was first used by author and sales expert Mack Hanan. The concept is simple. Know what your customer needs and offer them solutions to their problems. The process is a two-way street. Both buyer and provider are actively involved and should communicate clearly and with respect. While lots of advisors and their firms find themselves on the A list, there is a continuing flurry of lawsuits being filed that allege self-dealing, opacity of disclosures and reasonableness of fees. Visit the 401k Help Center website section regarding court decisions and legal activity to read for yourself.

As with any industry, the investment community is constantly self-examining its practices in order to improve. This is a positive thing. As I point out in "Fake News, Plagiarism and Business Ethics," good players have a vested interest in self-policing since they can be tainted, reputation-wise, as the result of bad actions of others. I've spoken to hundreds of buyers of financial services who question the checks and balances of those who manage their money or otherwise influence their retirement planning decisions. Frequent and clear communications with their respective advisor, consultant or portfolio executive can go a long way in assuring the doubting Thomas. There is no shortage of inspiration about how to effectively interact.

Over the holidays, I observed a back and forth between sellers and buyers at a national jewelry store. While waiting my turn, I watched shop clerks attend to customers who seemed thoroughly prepared with questions about quality and price. I'm not a big purveyor of charms but was certainly impressed with the breadth of knowledge on both sides of the cash register. I can relate. As my friends know, I have a penchant for perfume and like to treat myself to a new scent now and then. I do my research in advance, visiting sites like Wine connoisseurs are similarly motivated to gather information and sellers are wise to help educate them.

Whenever the product or service is personal, sellers must respond accordingly. Empower potential or existing customers with straightforward information. Be prepared to answer questions. Treat each client with respect as if they really count. For some organizations, the cost of selling could be too high unless the transaction is "large enough." Size is a perfectly fine business model to adapt but make it known in a courteous way that minimums apply. A small investor today could be your large investor tomorrow.

Most selling involves humans and that means that behaviors can't be ignored. Before he passed away, famed sales guru Zig Ziglar said "You can have everything in life you want, if you will just help enough other people get what they want."

Effective Retirement Plan Communications

My blog post entitled "Simplifying Retirement Planning Communications" resonated with readers. It's no surprise that there are still discussions about how best to improve the information provided to participants. Given the amount of litigation alleging lack of transparency, sponsors are wise to offer understandable documents that can be used by employees and retirees to make financial decisions. According to "Improved Retirement Plan Communication Can Boost Confidence" (Plan Sponsor, December 15, 2016), it's not just content but the delivery format as well. Companies are adding more retirement readiness tools to their websites, even if participants are sometimes slow to take advantage.

Financial literacy is another issue that challenges employers and participants alike. Even when adequate information is available, the recipient may be unable to digest product descriptions or performance reports. In his write-up entitled "401(k) Communication Challenges," Dr. Richard Glass bemoans the low rate of financial literacy and its negative impact on saving. His take is that defined contribution plan sponsors "have not recognized that the participants' sense of distrust and their lack of knowledge can easily create a mindset that is conducive to inaction." He uses target date fund disclosures to exemplify his view that more should be done to put participants at ease and thereby motivate them to better prepare for life after work. His suggestions include the following:

  • Don't sugar coat the issue of risk but instead make it known that no product is free of uncertainty;
  • Emphasize that calculations are based on assumptions;
  • Hold "educational sessions that explain to participants why arriving at the assumptions involves a lot of crystal ball gazing and why, in spite of that fact, assumptions still have to be made" for purposes of forecasting; and
  • Supply "gap analyses that show participants how many years they can expect to receive their targeted inflation-adjusted incomes at their current contribution rates."

I agree that strengthening financial literacy is essential although I am not particularly sanguine about getting everyone quickly up to speed on concepts such as diversification and risk measurement. That's not to say that employers should look the other way. To the contrary, they should act even though some organizations will have to do more work then others. As I explain in another blog post, grade 12 proficiency in reading and math is abysmally low in the United States. Anyone who gets hired with a poor grasp of such basics may struggle with learning even elementary investing ideas. See "Employers Worry About Skills Gap That Impacts Bottom Line" (January 7, 2017).

Despite the fact that companies spent nearly $71 billion in 2015 on training, chances are those expenses will increase. Realistically, shareholders and taxpayers may have little choice but to foot the bill for further education of anyone not yet able to understand what it means to save now for later on. The Aegon Retirement Readiness Survey 2016 finds that "[A]round the world, many workers are heavily reliant on government benefits and are not saving enough to adequately fund their retirement income needs." Obviously there is no time like the present to prioritize thrift and prudent investing.

Simplifying Retirement Planning Communications

For many people, retirement planning tends to be an exercise in frustration. Some complaints focus on numbers that seek to dazzle without enlightening. Others call out language that is overly long, complex and ambiguous. The author of "HR communications falls short" (Benefits Pro, November 10, 2015) references a Davis & Company survey that validates employee angst as follows:

  • About compensation, only one out of four persons were satisfied with documents they received;
  • Regarding benefits, only fifteen percent said they were adequately apprised; and
  • Nearly ninety percent of survey-takers said they had not been provided sufficient intelligence about performance management.

These results are not good news for anyone. Shareholders are paying a company's staff to convey important information to retain and attract talented workers. If that's not happening, money is being wasted and that erodes enterprise value. It's likewise problematic for active employees and retirees. Without meaningful instructions and data, they are ill-equipped to make decisions about how to save and select benefits. As a forensic economist, I've worked on multiple matters that addressed the frequency, magnitude and clarity of participant communications. It's a real issue and costly when the task of communicating is done poorly.

Unfortunately, even when arguably clear and copious guidance is made available by an employer, some may resist reading and/or asking questions. As former Wall Street Journal reporter Jonathan Clements points out in "Don't Bother Reading This" (November 18, 2016), certain persons are focused on today and not tomorrow. He adds that others "want to believe in magic" even when evidence about investment returns suggest otherwise. Finally, he bemoans the association of "sophistication with complexity." (As an aside, I don't agree with Mr. Clements that complexity is "usually a ruse to bamboozle." However, I do acknowledge that complex economic arrangements require a thorough vetting of the risk-return tradeoff).

If my experience teaching on an investment cruise a decade ago is any indication, there are signs that financial empowerment through education is alive and well, even for those who learn on their own. Based on questions and comments I received, it was clear that the audience had a strong sense of what risks they were willing to accept and what they hoped to avoid. Admittedly, these were mostly small business owners who had grown and prospered over the years by understanding that doing one's homework is necessary to survive.

While investment uncertainty is, by its nature, something we all face, it is always prudent to gauge risks ahead of time, to the extent possible. Employers and policy-makers who want to help others improve their financial literacy can contribute in multiple ways. Joanne Sammer advocates in HR Magazine for a "whole portfolio" focus that encompasses all savings and retirement vehicles owned by an employee and his or her spouse. See "Helping Employees Plan for Retirement" (March 1, 2014). Based on my work in the benefits world, I suggest other prescriptions to consider as follows:

  • Listen to what your constituents tell you they need to know.
  • Understand the composition of your labor force since not every demographic cohort absorbs information in the same way.
  • Become adept at storytelling to make retirement planning relatable.
  • Make it easy for employees and retirees to ask questions and receive answers in a timely fashion.
  • Get creative with snappy visuals and relevant technology tools that encourage knowledge-gathering.
  • Monitor engagement patterns and revise your communications protocol as often as needed. 

Whenever I think about getting my message out, I reflect on something a former doctoral professor shared with his students. Taking some liberties since I don't recall his exact words, he required us to distill pages of terse text and equations into a single sound bite that a lay person could understand and care about. This drive to motivate the recipient to pay heed is undeniable. As Ryan T. Howell said in his Psychology Today article entitled "Less Is More: The Power of Simple Language" (September 20, 2012), concentrate on the problem consumers are trying to solve.

Applied to retirement planning, what's the end goal? For millions of people, the answer is not so much about having X amount of money in the bank but more about satisfying life goals and having "enough" to make things happen.

Creating A Life Plan Before It's Too Late

In case you missed the announcement, today is part of a seven day celebration of National Retirement Security Week. The event is sponsored by the National Association of Government Defined Contribution Administrators, Inc. ("NAGDCA") and stems from Congressional action to:

  • Apprise employees about the need to be retirement ready in terms of personal finances;
  • Educate individuals about various ways to save for retirement; and
  • Help employers encourage their employees to save more.

While true that it's essential to address issues such as expected lifespan, job mobility, the power of compounding and taking advantage of a company match, money is not the only end goal. One could have a substantial piggy bank but end up lonely or in search of something satisfying to do. According to "How to Retire Happy" by Stan Hinden (AARP Bulletin, September 2014), it is important to ask what comes next. Some persons end up spending more time in retirement than the number of years they worked. Kerry Close reports for Time Money that a "record high number of retirees" are unhappy. She cites an Employee Benefit Research Institute study that shows a big drop in "very" satisfied retirees from 60.5 percent in 2012 to 48.6 percent in 2016.

One suggestion is to create (or update) a life plan, even if you are far from the gold watch party. According to a blog post by consultant and writer Royale Scuderi, this document should summarize "where you are now in all the areas that matter to you, where you want to improve and what you'd like your life to look like in the future." Easier said than done, pondering the big picture can be challenging but enlightening as well. As someone who is updating her life plan right now, I find the effort worthwhile. Acknowledging that you cannot recapture time reinforces the concept that one should be reflective about the past, grateful for the present and excited about the future. As Anthony Hopkin's character said in Meet Joe Black, the years go by "in a blink."

For those who want to give it a go, check out the the narrative provided by life coach Michael Hyatt. Earlier this year, he co-wrote Living Forward: A Proven Plan to Stop Drifting and Get the Life You Want with Daniel Harkavy. An online search yields additional educational resources. (Note: This blogger has no relationship with Michael Hyatt.)

Surveys Highlight Importance of Fiduciary Focus When Hiring Advisors

According to an August 17 press release from Fidelity Investments, "fiduciary responsibility tops plan sponsors' reasons for hiring advisors." What's more, this poll of nearly 1,000 defined contribution plan decision-makers makes clear that knowledgeable third parties have an edge in being hired and retained, especially if they can offer input about plan design and investment selection. Cited areas of concern include the following:

  • Increasing employee participation;
  • Properly measuring investment performance; and
  • Making sure that investment risk goals are heeded.

A 2016 Mass Mutual survey reveals similar findings that plan sponsors want help with plan design, discharging fiduciary duties and investment selection. Moreover, about two-thirds of respondents said they want an advisor who works with companies like theirs. 

It's no surprise then that educational initiatives continue to develop in response to changing regulations and an enhanced focus on fiduciary duties. As announced last month, the American Retirement Association has partnered with Morningstar "to develop a fiduciary education and best practices program for advisors."

April 2017 will be a busy month for many as they seek to comply with large chunks of the U.S. Department of Labor Fiduciary Rule.

More About the Fiduciary Gap

Thanks to the many people who shared their insights about various state retirement arrangements for eligible private company employees and the need for a proverbial umbrella to address the fiduciary gap.

Let me start with the Nutmeg State program since I discussed it in two earlier posts. Interested parties can click to download the final legislation that sets up the Connecticut Retirement Security Exchange. (Note the new name.) Several changes caught my eye.

  • On page 156 of 298, there is a provision that "If a participant does not affirmatively select a specific vendor or investment option within the program, such participant's contribution shall be invested in an age-appropriate target date fund that most closely matches the participant's normal retirement age, rotationally assigned by the program." If "rotationally" means "random," it will be helpful to know how board members identify age cohorts and select (and monitor thereafter) a particular product for each group.
  • Regarding a provision that allows the sitting governor to individually select the board chair without the advice and consent of the General Assembly, a best practice is that the engagement process be transparent. Interested parties want to know that the appointment reflects the right person for the job
  • It would be helpful to know the basis for why the voluntary opt-in for small businesses with more than five employees was removed. After all, forced regulation could end up costing firms so much in terms of paperwork and payroll set-up that hiring plans are put on hold.
  • It would be helpful to know how the three percent default contribution level will be tracked so that legislators will know whether to seek an increase later on. It's a low number, especially given the math for what can be done privately. Suppose a person makes $50,000 per year in wages. The three percent deduction translates into $1,500. In 2016, the IRA contribution limit for someone younger than fifty years is $5,500. Should an individual decide to allocate the maximum, participation in the state program will logically require that the individual go elsewhere to invest the additional $4,000. Why doesn't that individual simply invest the full $5,500 with one reputable organization? I assume the counter argument is that an individual who would not max the annual IRA limit needs a nudge in the form of the state program.

As I wrote in "State Retirement Arrangements for Small Business Employees," there are multiple state endeavors and one would need to examine the details of each one to assess economic impact and pension governance implications. Questions about federal programs exist as well. Putting aside dire long-term projections about the U.S. Social Security Trust Fund, absent reforms, several critics are unhappy with what they see as a fiduciary gap for anyone enrolled in the myRA program. By way of background, there are no fees to the individual enrollee. This is good but the guaranteed return is low because it is tied to federal debt security yields. For June 2016, the number is 1.875 percent APR. There is a lifetime maximum of $15,000 for eligible persons. A person's employer must agree to facilitate automatic deductions which means you must be employed.

One attorney I called today said he did not think there is a fiduciary in place for this federal product. Chris Carosa, editor of Fiduciary News, has another take. In "Does "myRA breach fiduciary duty?" he lays out reasons why he thinks the myRA product is "blatantly ill-suited for retirement savers." He decries the "oozing irony" of political leaders who want the Fiduciary Rule applied to others but not to themselves, adding there is no diversification potential and the selling firm (i.e. the U.S. Treasury) is conflicted by distributing its own product. Another retirement industry professional wants to know "What fiduciary would MANDATE that a twenty-five year old invest his or her retirement assets in a short to intermediate term government bond fund and expect to avoid liability?

You get the picture. We need to understand where the fiduciary gaps exist and then strive to close them as quickly and efficaciously as possible.

State Retirement Arrangements for Small Business Employees

After posting "Public-Private Retirement Plans and Possible Fiduciary Gaps," a senior legal expert kindly informed me that Connecticut's legislation draws extensively from U.S. federal pension law. (ERISA does not directly apply to most government plans and the U.S. Department of Labor has proposed a safe harbor that would exempt states from being tagged as ERISA fiduciaries.) Interestingly, a word search for "fiduciary" in the Public Act No. 16-29 document comes up empty. Specifically, as laid out in Section 6, entitled "Board Duty To Act With Prudence And In Interest of Participants," the Connecticut Retirement Security Authority board of directors are to act with the "care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of like character and with like aims" and solely "in the interests of the program's participants and beneficiaries."

Regarding legal redress, my understanding is that individuals who allow their employers to deduct three percent of their taxable wages to be placed in an "age-appropriate target date fund" or similarly allowed investment will not have the right to sue individual members of the Connecticut Retirement Security Authority Board nor will they have the right to sue the State of Connecticut. They will have to rely on authorized directors and the Attorney General to properly oversee selected service providers and take corrective action to improve things going forward. However, even if participants can demonstrate economic harm, they would not be able to recover past damages.

Programs offered by other states vary. One would have to research dozens of legal documents to compare and contrast governance, investment opportunities and conflict of interest avoidance mechanisms. Interested parties can visit the Pension Rights Center's State-based retirement plans for the private sector or the AARP's State Retirement Savings Resource Center. I am not sure how often these websites are updated.

I remain skeptical and am not alone. Michael Barry, president of the Plan Advisory Services Group, explains his reservations in "Are State Plans the Answer?" (Plan Sponsor, November 2015). Paul Schott Stevens, president and CEO of the Investment Company Institute, gives a thumbs up to private initiatives such as expanding multiple employer plans or MEPs to include smaller companies. Another way forward would be to simplify 401(k) plan regulations to encourage employers to better help their workforce save for retirement. See "State-Run Retirement? Better to Go Private" (Wall Street Journal, February 7, 2016).

My lack of enthusiasm for these state-run programs has more to do with philosophy and a desire to encourage economic growth. Here is some food for thought.

  • Small businesses around the world are drowning in a sea of regulations. According to an article in Small Business Trends, there is an inverse relationship between company formations and the number of pages in the Federal Register. These "little engines that could" create jobs are not leaving the train station, discouraged by too many rules.
  • As any free market economist can handily demonstrate, unintended consequences often occur, resulting in added expense and unwelcome behavior. Instead of spending X hours per month on growing sales and profit, a small business owner that is obliged to complete paperwork may now forego hiring new employees or cut back on existing perks.
  • Some of the states that are setting up retirement programs for private company workers have a poor track record as evidenced by underfunded pension plans for municipal staff.
  • Unless one is convinced that small company employees are unable or unlikely to set up an IRA on their own, these state-involved arrangements are not needed. CNBC reports that "Employees participating in auto enrollment tend to contribute less than people who sign up for 401(k) plans on their own, often because their employers set a low default contribution level."
  • It's not clear to me that individuals will have a better level of consumer protection by being part of a state-run program versus setting up an IRA account directly with a reputable financial institution. So far, no one has convinced me to the contrary.

I'm all for encouraging individuals to save for the long-term but I seriously wonder why government has to be involved with every decision someone makes. Hopefully I will be proven wrong and these state programs for private company employees will succeed.

Note: I welcome insightful essays and commentaries on this and other relevant pension governance topics. If you would like to be a guest contributor, please email with your idea or write-up.

Public-Private Retirement Plans and Possible Fiduciary Gaps

Hot off the press, a study from Pew Charitable Trusts ("Pew") examines retirement benefit planning by geography. Key takeaways from "A Look at Access to Employer-Based Retirement Plans in the Nation's Metropolitan Areas" and a summary by Pew's Director of Retirement Savings, John Scott, include the following:

  • At least four out of ten full-time employees work for private companies that do not offer a retirement plan;
  • Where one works can influence whether an individual has access to an employer-provided retirement plan;
  • Data shows that access is lowest in Florida, Texas and California; 
  • Access is typically lower for employees of small companies;
  • Workers who earn more than $100,000 per year generally have greater access to an employer-sponsored plan than individuals who earn less than $25,000; and
  • Underserved employees (in terms of access to a company-provided retirement plan) are clustered in large cities.

These insights validate what many know. Millions of people worldwide are not saving enough by far for retirement. One response (not surprisingly) is for government involvement to encourage individuals to save more. On November 16, 2015, the U.S. Department of Labor ("DOL") announced its proposed regulation to enable states to facilitate retirement plans for uncovered private sector employees without being subject to the Employee Retirement Income Security Act ("ERISA"). Read "State Savings Programs for Non-Government Employees" for details.

As the result of this suggested safe harbor (as I don't believe the DOL regulation has been passed yet), lots of states are jumping on the retirement bandwagon. Besides the State of Washington, California and Illinois require or encourage mostly smaller employers to offer a plan or engage in getting their employees to join a state network.

Not everyone is shouting with glee. According to "Initiatives for private-sector retirement moving to states" by Hazel Bradford (Pensions & Investments, January 25, 2016), certain financial service organizations fear increased compliance costs due to a patchwork approach across fifty states. Another concern is whether participants in newly formed state programs will be adequately protected. Even if a state private-public program is run by those who have sufficient experience and knowledge, will they be held to a fiduciary standard? If not, why not? If so, how will the fiduciary standard compare with ERISA norms if ERISA does not apply? In my discussions with several persons involved in this area, they too share the concern about a fiduciary gap.

Consider the case of Connecticut. After threatening to veto the bill to create the Connecticut Retirement Security Board in mid May 2016, the Nutmeg State's governor signed the act on May 27 with operations planned to commence in 2018. According to the original text for sHB 5591, if an employee does not "affirmatively opt in" then a "qualified" employer must enroll each employee and deduct three percent of taxable wages "up to normal IRS limits." An employee can opt out by indicating a contribution level of zero. The chairperson and other directors of the Connecticut Retirement Security Board will be selected by the governor in concert with the General Assembly. The board members must "act with care and solely in the interests of the program participants" with power given to the attorney general to "investigate violations of this requirement and to seek injunctive relief regarding violations." Board members are to have "protection from individual liability."

I will defer to attorneys to hash the legal niceties about individual state endeavors to assist private company employees. From a governance perspective, I belief strongly that private company employers, plan participants and taxpayers must have answers to critical questions such as those listed below:

  • How will board members be protected? If they are to be covered by some kind of liability insurance policy, who will pay the premiums and determine the adequacy of coverage? Will taxpayers be asked to pay anything if something goes awry and the insurance policy is insufficient?
  • Who will monitor the performance of board members to assess possible conflicts of interest?
  • Will board members be term limited?
  • Will board members be compensated and who will pay their compensation?
  • In the event of a major snafu, do participants have any redress? If so, to whom and on what basis? Litigation? Mediation? Arbitration? Other?
  • When would board members act as fiduciaries? Will their actions be evaluated on the basis of state trust law? If so, how does the state trust law compare to ERISA fiduciary duties? Weaker? Stronger? Same?
  • Would individuals have stronger protection if they transact directly with a financial service company and open up an IRA on their own?

In the aftermath of the passage of the U.S. Department of Labor Fiduciary Rule (acknowledging several legal challenges just filed), the concept of fiduciary duty is foremost on the minds of numerous industry executives and policymakers. Will public-private retirement plans receive the same scrutiny or is there a fiduciary gap? If the latter, who is on the hook in case of a problem?

Fiduciary Rule and Small Businesses

Given the newness of the U.S. Department of Labor ("DOL") Fiduciary Rule, many still have questions about both content and implementation. One such inquiry arose during a workshop I was asked to create for members of the CT chapter of the National Institute of Pension Administrators ("NIPA"). During our discussion, an audience member wondered out loud if small businesses would be sufficiently overwhelmed that they decide to jettison plans to offer benefits to employees. The reasoning is that compliance costs could dwarf any perceived upside associated with creating retirement arrangements for workers.

As we celebrate National Small Business Week from May 1 through May 7, 2016, the issue of disproportionate impact is certainly relevant. As with any regulation, there are winners and losers. Critics have been vocal about what they see as flaws. Last June, the U.S. Chamber of Commerce released a report entitled "Locked Out of Retirement: The Threat to Small Business Retirement Savings" that predicted a fallout for small business owners who "provide roughly $472 billion in retirement savings for over 9 million U.S. households" via SEP and SIMPLE-type IRA plans. Its author, Drinker Biddle & Reath LLP attorney Bradford Campbell, wrote that "Main Street advisors will have to review how they do business, and likely will decrease services, increase costs, or both." As the U.S. Department of Labor Fact Sheet points out, the final rule covers IRAs, 401(k) plans and many other types of employee benefit plans, some of which were already regulated pursuant to the Employee Retirement Income Security Act of 1974.

Talk about deja vu. Investment News just published an article about the Fiduciary Rule effect on small broker-dealers as relates to documentation and other elements of compliance. The author, Attorney Ross David Carmel, worries that the DOL Fiduciary Rule could be catnip to the plaintiffs' bar because it is vague, "with no definition of best interest or reasonable compensation." He adds that increased costs will likely be passed along to consumers. Of course, buyers of any services have the right to decline or go elsewhere if competitors are willing to sell.

Only time will tell how things materialize for companies that rely on IRAs and will therefore be impacted by the Fiduciary Rule. In aggregate, economic consequences could be large if small business compliance hits the bottom line hard. Statistics from the U.S. Small Business Administration website show that 28 million small businesses contribute 54 percent of U.S. sales.

April is Financial Literacy Month

Every year, April brings spring showers and a celebration of Financial Literacy Month. Instead of balloons and party favors, the Council for Economic Education launched a video campaign of famous people who explain "what they've learned about the importance of financial literacy and saving." Given the dismal outlook of retirement readiness, any effort to get people thinking about putting money aside for the future is a good thing.

According to the 2016 Retirement Confidence Survey, roughly one of every five individuals expects to postpone retirement for monetary reasons. Insured Retirement Institute research suggests that "less than a quarter of baby boomers, 24 percent, are confident they will have enough savings to last throughout their retirement years."

The extent to which the recently released U.S. Department of Labor Fiduciary Rule will impact savings patterns is unknown at this time. Certainly the goal is to empower individuals to plan ahead.

Retirement Planning and Risk Management

Retirement planning is hard work and requires discipline and care. Few of us can rely on luck or the proverbial leprechaun's pot of gold at the end of the rainbow, Assessing uncertainty on an ongoing basis is as important as identifying goals. Sadly, I'm not convinced that the topic of risk management is being discussed as often as it should be with workers and retirees alike.

In the last month, I spent copious time reviewing educational materials produced by a handful of financial advisory firms. What I found confirmed my suspicion that coverage of the topic of risk does not often extend beyond an initial assessment of risk tolerance. A prospective client is asked to complete a questionnaire. The financial advisor then reviews the answers and makes a recommendation about what asset allocation mix seems right. When scenario modeling is used, an individual may be given several possible portfolios from which to choose. Ideally, as an individual's circumstances or goals change, the questionnaire should be completed anew and modifications made accordingly.

Outside of product boilerplate language and short paragraphs about diversification and dollar cost averaging, I did not uncover much information about specific risk management techniques that an individual investor can put to work. This is lamentable. Investment risk management is not just for corporations, financial service companies and governments.

There are lots of techniques that an individual can utilize, starting with the creation of an inventory of what protection is already in place, if any, and a risk map that specifies outcomes that an investor wants to avoid at all costs. In behavioral finance, the desire to avert losses is a well-known psychological bias and should not be ignored. It is important that an individual investor and his financial advisor acknowledge the "worst case" situation as part of setting objectives.

While gauging tolerance for risk is necessary, it is seldom sufficient for several reasons. First, a financial plan may focus only on investments and therefore exclude different kinds of insurance policies that are integral to capturing which risks are already hedged and which ones are not. Second, an investor may realize a target level of return but have a portfolio that is too small to generate sufficient cash flows. Bills are paid with cash, not returns. Third, if securities or funds are selected on the basis of expected return and standard deviation only, material quantitative and qualitative risk factors are likely excluded. As a result, an investor could be assuming "excessive" risk or not enough risk.

As famed author Mark Twain quipped "There are two times in a man's life when he should not speculate: when he can't afford it and when he can." One might say he was a risk manager ahead of his time.

Retirement FinTech Gets Another Suitor - Goldman Sachs

No sooner had I written "Financial Technology and the Fiduciary Rule," an invitation to the Future of Finance 2016 appeared in my in-box with the call-out that "Technology is about to revolutionise financial services." (Note the British spelling for this Oxford conference.) Based on session titles, attendees will hear about topics such as how technology can:

  • Be "used to build trusting relationships with clients" and increase transparency;
  • Substitute for "expensive human intermediaries" to lower costs; and
  • Encourage the creation of "simpler and cheaper" insurance and savings products.

Increasingly, angels and venture capitalists are waking up to the fact that the global retirement marketplace is big and ripe for innovation. Earlier today, Goldman Sachs Investment Management Division announced its intent to acquire Honest Dollar. According to CrunchBase, this transaction follows a seed financing last fall to further build a web and mobile platform that allows small businesses to cost-effectively set up retirement plans. Expansive Ventures led that round that includes former Citigroup CEO Vikram Pandit and, founder of The Black Eyed Peas musical group.

Yet another indication that investors see "gold in them thar health care and retirement plan hills" is a $30 million capital raise for a company called Namely. Its February 23, 2016 press release lists Sequoia Capital as the lead venture capital firm for this round, bringing its total funding so far to $107.8 million for this "SaaS HR platform for mid-market companies."

Interestingly, in articles about both Honest Dollar and Namely, the tsunami of complex regulations is cited as a reason why employers need help from financial technology organizations. With mandates growing and becoming more muscular, no one should be surprised if cash-rich backers write big checks to financial technology businesses. As Xconomy reporter Angela Shah points out, multiple start-ups are "trying to compete for the 80-plus percent who don't offer benefits."

There is no doubt that the competitive landscape is changing and will prompt more strategic soul-searching for vendors and policy-makers alike. I've listed a few of the many questions in search of answers as things evolve.

  • Will other large financial service organizations like Goldman Sachs swallow up smaller start-ups? If so, does that change the role of angels and venture capitalists?
  • If enough of these companies pop up to serve small businesses and self-employed persons, is there still a need for the product offered by the U.S. government - myRA?
  • Will the U.S. Department of Labor fiduciary rule, if passed into law, accelerate the formation and growth of financial technology companies? If so, how?
  • Will there be a need for more or fewer financial advisors as the financial technology sector grows?
  • Will individuals buy more insurance and savings products? If not, why not?

Life in financial services land will never be dull.

Financial Technology and the Fiduciary Rule

Whether the proposed U.S. Department of Labor so-called fiduciary rule becomes law this year remains to be seen. Many in the industry think its passage is nigh. Critics hope for a reprieve, asserting that costs are likely to outweigh benefits.

One oft-repeated concern is that small savers will be harmed if financial service companies decide to jettison accounts that fall below target asset levels. The Securities Industry and Financial Markets Association ("SIFMA") explains "Because they cannot afford a fiduciary investment advisory fee, they will instead be forced to solely rely on a computer algorithm known as a 'robo-advisor.'"

Financial technology enthusiasts will counter that a more automated approach to retirement planning is a good thing for big and small savers alike. Certainly the topic merits review for at least two reasons.

  • The use of machines has exploded in recent years. In her November 9, 2015 speech about technology, innovation and competition, U.S. Securities and Exchange ("SEC") Commissioner Kara Stein foretells buoyant growth with an expected $2 trillion in assets under management by robotized advisors by 2020.
  • There are central questions about the fiduciary obligations of a company that concentrates on algorithmic advising and money management. Besides seeking to contain model risk, there is a need, at a minimum, for a vendor to regularly review client objectives and constraints. Click here to access a white paper on this topic by National Regulatory Services.

A few weeks ago, a handful of venture capitalists and prominent angels announced a $3.5 million capital round for a financial technology company called Captain401. Its stated goal is to help small businesses streamline the creation and administration of 401(k) plans that the founders argue would be too expensive to offer without automation. A cursory review of the company website makes it impossible to know much about its business model, technology safeguards or compliance infrastructure. Nevertheless, the funding of this and other "Fin Tech" organizations augurs favorably for added growth in this area.

As the global retirement marketplace adapts to regulatory and economic realities, it will be interesting to watch (or perhaps lead) what unfolds in terms of innovation, service provider competitiveness, cost tiers and other outcomes that impact savers and those who have already retired.

Simplifying Investment Product Jargon

Being able to make an informed decision about what to buy is important and retirement products are no exception. If language is obtuse, confusing or otherwise difficult to understand, an investor may end up making an inappropriate selection or assuming too much risk.

Although each industry has its share of technical jargon, UK personal finance editor Simon Read thinks there is a "massive problem when it comes to financial services, with the pensions industry arguably the worst of the lot." In "Pension firms urged to use plain English" (Independent, March 2, 2016), he suggests that terms such as "flexi-access drawdown" or "safeguarded benefits" mean little to the everyday reader and are therefore not helpful.

In its 2014 Wall Street Journal compilation of "loathed investment jargon," American Association of Individual Investors ("AAII") executive Charles Rotblut explains "There is too often an assumption that everybody understands what is being discussed, when the reality is much different."

Naming a product for an investment strategy does not necessarily help the investor either, especially if the strategy means different things to different people or has multiple monikers. Products that are part of the smart beta family come to mind.

According to the Financial Times, their use is "swelling," with assets of around $400 billion or one fifth of the $1.7 trillion Exchange Traded Fund market. At the same time, this strategy has no singular definition or name. Ben Johnson with Morningstar describes terms such as "smart beta" and "enhanced indexes" as a "broad and rapidly growing category of benchmarks and the investment products that track them." See "A Sensible Approach to 'Smart Beta'" (Morningstar, May 14, 2014). Eric Balchunas with Bloomberg writes that "Few can define it..."

A 2015 investor alert, issued by the Financial Industry Regulatory Authority ("FINRA"), describes a smart beta index as one that is "based on measures other than weighting by market capitalization" and gives examples of labels being used to market these products. Their recommendation is that interested persons pose six questions before purchasing as follows:

  • What is the product's strategy?
  • What are the costs?
  • What are the potential advantages?
  • What are the potential risks?
  • How liquid is the product and its holdings?
  • Are the performance figures back-tested?

This is not a universal list of questions to ask nor is this type of risk-return inquiry unique to smart beta products. Investors and their advisors should be kicking the proverbial tires on any product being considered. Retirement plan fiduciaries need to do likewise on behalf of plan participants. The message remains the same. In order to make an informed decision, it is important that product language is clear and easy to understand.

Speaking of words, logophiles have cause to celebrate. March 4, 2016 is National Grammar Day.

Romance and a Good Pension Plan

Global financial markets may be zigzagging but sales of candy and flowers remain brisk ahead of the February 14 holiday. While some may not have a Valentine's Day celebration on their calendar, it's still nice to be reminded about the power of good relationships, whether focused on family, friends or both.

Gifts are always nice of course but careful financial planning is an important way of being kind to our loved ones throughout the year.

I recently heard Jane Bryant Quinn speak about her new book entitled "How to Make Your Money Last: The Indispensable Retirement Guide." During the Question and Answer period (and on her website), she talked about the advantages of adequate preparation for later years. After spending considerable money on her late husband's care, when she was ready to remarry, she asked her then beau to purchase long-term care insurance prior to completing their nuptials.

According to "How Couples Can Resolve Their Biggest Fights Over Money," (Wall Street Journal, April 12, 2015) budgetary nuts and bolts can be a touchy subject and hard to address when family members disagree on goals and spending habits. At the same time, being financially responsible is seen as a good trait to have.

It's not just individuals who need to adapt to changing circumstances. Investment companies must recognize that family structure has changed dramatically over time in order to deliver value-added services. In its 2014 "LoveFamilyMoney" study, Allianz describes multiple types of family structures and the related impact on goal-setting. In its 2013 research study, "Family & Retirement: The Elephant in the Room," Merrill Lynch and Age Wave find that only 29 percent of respondents regularly talk about family financial issues.  

It is hard to come up with an action plan, absent dialogue. Emphasizing the personal in "personal finance" could go a long way to getting family members to sit around the proverbial kitchen table and talk about how to afford life goals like college, retirement, buying a house or caring for an older parent.

Is Seventy the New Thirty?

Last year, the Today show celebrated Tao Porchon-Lynch for inspiring others with her verve for life. At ninety-six years of age, she is recognized by Guinness World Records as the oldest yoga teacher and still going strong. Yoga Journal quotes her as saying "I don't want to know what I can't do. I'm only interested in what I can do."

Mental Floss Magazine likewise inspired with its article entitled "10 People Who Switched Careers After 50 (and Thrived!)." Writer Ethan Trex waxed poetic about the accomplishments of seniors such as Colonel Sanders, Tim and Nina Zagat, Ronald Reagan and Laura Ingalls Wilder. Business Insider's Richard Feloni urged readers that it's never too late to follow one's dream, citing exemplars such as Vera Wang, Julia Child, Henry Ford, Grandma Moses and Taikichiro Mori in "20 People Who Became Highly Successful After Age 40."

Hollywood appears poised to convey a similar message about the advantages of wisdom and experience for those who are no longer twenty-one. In "The Intern," Robert De Niro plays a seventy year old widower who is not ready to retire. An ex-sales and marketing executive, his character joins a start-up company as an intern to the CEO and quickly grabs the hearts and minds of his younger co-workers. In "A Walk in the Woods," Robert Redford and Nick Nolte are septuagenarians whose characters are based on the bestselling book by Bill Bryson. They hike the Appalachian Trail, rekindle their friendship, evade grizzly bears and remember how nice it is to keep trying to challenge one's self. In "I'll See You In My Dreams," Blythe Danner discovers romance and purpose past sixty.

The implication seems to be that many individuals around the world prefer to keep working. According to the UK newspaper, the Daily Mail, "One in 20 people still have a job when they're over 70 - a figure that has doubled in the past decade..." USA Today's Rodney Brooks interviewed various individuals who extolled the virtues of never retiring, even though they could afford to stop working. In some cases, the goal was to try something altogether different.

George Burns "began a solo career when he was nearly 80." Although he missed his engagement to perform in London on his centennial birthday by a matter of months, he urged people to keep in mind that "You can't help getting older, but you don't have to get old."

With that truism in mind, one cannot forget that it takes money to:

  • Retire early;
  • Forego the salary and benefits of a steady job to tackle something new like start a company; and/or
  • Live large on a fixed income only.

For some individuals, the gap between one's retirement piggybank and monetary requirements is a reason to return to the workplace or never exit in the first place. For others, there is a true passion to stay in the game, whether that entails work, volunteering or something else. Most people strive for the ability to choose. That in turn requires a commitment early on, and thereafter, to identify, measure and effectively mitigate retirement portfolio risks.

Fiduciary Standard TV Ads

I have long professed my concern that retirement issues get short shrift when it comes to political speeches and public discourse. I am not talking about industry discussions which occur all the time. I am referring instead to Main Street outreach. Even today, there seems to be scant mention by U.S. presidential candidates about how to strengthen programs like Social Security and reform tax laws to encourage savings. Of course what the pundits call the "silly season" has just begun, with many months of campaigning to go. Imagine my surprise then when, in between news segments this week, several ads appeared on television about impending changes. In one ad, a man and a woman are chatting in a car about their concern that talking to their advisor will become more expensive and they will end up talking to a robot. Another ad showcases a small business owner who worries that new regulations will make it harder for him to keep offering a 401(k) plan to his employees. Viewers are urged to call their lawmakers.

Research suggests that the ads are sponsored by the Secure Family Coalition. Its website lists organizations that include the following:

  • American Council of Life Insurers;
  • Association for Advanced Life Underwriting;
  • Insured Retirement Institute;
  • National Association for Fixed Annuities;
  • National Association of Independent Life Brokerage Agencies; and
  • National Association of Insurance and Financial Advisors.

On the opposite end of the spectrum are groups such the Institute for the Fiduciary Standard. Its website cites advocacy, research and education of the public as ways for "all those willing to help" to get involved.

Regardless of one's stance about the U.S. Department of Labor proposal (and discussions by other regulators and lawmakers), the hope is that further conversations about retirement planning will encourage a long overdue focus on the abysmal state of readiness in this country and around the world.

If ads are hitting the airwaves now, is a Hollywood movie next?

Beauty Makeovers and the Retirement Industry

As I milled around the counters last Sunday during a private shopping event, I was reminded how much fun it is to try out new products. Certainly the roughly $400+ billion beauty industry has realized to great effect that the concept of a makeover and the lure of a new look can generate profits. If the consumer likes a product, there is a strong likelihood that he or she will buy it again when the first bottle is finished. Indeed, some cosmetic and skincare retailers offer sign-ups to ensure regular deliveries of favorite creams and gels. Make no mistake however. The purchasing experience itself is an important part of the process. Those organizations that recognize the allure of feel, smell and touch are raking in the dough. According to "The Sephora effect: How the cosmetics retailer transformed the beauty industry" by Sarah Halzack (The Washington Post, March 9, 2015), brand loyalty has given way to plunking down dollars "in a place where you can easily test virtually any product." Buyers have constant access to information, in large part due to social media marketing. "They don't have to go to a counter to get that education."

Although lipstick and Individual Retirement Accounts ("IRAs") may seem like polar ends of the consumption spectrum, there are enough similarities that financial services marketing executives may want to spend some time perusing the powder and perfume aisles. To curry favor with investors who find it hard to differentiate among savings vehicles, savvy sellers are starting to recognize the importance of making the buying process "fun" and "lively." Offering a financial "beauty makeover" with encouragement about a better future is one way to establish a meaningful dialogue between an advisor and an investor. Being transparent and showcasing multiple products is another strategy.

Things are changing from Wall Street to Main Street but there is room for improvement. In "Creative Content Marketing for Financial Services: 3 Examples" (Chief Content Officer Magazine, March 7, 2013), Kevin Cain points out that "...the industry seemingly operates under the misconception that its heavy regulatory burdens both preclude and exempt it from taking a creative approach to content" and should embrace "the style and delivery of the message." He then illustrates the tact taken by three financial service firms to attract and retain business.

Sentient marketing and a dash of pizzazz may soon become a necessity if the financial services industry wants to sell to the younger generation. As the Society of Actuaries website informs, those in their twenties and thirties are expected to "make up 50 percent of the U.S. workforce by 2020" and therefore represent "a sizable market for financial products." To reach these millennials, TIAA-CREF executives, Richard Pretty and Jonathan Gentry, urge firms to: (a) explain both short-term and long-term planning issues such as paying off student debt while seeking to put money aside (b) recognize the imperative of digital communications and engage Generation Y accordingly (c) leverage the influence of parents and peers and (d) describe the vagaries of the capital markets and "restore confidence in investing." They may need to act fast if they want to compete with robo advisors. As Marlene Y. Satter writes in "Wealthy millennials want automated retirement" (Benefits Pro, April 28, 2015), a new study from Global Wealth Monitor will eschew the "personal touch in retirement planning" in exchange for online tools and analysis.

Those planning for retirement may not get a free lipstick but snappy interactions with prospects and existing clients are likely just the beginning of the brave new world of financial services marketing. Competition with robots and clarion calls for lower fees challenge service providers even further.

Employee Ownership and ERISA Litigation

I had the pleasure of speaking at the sold-out National Center of Employee Ownership ("NCEO") conference on April 21 about board education, compensation metrics and procedural prudence. Consonant with NCEO's commitment to providing trustee and director education about Employee Stock Ownership Plan ("ESOP") administration and governance, my co-speakers and I fielded lots of questions from the audience relating to insurance coverage, selection of directors, board composition, training, governance red flags to avoid and long-term versus short-term strategy.

In conversing with some of the ESOP company CEOs and independent trustees who traveled to Denver for this annual convening (last held in Atlanta), the message was clear. Employee ownership is working for their respective companies. The sentiment struck me as quite different from what I heard last week when I attended the American Conference Institute meeting about ERISA litigation. Post Dudenhoeffer (courtesy of the U.S. Supreme Court), there seems to be a lot of caution on the part of large company counsel about how much equity should be in the hands of employees.

Clearly, facts and circumstances will determine the appropriateness of any particular structure. That said, results of a recent survey reflect a growth in employee power, at least as of several years ago. According to NCEO's research project director, Nancy Wiefek, the tabulated results show that 214 Employee Stock Ownership Plans commenced between 2001 and 2012, a rise of 44 percent from earlier periods. Out of 502 ESOP company responses, 317 were reported as fully owned at 100 percent. Click here to read more about the complete survey.

Whether the 2014 Dudenhoeffer decision will have an impact on the mostly private businesses that consider ESOP implementation remains to be seen. For now, it is important that venues exist to allow for an exchange of ideas about what works and what to avoid, should a company's management decide to embark on putting company stock in the hands of employees.

Pension Risk Governance Blog Still Going Strong After Nine Years

Nine years today marked the debut of Since then, I am proud to say that traffic has steadily grown, with continued feedback and suggestions about all sorts of topics. I am deeply grateful to visitors to this independent website for their time and encouragement. While the specific feedback tends to vary by issue or job function, a central theme is clear. Ongoing education about topics such as due diligence, fees, risk management, asset allocation, hedge funds, liquidity and valuation is both needed and desired. In 2015, this award-winning blog will continue its focus on providing objective and helpful information about important subjects that challenge investment stewards and their advisors, attorneys and regulators who oversee the management of more than $30 trillion.

As I point out in "Financial Expert Susan Mangiero Celebrates Ninth Year as Lead Contributor to Pension Risk Governance Blog" (Business Wire, March 25, 2015), "There is never a shortage of subjects to discuss, thanks to ongoing suggestions and contributions from readers and the significant realities of changing demographics, market volatility and new accounting rules."

To date, there are over 900 published analyses, research updates and guest interviews that can be readily accessed by category and keyword. Simply click on the Archives section of For a complimentary subscription to this blog, as posts are published, click here to sign up. Click here to read our Privacy Policy. If you are interested in contributing an educational essay or letting us know about a relevant news item or rule change, please email

Until the next blog post, thank you for your interest!

Report Card For Teacher Pension Plans

According to "Doing the Math on Teacher Pensions: How to Protect Teachers and Taxpayers," just published by the National Council on Teacher Quality, "state teacher pension systems had a total of $499 billion in unfunded liabilities" in 2014, up by $100 billion since its 2012 study. On a gloomy note, they add that "the debt costs spread out across the K-12 student population amount to more than $10,000 per student and growing." This can only be seen as bad news for beleaguered municipalities with tight budgets.

Concurrent with funding pressures, researchers explain that numerous state sponsors "are also making it harder for teachers to receive benefits." Sprinkled throughout the report is a reference to fairness (or lack thereof) and limited flexibility, with occasional references to the advantages of offering a defined contribution plan to eligible educators. Few defined benefit plans were identified as being sufficiently portable or moderate in terms of what teachers were asked to contribute. Another cited flaw was the factoring of years of service instead of age only as a determinant of when one could retire. Long vesting periods and restrictions as to when employer contributions could be withdrawn by employees are other weak spots. The inability for teachers to purchase service credits for "prior teaching or approved leave" led to poor rankings for some states.

With a pension grade of A, Alaska tops the list. Mississippi lags with a pension grade of F. Too many states for comfort had a C, C-, D+ or D assessment. Fourth from the bottom is Kentucky with a grade of D-, accounting perhaps for its headlines about legislative reform. In "Ky. lawmakers demand reforms to teacher pension plan" (Louisville Courier-Journal, January 1, 2015 ) reporter Mike Wynn tallies unfunded liabilities at $14 billion, "on top of the $17 billion funding gap at Kentucky Retirement Systems." It is no surprise that the Bluegrass State is under pressure to implement change. In addition, a putative class action suit has been filed by a local history teacher against the Kentucky Teachers' Retirement System, "alleging their administrators have been negligent in protecting teachers' pensions from chronic underfunding by the state and bad investments..."

With low scores, large financial gaps and investment risk-taking on the rise for more than a few state teacher retirement plans, somebody may have to stay after school and write "I will change" one hundred times.

Retirement Planning Involves Many Factors

Whenever I teach an investments course, I ask the students if their vision for retirement involves penny pinching or taking luxury cruises. Once the silly ideas are tossed away ("I want to be a millionaire by twenty-five but don't plan to save"), the seriousness of what could happen (absent focus and discipline) starts to set in. There is no magic potion. Deciding how much to set aside, when one can retire and how to invest and still sleep at night are far from trivial questions.

In today's New York Times, Elizabeth Olson writes about "When Outside Factors Dictate Retirement Age." Her sense is that life expectancy, fears of age bias and "changing technological demands of the workplace" could materially influence when an employee punches the clock one last time.

Not everyone concurs that leaving the work force earlier than originally planned makes sense. According to "The anti-retirement plan: Working 9-to-5 past 65" (October 3, 2014) Washington Post reporter Jonnelle Marte describes one segment of the population that happily sprints each day to join colleagues for another eight hours. Historical U.S. Department of Labor statistics show that "employment of workers 65 and over increased 101 percent, compared to a much smaller increase of 59 percent for total employment (16 and over)."

The topic of retirement planning is not new but is certainly grabbing policy-makers' attention, in the United States and around the world. The macro implications are far-reaching from a collective perspective. Too few savers can put a drain on a country's resources and ability to grow its economy.

From the viewpoint of each household, the importance of taking individualized facts and circumstances into account as part of retirement planning remains as true today as it was ten, twenty or thirty years ago. For example, some people want to stay active because working is fun for them. Others groan. As famed basketball coach Abe Lemons said "The trouble with retirement is that you never get a day off."

Santa Claus and the Fiduciary Standard

At this time of the year, when Santa Claus is making his list of who has been naughty and nice, optimists rub their hands in glee, anticipating a stocking full of goodies. Pessimistic believers resign themselves to something worse. In pension land, if you embrace fiduciary change, the incoming head of the U.S. Senate Finance Committee may be about to hand you the proverbial lump of coal.

According to Washington Bureau Chief Melanie Waddell, Senator Orrin Hatch intends to push anew for the passage of his Secure Annuities for Employee Retirement or "SAFE" Act. He spoke about pension reform and the "pension debt crisis" on July 9, 2013 in his "Introduction of the SAFE Retirement Act of 2013."  His objective is to "stop the Department of Labor from writing fiduciary rules for individual retirement accounts" and "over-regulating IRA investment advice." See "Sen. Hatch's 2015 Priority: Torpedo DOL Fiduciary Efforts" (Investment Advisor Magazine, December 15, 2014).

Put forward as a Conflict of Interest Rule-Investment Advice, the U.S. Department of Labor seeks to "reduce harmful conflicts of interest by amending the regulatory definition of the term 'fiduciary' set forth at 29 CFR 2510.3-21(c) to more broadly define as fiduciaries those persons who render investment advice to plans and IRAs for a fee within the meaning of section 3(21) of the Employee Retirement Income Security Act (ERISA) and section 4975(e)(3) of the Internal Revenue Code. The amendment would take into account current practices of investment advisers, and the expectations of plan officials and participants, and IRA owners who receive investment advice, as well as changes that have occurred in the investment marketplace, and in the ways advisers are compensated that frequently subject advisers to harmful conflicts of interest."

As with any mandate, if approved, some will be impacted more than others. In its "DOL 2014 Fall Regulatory Agenda," ERISA attorneys Fred Reish, Bruce Ashton and their Drinker Biddle & Reath LLP colleagues assert that broker-dealers and their registered representatives will likely bear the brunt of new rules. They write that "Adoption of an expanded definition will likely affect both the status for broker-dealers as fiduciaries and their compensation (due to the fiduciary prohibited transaction rules of ERISA). In response, these broker-dealers may need to develop RIA fiduciary programs for advisors who focus on retirement plans and decide how to manage the plan business of those who do not."

Whatever your holiday preference may be, keep a look out for the "gifts" that 2015 has in store for plan sponsors and their service providers.

Longevity Trends and Pension Costs

When it comes to estimating defined benefit ("DB") plan costs, it is critical to use inputs and assumptions that make sense. Longevity is one such important factor that demands attention. Getting good answers to questions about life span differences among age, income and health cohorts is necessary for decision-makers. The assessment of how to redesign a plan, transfer risk and/or modify investment strategy depends on knowing what variables determine the size of the liability.

Studies such as the one just released by the National Association of Pension Funds ("NAPF") and Club Vita (a Hymans Robertson Company) can be helpful to the extent that they shed light about how long participant groups are expected to live. In a November 27, 2014 joint announcement, its "unique" research is described as likely to result in companies having to report higher pension liabilities. Based on an assessment of data about 2.5 million pensioners and one million deaths, authors conclude that "the pace of longevity increases varies significantly within DB schemes and for different groups of DB pension scheme members." One inference is that the life span gap between men and women in the "hard pressed" economic category versus those who are "comfortable" is narrowing. A second finding is that a typical defined benefit plan liability is likely to rise by one percent.

As the researchers correctly point out, access to granular details about the sensitivity of the cost-demographic lever can be utilized by DB plan trustees when deciding if and how to restructure via a buy-out, liability-driven investing strategy or something else. Click to read "The NAPF Longevity Model" (November 2014).

Love What You Do and Do What You Love

We are movie aficionados in our family and try to see a variety of celluloid offerings, as time permits. We recently had the pleasure of seeing an uplifting motion picture entitled St. Vincent. Bill Murray plays a grumpy man who, at first glance, seems unlikely to warm any hearts. Over time, however, the audience learns that he is a good guy, a war hero and a kind person. He befriends the little boy who moves in next door and, no surprise, inspires smiles all around. At the end of the film, as the credits roll, there is a scene where Bill Murray is enjoying a quiet moment in his modest backyard, singing along to Bob Dylan's "Shelter From The Storm." Maybe because the song is lyrical or people were curious about the scene, they stayed and listened.

Although Bob Dylan was a musician from an earlier generation, he remains an admired talent and is recognized for his vast body of work. According to an October 2014 Rolling Stone article, Dylan is so prolific that The Lyrics: Since 1962 includes nearly one thousand pages and weighs "approximately 13 and a half pounds." In his early 70's, he is still giving live concerts.

There is something magical about being excited about music, friends, work and play. Famed author Ray Bradbury who died a few years ago at age 91 was quoted as saying "Love what you do and do what you love."

I certainly enjoy the challenges of providing forensic economic analyses and investment risk governance consulting. Colleagues and attorneys I know (some of whom are clients) often say that they are proud to be making a difference. That purpose and excitement about time well spent applies to others I know who are far removed from law or business. One friend (now sadly deceased) used to find great pleasure in selling office supplies and being able to interact with her customers.

Though it did not generate box office mojo, "Hector and the Search for Happiness" made the point that the pursuit of happiness may be trumped by the happiness of pursuit. Inspired by a book with the same title and authored by Francois Lelord, a French psychiatrist, the film referenced the mind-brain link of living a life with joy. It turns out that anyone with access to a computer can now take "The Science of Happiness," courtesy of the University of California - Berkeley and professors from the Greater Good Science Center.

Whether you are heading towards retirement or solidly part of the workforce, keep Bobby McFerrin's words in mind. "Don't worry, be happy." It's a good way to live life.

Retail Investors and Derivatives Trading

During a catch-up conversation, a now-retired colleague told me how much money he was making by trading options. Based on several recent articles, it seems that he is not alone in looking to Wall Street instruments in hopes of an income boost or a way to hedge uncertainty. In "Retail Investors Flock to Derivatives for Income and Safety" (, October 31, 2014), senior reporter Dan Freed describes a growing trend in trading options and futures, with growth rates that exceed the level of purchases and sales of stock. On November 3, 2014, the Options Clearing Corporation reported a 22.32 percent rise in total equity and index option volume in October 2014 from one year earlier, "the second highest monthly volume on record behind the August 2011 record volume of 554,842,463 contracts" or a year-to-date volume of 3,673,768,194 contracts.

Reuters journalist Chris Taylor describes the average options trader as 53 years of age, citing Options Industry Council statistics that put nearly thirty percent of those who trade options at between "the ages of 55 and 64." However, in "New baby boomer hobby: trading options" (July 9, 2013), even retirees with a high net worth are cautioned to educate themselves about the downside of leverage. Mary Savoie, Executive Director of the Options Education Program, talks about the free resources made available by the Options Industry Council.

Critics counter that formal training cannot replace experience and that retirement assets should be invested with a long-term goal in mind, especially for those individuals with a low net worth. What they may not realize is that numerous retirement plans are chockablock with exposure to derivatives in the form of investment funds that trade swaps, options and futures. In mid-September of this year, Bloomberg reporters Miles Weiss and Susanne Walker wrote that then PIMCO senior executive and co-founder of the Pacific Investment Management Company Bill Gross "sold most of the $48 billion of U.S. Treasuries held by his $221.6 billion Pimco Total Return Fund (PTTRX) in the second quarter, replacing them with about $45 billion of futures. In "SEC Preps Mutual Fund Rules," Wall Street Journal reporter Andrew Ackerman (September 7, 2014) cites a concern on the part of the U.S. Securities and Exchange Commission about the use of derivatives by certain mutual funds and could seek "to limit the use of derivatives in mutual funds sold to small investors, including both alternative funds and certain 'leveraged' exchange-traded funds, volatile investments that use derivatives to double or even triple the daily performances of the indexes they track..." 

Over the years, I have traded derivatives, valued derivatives, reviewed financial models, created hedges and stress tested deals for compliance purposes. Throughout that time, the global markets continue to grow, attesting to their popularity. Earlier this summer, the Bank for International Settlements measured the over-the-counter derivatives market as having expanded to outstanding contracts with a value of $710 trillion at yearend 2013, up from $633 trillion in a single year.

Whether singular derivative transactions are appropriate for any one individual plan participant depends on a number of factors. Suffice it to say, derivative instruments are here to stay. It would be incorrect to underestimate the ubiquitous nature of derivatives. Besides asset managers who use derivatives, there are plenty of structured products that layer in derivatives with traditional equity or fixed income securities.

Stay tuned for more from the regulators about the usage of derivatives and asset management. In the aftermath of the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, rules about derivatives trading and clearing are changing the operational and technology landscape. Fund directors not already in the know are being urged to pay attention to the economic impact on fund activity when derivatives are used. Click here to download a good risk management checklist. It is part of a November 8, 2007 speech by Gene Gohlke, then Associate Director, Office of Compliance Inspection and Examinations, SEC. Entitled "If I Were a Director of a Fund Investing in Derivatives - Key Areas of Risk on Which I Would Focus," Attorney Gohlke addresses the panoply of due diligence considerations such as custody, pricing and valuation, legal, contractual, settlement, tax, performance calculations, disclosure, investor reporting and compliance. These are important knowledge areas for investors too.

Public Plans For Private Sector Employees - Say Whaaat?

The news about public retirement plans for private workers may not be as snappy as a dog with red sunglasses taking a selfie but it sure caught my attention.

On June 17, 2014, Pensions & Investments reported that efforts are underway to "provide retirement security for all New Yorkers - not just participants in the $150 billion New York City Retirement Systems." In "NYC comptroller to launch advisory panel for retirement security," writer Robert Steyer tells readers that Chief Investment Officer Scott Evans will lead the group, with members yet to be appointed. The Nutmeg State is on the same glide path with its creation of the Connecticut Retirement Security Board. Michelle Chen of The Nation applauds this initiative while Bill Cummings of the Connecticut Post decries the costs that small business owners will bear if a mandatory offering occurs.

In "State-based retirement plans for the private sector" (August 6, 2014), the Pension Rights Center lays out legislative happenings elsewhere as part of a "movement afoot to use the efficiencies of public retirement systems to administer new types of pension plans for private-sector workers." The list includes Arizona, California, Colorado, Illinois, Indiana, Maine, Maryland, Massachusetts, Minnesota, Nebraska, Ohio, Oregon, Vermont, Washington, West Virginia and Wisconsin.

Certainly there is merit for any effort that helps to promote savings and financial independence. That said, there is a plethora of critical questions to be answered before any products are developed, let alone forced on taxpayers and employers. For one thing, who will serve as a fiduciary for each plan and what regulatory regime will prevail? ERISA does not extend to government plans. Will state trust law apply? Second, some of the aforementioned states are struggling with underfunded plans for municipal workers. If said deficits are revealed as the result of questionable investment and benefit mix decisions and/or limited oversight, does it make sense to put these same persons in charge of a new plan? Third, to the extent that state funding is used to install these new plans, how will fiscal policy change as a result? Fourth, are there true efficiencies to exploit and in what areas - investment, operational, technology, etc?

Maybe state delivery of private retirement benefits makes sense but I hope that a lot of important issues get vetted before too much big spending takes place.

A Pension Rock and a Hard Place

Not surprisingly, the conversations about pension reform are getting louder and taking place more often. Calls for further transparency, political posturing and headlines regarding the link between municipal debt service and questions about the contractual nature of pension IOUs are three of the many factors that are being hotly debated, with no end in sight. Interested parties are invited to read "Muni Bonds, Pension Liabilities and Investment Due Diligence" by Dr. Susan Mangiero, Dr. Israel Shaked and Mr. Brad Orelowitz, CPA. Published by the American Bankruptcy Institute, the authors bring attention to the fact that courts are making decisions about critical issues such as whether creditors, in distress, can move ahead of public pension plan participants. Click here to read more about the article and the connection between retirement plan promises and municipal bond credit risk.

Others are approaching the topic of public and corporate pension plan obligations from the perspective of younger workers being asked to subsidize seniors. In "Why We Need to Change the Conversation about Pension Reform" (Financial Analysts Journal, 2014), Keith Ambachtsheer writes that "Pension plan sustainability requires intergenerational fairness." He adds that suggestions such as lengthening the time over which an unfunded liability can be amortized or assuming more investment risk "effectively pass the problem on to the next generation once again."

Legislators are slowing starting to act, in large part because they cannot afford not to do so. According to Wall Street Journal reporter Josh Dawsey, New Jersey Governor Chris Christie has spent his summer with constituents, holding town hall meetings to explain his decisions about pension plan funding. See "Christie Plays Pension Issue Beyond N.J." (August 9-10, 2014). On August 1, 2014, he signed Executive Order 161 to facilitate the creation of a special group that is tasked with making recommendations to his office about tackling "these ever growing entitlement costs."

New Jersey is not alone. Prairie State politicos are attempting to forge reform. In "4 reasons you should care about pension reform in Illinois" (July 25, 2014, Chicago Sun Times reporter Sydney Lawson explains that the $175.7 billion owed to participants and bond investors will cost every taxpayer about $43,000 if paid today. According to its website, the Better Government Association estimates that replenishing numerous police and fire retirement plans in Cook County will "require tax hikes, service cuts or both."

The Big Apple retirement crisis  is no less massive. New York Times journalists David W. Chen and Mary Williams Walsh write that "the city's pension hole just keeps getting bigger, forcing progressively more significant cutbacks in municipal programs and services every year." A smaller asset base and decision-making that occurs across five separately managed funds are described as trouble spots for Mayer Bill de Blasio. Noteworthy is the mention of an investigation by Benjamin M. Lawsky, head of the Department of Financial Services, that seeks to understand how service providers were selected to work with New York City pension plans and the level of compensation they receive. See "New York City Pension System Is Strained by Costs and Politics" (August 3, 2014).

Curious about the extent of this New York City and New York State focused investigation, I asked one of my researchers to file a Freedom of Information Act request in order to obtain details. We are awaiting the receipt of meaningful results. So far, we are being told that information is not available to send. What is known so far, based on an October 8, 2013 letter from Superintendent Lawsky to Comptroller of the State of New York, Thomas P. DiNapoli, is that questions will or are being asked about retirement plan enterprise risk management and "[c]ontrols to prevent conflicts of interest, as well as the use of consultants, advisory councils and other similar structures."

Pandering for votes by promising lots of goodies may not be a successful recipe for reforming pensions that need help. Moreover, judges are in the driver's seat once a dispute about contractual status is litigated. In a recent opinion, a federal court of appeals ruling about lowering cost of living adjustments overturned an earlier decision that such an action was unconstitutional. See "Baltimore wins round in battle over police, firefighters pension reform" (The Daily Record, August 6, 2014). Click to download the August 6, 2014 opinion in Cherry v. Mayor and City Council of Baltimore, No. 13-1007, 4th U.S. Circuit Court of Appeals.

Like Homer's Odysseus who was caught between Scylla and Charybdis, policy-makers, union leaders and heads of taxpayer groups are navigating some very rough waters indeed. We have not seen the end of these heated debates about what to do with underfunded municipal pension plans. Trying to align interests of seemingly disparate groups is only the beginning.

Jersey Boys and Working at 80

If you are looking for a few hours of musical fun and a good rags to riches story, I recommend Jersey Boys. I had the pleasure of seeing the stage production in Las Vegas last year. I liked it so much that I am seeing the Broadway show later this summer. The movie is equally fine although a theatrical aficionado may find the drama with music less exciting than music with a bit of drama. Besides the entertainment factor (and I give the film a thumbs up), the original endeavor and global touring companies continue to spin foot-thumping sounds into commercial gold. According to "'Jersey Boys' has been a windfall for all involved" by L.A. Times writer David Ng (June 21, 2014), worldwide grosses exceeded $1.7 billion in March with more than "20 million people in 10 countries," counting themselves as lucky audience members.

What you may find notable is that some of the talented contributors passed twenty-one a long time ago and yet demonstrate that one can keep working, if desired, for many years. Clint Eastwood was both a producer and director of the movie. He is eighty-four years old. Frankie Valli was an executive producer of the movie, helped to develop the stage deliverable and is still singing live at the age of eighty. Christopher Walken does a marvelous job as a celluloid version of Valli mentor, Gyp DeCarlo. He is seventy-one years old. Bob Gaudio, the magical hit-maker for the Four Seasons and member of the Songwriters Hall of Fame, has been front and center in the making of the play and movie. He is seventy-two years old.

These individuals are not alone in continuing their presence in the work force. Forbes staffer Halah Touryalai cited a Wells Fargo study that 30% of polled "middle-class American[s] believe they will need to work until they are at least 80-years-old in order to retire comfortably" but may not have the okay from employers. See "More American Say 80 Is The New Retirement Age" (October 23, 2012). New York Daily News reporter Heidi Evans refers to 80 as the "new 50." NBC News recently reported that creative seniors are setting up consulting practices, starting businesses, seeking jobs with non-profits or working part-time. See "Retirees Keep One Foot in the Workforce" by Shelly Schwartz (April 8, 2014). Great Jobs for Everyone 50+ by Kerry Hannon addresses opportunities by category such as snowbirds or retired teachers as does the AARP in its 2011 guidance for those who head south for sun when bad weather in winter looms.

Some say that age is an illusion in terms of what one can do. Famed wit George Burns is quoted as saying that "You can't help getting older, but you don't have to get old." Sadly Mr. Burns did not appear for his famed booking at London's Palladium to celebrate 100. A bad fall led to its cancellation and he celebrated this marker elsewhere. In "Curtain Falls: George Burns Dies at 100" (Seattle Times, March 10, 1996), reporter Howard Reich writes that Burns extolled the virtues of passion about what one does, adding that "If you can fall in love with what you're going to do for a living, you got it made." Hear, hear for the motivational cue.

From an economic perspective, global demographics open the door wide to tremendous business opportunities for financial service companies. Providing advice to seniors as well as employers that want gray matter is one promising area. Restructuring existing retirement plans is yet another. Consider the recent announcement that BT Retirement Saving Scheme has arranged for longevity insurance and reinsurance "to provide long term protection to the Scheme against costs associated with potential increases in life expectancy of members." The 16 billion GBP is "the largest ever in the UK and involved the creation of the BT Pension Scheme's own insurance company." See "BT Adds Longevity Insurance to Limit Risks of Pension Plan" by Amy Thomson and Sarah Jones (Bloomberg, July 4, 2014).

Enjoy the popcorn, watch the summer flick and then ponder what you intend to do with the rest of your life. If that means putting together your business plan for creating value-add services to companies and individuals in this new era, go for it. There are lots of ideas for profit.

Cat Food or Cruises For Retirement

When I taught personal finance and investment management courses as a finance professor in the 1990's, I talked at length about the need to save early and save big. We went through sensitivity analyses that were based on input from the students. What always struck me was the lack of realism in terms of how long it would take to accumulate sufficient funds to stop working and begin the "golden years" phase. I would point out that bad planning could result in having to eat low-cost cat food instead of being able to book a long-desired cruise around the world or doing something similarly fun. This hypothetical got a few laughs until students looked at the numbers and realized for themselves that it's just math. Save too little and your choices will be limited.

The reality is that inadequate retirement planning on the part of some individuals will cost everyone. It is a perfect example of the free rider dilemma that makes it hard to motivate those who are not thinking about their future. Essentially, with any safety net system, anyone earning an income is going to be taxed to pay for government-provided benefits. This means that a national retirement deficit will take something out of the wallets of all. By extension, this means that everyone (in the U.S. and elsewhere) has a stake in improving financial literacy. (The issue of poverty and the adverse impact on being able to plan for retirement is not addressed herein but certainly cannot be ignored either.)

Financial education is hugely important and can't start soon enough in my opinion. Organizations that promote how to plan ahead should be commended. One such group, the International Foundation of Employee Benefit Plans ("IFEBP"), has gone a step further by creating the National Employee Benefits Day. Set for April 2 this year, the goal is to remind individuals to be pro-active, "take control of your future" and "get to know your retirement plan." Besides an educational section on their website, the IFEBP includes a worksheet entitled "Your Retirement Picture." Links are provided to retirement calculators such as the Smart Money Retirement Calculator. Of course, not every company offers retirement benefits. Even when an employee does have access to company-sponsored benefits, individual savings should not be ignored, however small.

The Jump$tart Coalition for Personal Financial Literacy is another organization that seeks to make economic empowerment a top priority. A non-profit organization, its stated mission is to promote "quality and effectiveness in financial education." Yet another notable organization is Junior Achievement which seeks to "foster work-readiness, entrepreneurship and financial literacy skills." I am proud to say that I once served as a Junior Achievement volunteer in two different schools and found the experience highly rewarding. I was told that the students and host teachers likewise found the classroom interaction to be productive and enlightening.

Courtesy of U.S. taxpayers, MyMoney.Gov is a helpful resource about topics such as borrowing, saving and consumer precautions against adverse circumstances. "This website is a product of the Congressionally chartered Federal Financial Literacy and Education Commission..." Click to read a flyer about "Financial Literacy and Education Commission Research and Data Clearinghouse."

Thomas Jefferson is quoted as saying that "It is neither wealth nor splendor; but tranquility and occupation which give you happiness." In Jerry Maguire, Cuba Gooding's character made "show me the money" a mantra for countless moviegoers. Practically speaking, currency is important. If you don't have it, your choices are limited. That is why financial advisors talk address saving and goal-setting in the same conversation.

While cat food is important for felines, humans will likely opt for something different. Let's hope your future includes the freedom to choose what you want.

Alternatives and Retail Retirement Account Owners

The prospect of being part of millions of retail retirement plans has some financial advisors and hedge fund managers giddy with excitement. The 401(k) market alone is huge. According to the Investment Company Institute, as of Q3-2012, these defined contribution plans held an estimated $3.5 trillion in assets. In 2011, over fifty million U.S. workers were "active 401(k) participants." This compares favorably to an approximate $2.66 trillion hedge fund market size in 2013, up from $2.3 trillion one year earlier. Private equity, real estate and infrastructure comprise the rest of the alternatives investment sector according to a press release issued by Preqin, a financial research company. See "Alternative Assets Industry Hits $6tn in AUM for First Time" (January 21, 2014).

CNBC contributor Shelly K. Schwartz explains that alternative investment strategies are appearing in the form of 400 plus mutual funds and exchange-traded funds ("ETFs") that employ "complex trading strategies" such as managed futures, long/short trading in stocks and multiple currency exposures. Allocating to leveraged loans, start-up ventures and global real estate are other ways that these relatively new funds seem to be mimicking the approach taken by hedge funds and private equity funds that traditionally have catered to institutional investors and high net worth individuals. Notwithstanding regulatory differences relating to diversification, percentage of "illiquid" investments, redemption, daily pricing and how much debt can be used to lever a portfolio, statistics suggest a growing interest on the part of smaller investors to get in on the action. See "Seeking safe havens? Analysts, advisors point to liquid alternative funds" (November 24, 2013). Also check out "Goldman pushes hedge funds for your 401(k)" (Fortune, May 22, 2013) in which reporter Stephen Gandel describes new funds being offered by various financial institutions, some of which invest in mutual funds that mimic hedge fund investing strategies and others that invest in hedge funds directly.

Not everyone is an ardent fan. In "FINRA warns investors on alternative mutual funds," Reuters reporter Trevor Hunnicutt (June 11, 2013) describes regulators' concerns that "not all advisers and investors understand the risks involved," especially with respect to whether a retail-oriented fund is truly liquid. In its "Alternative Funds Are Not Your Typical Mutual Fund" publication, the Financial Industry Regulatory Authority ("FINRA") cautions investors to assess investment structure, strategy risk, investment objectives, operating expenses, the background of a particular fund manager and performance history.

Given the ongoing search for the next big thing, we are likely to see a lot more activity in the alternative investments marketplace - for both institutional and high net worth clients as well as for individuals with modest wealth levels. will return to this topic in future posts. There is much to write about with respect to fiduciary implications, risk management and valuation.

In the meantime, I want to thank ERISA attorney David C. Olstein with Skadden, Arps, Slate, Meagher & Flom LLP & Affiliates for apprising me of a 2012 U.S. Department of Labor grant of individual exemption for Renaissance Technologies, LLC ("Renaissance").  Described as a "private hedge fund investment company based in New York with over $15 billion under management" by (September 26, 2013), Renaissance holds a large number of equity positions in stocks issued by household name companies. Click to see a recent list of their transactions. The "Grant of Individual Exemption Involving Renaissance Technologies, LLC," published in the Federal Register on April 20, 2012 makes for interesting reading for several reasons. First, it describes policies relating to important topics such as valuation, redemption and disclosures for "privately offered collective investment vehicles managed by Renaissance, comprised almost exclusively of proprietary funds" and the impact on retirement accounts in the name of Renaissance employees, some of its owners and spouses of both employees and owners. Second, as far as I know, there are not a lot of publicly available documents about proprietary investment products that find their way into the retirement portfolios of asset management firm employees and shareholders. Third, as earlier described, there is evidence of a growing interest on the part of the financial community in bringing hedge funds or hedge fund "look alike" products to the retirement "masses."

Shrinking Job Market and Adverse Impact on Pension System

Stephen D. Rosenberg, Esquire, has a nice companion piece to my September 9, 2013 post entitled "Gloomy Jobs Outlook and Impact on Retirement Planning." I recommend his analysis of what we both believe is a dire situation that is getting worse. In "Why Jobs are Job 1, to Steal from an Old Ford Ad" (September 11, 2013), this ERISA litigator and compliance attorney writes that "There are a lot of costs to a shrinking and/or severely curtailed job market, from the personal costs to those who can’t get jobs, to the long term reduction in earnings for those who must wait years beyond graduation to really get started on a profitable work life, to the inability of many to retire after job losses and stock market losses struck them in the latter part of their work lives."

More to come...

Gloomy Jobs Outlook and Impact on Retirement Planning

Job hunters and those already employed may need super powers to ready themselves for retirement. A big part of planning is knowing what you are likely to earn from work. For so many without jobs and deep in debt, looking ahead is tough. People with jobs are affected too. Even fuzzy mathematicians have to acknowledge that taxpayers will be stretched further as the number of non-contributors goes up.

To say that this issue has touched a nerve is a gross understatement.

ERISA attorney Stephen Rosenberg and blogger extraordinaire at ruminates about labor force participation all the time and commented accordingly. "I have always thought that a reduction of force ("RIF") of people in their 50s, perhaps via early retirement programs (combined with subtle bias, structural and otherwise, against older workers), on the one end, and the demands for more education before starting careers/difficulty getting first jobs on the other end, were creating a much smaller and more demographically circumscribed labor pool. I am reminded all the time that the most important thing in the economy is job creation – real jobs, like when a new business makes it. It creates such a ripple effect for everyone else, that nothing equals it." ERS Group labor economist, Dr. Dubravka Tosic, asserts that "A critical lack of supply of qualified labor in certain occupations is really startling. Consider the shortage of truck drivers and truck mechanics as two examples. There is a nursing shortage as well although the imbalance may be somewhat corrected as qualified persons are allowed to work in the United States on special visas from countries such as the Philippines. Returning veterans with needed skills could be another way to help companies in need of qualified workers." She points to a recent article entitled "Seventy Four Percent of Construction Firms Report Having Trouble Finding Qualified Workers" (September 4, 2013) as one of many references.

Last week, the U.S. Department of Labor announced the addition of 169,000 jobs in August 2013 with a steady unemployment rate just above seven percent. Netted against its downward adjustments for June and July 2013 number, the true increase is pegged at 95,000 jobs. See "U.S. Adds 169,000 Jobs in August, But Economic Outlook Remains Gloomy" by Christopher Matthews, Time, September 6, 2013. Ask most people what they think about the future and expect to get a reply that reflects cautious optimism at best. Withdrawals from 401(k) plans have exacerbated an already difficult situation for the disillusioned, underemployed and out of work professionals.

This blog author will return to the issue of retirement planning as it is important to all of us, individually and collectively, except perhaps to the top one percent of wealth owners. According to "Top 1% take biggest income slice on record" by Matt Krantz (USA Today, September 10, 2013), individuals at the head of the class account for "19.3% of total household income in 2012, which is their biggest slice of total income in more than 100 years."

Pensions and Politics

I have a favorite shirt that gets a few laughs when I wear it. The message is "Change is good. You go first." That is how I feel when I hear pundits talk about the future of pensions and the need for reform. What I continue to believe and have said many times in the last ten years is that the retirement issue is getting closer to the point of no return. Politicians will jump in to allegedly save the day. Part of the problem is that there is a battle of interests with few constituencies aligned to move in the same direction. When this occurs, a central authority typically intervenes.

On May 2, 2013, one speaker who presented as part of the "Bloomberg Forum on Pension Reform" called the situation "desperate." Another speaker said that he is optimistic that the U.S. Congress is proceeding apace with relevant reform. Another speaker hinted at inevitable higher premiums to be paid by plan sponsors to the Pension Benefit Guaranty Corporation ("PBGC"). Comments were made that some underfunded plans will have to materially cut retirement benefits in order to survive.

People are starting to ring the alarm bells. In its 2013 Retirement Confidence Survey, the Employee Benefit Research Institute ("EBRI") found that only 13 percent of workers feel "very confident" about the ability to enjoy a comfortable retirement. That means that 87 percent of workers do not feel confident. Click to see the results of the 2013 Retirement Confidence Survey.

It is unclear how much power voters will have to effect movement as relates to retirement reform such as tax incentives to save, especially when the issue is seldom discussed as part of political campaigns. That could change over time.

When I recently took my 22-year old nephew out to lunch, we talked at length about his views on the budget. He has no debt and has found a job but he knows that many of his peers are not so fortunate. They are graduating with large school loans, have not found a job and are sleeping on mom's couch. These "boomerang" kids are growing in numbers around the world. While they may not be an economic force right now, they vote. At the polar opposite end in terms of desire for how the system should change, if at all, retirees vote as well.

How will politicians respond to younger persons who do not want to shoulder the high costs of social safety net programs and seniors who want them?

Politics and pensions may not make for strange bedfellows after all. As a champion of free markets, I am not particularly happy about the prospect of a "one size fits all" law(s) that seeks to create a national retirement system and/or levies tax penalties for those who wish to save more than $3.4 million or whatever level is deemed "too much." Think higher compliance costs, perverse incentives, the law of unintended consequences, moral hazard and the loss of flexibility. Unfortunately, with disparate owners who each want different things, something will have to take place soon. Many of the retirement piggybanks around the world are close to empty.

Pension Risk Governance Blog Celebrates Seventh Birthday

I am delighted to announce our seventh year as an educational resource for the $30+ trillion global retirement plan industry. With over a million visitors to, I appreciate the ongoing feedback and encouragement from financial and legal readers. This blog began as a labor of love and continues to be personally rewarding as a way to help guide the discussions about pension risk, governance and fiduciary duties.

Here is a link to the March 25, 2013 Business Wire press release about, an educational pension risk governance blog for ERISA, public and non-U.S. pension plan trustees and their advisors.

As always, your input is important. Click to send an email with your comments and suggestions.

Thank you!

$89 For An Umbrella and No Money To Retire

In between business meetings in Greenwich, Connecticut the other day, it started to rain heavily so this blogger walked a few blocks to an upscale department store (the closest in sight), in search of a reasonably priced umbrella. Since I have so many umbrellas already (but had forgotten to pack one), I figured I would spend a modest $15 or $20 to buy another umbrella to keep me dry. How much could an umbrella cost after all? To my surprise and shock, none of the umbrellas came in at less than $89 (plus tax of course). For some people, that's a tiny price for protection. Certainly this merchant was thriving with designer attire, shoes and jewelry finding its way into shoppers' bags.

However, the reality is that not everyone is going to shell out 89 big ones for an umbrella, no matter what the brand. For a large segment of the U.S. population, money is a scarce resource and confidence in a secure future is low. According to the results of a recent Wells Fargo/Gallup Investor study, optimism is down and pessimism is up. At the same time that 68% of respondents say they have "little to no" confidence in the stock market as a way to prepare for retirement, 80% of investors urge lawmakers to act now so that savings is encouraged.

Unfortunately, most of the initiatives that individuals cite as "must have" elements of a national retirement readiness program are in direct conflict with the political grab to raise taxes. Consider a few examples.

  • Sixty-nine percent of the survey respondents say it is "extremely" or "very important" that politicians encourage every company to offer a 401(k) plan to its employees. Since there is already talk in Washington, DC about stripping companies of the tax benefits associated with offering retirement plans, it is unlikely that employers will realize further tax advantages at the expense of big spenders having to lose tax "revenue."
  • Sixty-six percent cite the need for the government to figure out how Americans who participate in 401(k) plans can get "more quality investment advice." Anticipating increased regulations as relates to investment fiduciary duties, some financial advisors are becoming less generous with information for fear of being sued. As described in "401(k) Lawsuits, Investment Advisers and Fiduciary Breach" (November 18, 2012), breach of fiduciary duty is cited as the top complaint in FINRA arbitration matters.
  • Sixty-nine percent want the government to establish initiatives that will motivate individuals to participate in their employer's 401(k) retirement savings option, assuming that they work for a company that offers benefits. Yet here we are, talking about a fiscal cliff that could impact millions of people with incomes below the magical "rich" benchmark of $250,000.  For one thing, in the absence of inflation indexing, the Alternative Minimum Tax that was enacted decades ago will show up as a nasty spring 2013 surprise for countless tax-paying middle-class households. Then there is the issue of jobs not created because employers will be writing larger checks to the IRS instead as various tax rates go up.

The United States is not alone in having to tackle difficult problems. The list is long and includes (but is not limited to) insufficient aggregate savings, underfunded social programs that are not sustainable safety nets without reform, high unemployment, corporate jitters about parting with cash, uncertain tax and regulatory environment and conflicting interests that make it almost possible to come up with near-term solutions.

There is a way forward to expand economic growth but that will require political courage. Let's hold our policy-makers accountable in 2013.

Registered Investment Advisor (RIA) Fiduciary Liability Risk

According to "Do plan advisers understand their risks?" by Rich Fachet (Investment News, October 8, 2012), some financial careerists may be woefully unaware of the risks they face as ERISA fiduciaries. The author, team leader with The Travelers Cos. Inc., goes on to say that the U.S. Department of Labor is serious about enforcement with $1.38 billion having been collected in 2011 "through prohibited-transaction corrections, restoration of plan benefits or the voluntary fiduciary-correction program." He adds that RIAs face both personal and professional liability. Whether tasked with discretionary authority over how to allocate an ERISA plan portfolio or giving advice with limited control over assets, these investment professionals have a lot to lose. Fachet lays out what kind of information should be gathered as a step towards mitigating fiduciary risk. The list includes, but is not limited to, the following tasks:

  • Assessment of the nature and magnitude of liability, taking new regulations such as ERISA 408(b)(2) into account and the potential cost of non-compliance;
  • "Lessons learned" from lawsuits that plaintiffs' counsel has won;
  • Determination of ERISA 404(c) "safe" versus "unsafe" harbors and how to counsel a plan sponsor as a result;
  • Review of "plan participant  options and models" as well as asset allocation percentages; and
  • Analysis of insurance gaps to include a review of adviser errors and omissions, professional liability, fiduciary liability and/or ERISA bond coverage.

Gary J. Caine, FSA, with Multnomah Group, Inc. addresses the flip side, i.e. that ERISA fiduciaries must carefully vet investment advisers before they are hired and thereafter. In "Fiduciary Reliance on Registered Investment Advisors," he suggests that plan sponsors need to minimally ask about qualifications such as education, experience in assisting plans, professional designations and securities licenses. Conflicts of interest, liability insurance coverage and compensation arrangements are other areas to investigate.

Notwithstanding the need to carefully assess which registered investment advisers are appropriate partners for ERISA pension plans, merger and acquisition ("M&A") activity in this sector continues. According to a new study produced by Schwab Advisor Services, "year-to-date assets under management (AUM) for M&A deal activity reached $42.3 billion at the end of the third quarter, which nearly eclipses last year's AUM total of $43.9 billion.". See "New Clients Drive Steady Growth for Independent Advisors in Face of Uncertain Economic Environment, Say 2012 RIA Benchmarking Study From Charles Schwab" (July 17, 2012 press release).

With Retirement Savings Week just wrapped up on October 27, 2012, experts write that many individuals are still woefully unprepared for post-employment life. In "Retirement 'Savings Week' highlights savings gap," Market Watch reporter Elizabeth O'Brien describes a study from the Employee Benefit Research Institute ("EBRI") on October 22, 2012 that says that 44 percent of simulated "lifepaths" bolsters the reality of inadequate income for one's "golden years."

A glaring take-away from all of this is that registered investment advisers will have a large client base as long as people need help with retirement planning.

The Larry Crowne Approach to Enjoying Life

Congratulations to Tom Hanks for his rendition of what a tough economy looks like for more than a few individuals. While his newest film falls short of legendary, it is an entertaining reminder that every day presents a second chance if one is open to Phase Two.

Playing a Navy veteran who gets downsized for lack of a college education, Hank's character Larry Crowne gets the idea of going back to school. With none other than Julia Roberts as his burnt out speech teacher who comes to life as her students progress, the movie's protagonist keeps his cool and sunny disposition as he navigates homework, financial distress and the uncertainty of a different tomorrow than what he originally planned.

I like the central message, however Hollywood it may seem.

It is always nice to think that the next day brings about renewal, excitement, satisfaction and maybe even a bit of fun.

Given current demographic patterns, a large number of individuals are working longer and living well past age 65. A cheery attitude (and hopefully the gift of good health too) are the stuff of fortunes.

Career consultant and transition coach Donna Bradshaw offers some unique advice. "Don't actually retire. Stay in shape. Take up a cause." Check out her top ten list by visiting "Making the Most of Retirement" (May 19, 2011).

On a practical note, check out "Special Report: Making the Most of Retirement" by Janet Novack,, September 15, 2010 for comments about savings and geographically desirable places to live after a certain age.

Charles Dickens describes Father Time as one who "often lays his hand lightly upon those who have used him well; making them old men and women inexorably enough, but leaving their hearts and spirits young and in full vigour. With such people the grey head is but the impression of the old fellow's hand in giving them his blessing, and every wrinkle but a notch in the quiet calendar of a well-spent life."

Words to live by and savor...

Work Opportunities and Retirement Realities

In its "2011 Retirement Confidence Survey," the Employee Benefit Research Institute found that few people are confident in their ability to retire at the traditional age of 65 or 66 years of age. The jitters make sense given that "A sizable percentage of workers report they have virtually no savings or investments." Funding woes related to Social Security and Medicare benefits add to an already gloomy scenario.

On the bright side, research suggests that work opportunities abound, notably in fields such as professional training, computer games, biotechnology, computer networking, nanotechnology and wireless. According to WIRED Magazine writer Adam Davidson, these opportunities can be collectively labeled "smart jobs" because they are "innovative and high tech," specialized, involving factories and machines and available to transform the middle class. Moreover, the geographic pockets of inspiration include cities such as Provo, Little Rock, Savannah, Wichita, Denver, Reno, Hartford, Rochester, Omaha and Des Moines.

Check out the "The Economic Rebound: It Isn't What You Think" by Adam Davidson, May 31, 2011 for an interesting analysis of the new employment paradigm, one that comes at a time of grave concern about what is next for millions of individuals. In conjunction with National Public Radio ("NPR")'s Planet Money, Mr. Davidson provides numerous examples about industrial and service technologies and processing enhancements that could make an extended work life prosperous for more than a few already at the top.

Celebrate National Retirement Planning Week

It may not be a federal holiday but National Retirement Planning Week starts on April 11, 2011 with festivities planned throughout the week. Highlighted events include:

  • Online discussion about individuals' retirement readiness, hosted by the Employee Benefit Research Institute
  • Media Forum with industry experts about "risk management in the insured retirement market," led by the Insured Retirement Institute
  • Release of a toolkit that financial advisers can use to help their clients improve retirement planning
  • Roundtable hosted by the Aspen Institute on the topic of retirement issues.

For more information, read "National Retirement Planning Week® 2011 Kicks Off April 11" (Insured Retirement Institute press release, dated April 4, 2011). This educational initiative is sponsored by The National Retirement Planning Coalition that is headed by the Insured Retirement Institute and includes the American Council of Life Insurers, Americans for Secure Retirement, The American College, Aspen Institute Initiative on Financial Security, Women's Institute for a Secure Retirement and many more organizations seeking to "raise public awareness of the need for comprehensive retirement planning." 

Note to Readers:

Rethinking Work

I caught the last half hour of "Castaway" the other day on television. I've seen this 2000 morality tale several times. Directed by Robert Zemeckis and starring Tom Hanks, the plot is straightforward. A Federal Express executive survives a plane crash, only to find himself alone for four years except for the company of a sports ball he names Wilson. When he is finally saved, a reunion with his beloved girlfriend is bittersweet. Having reconciled herself to having lost the "love of her life," she has since married and become the mother of a baby girl. The film ends with the protagonist standing at the crossroads where four paths converge, deciding on his next move and feeling sad but hopeful about what tomorrow will bring.

As I read "Boomers Find 401(k) Plans Fall Short" by E.S. Browning (Wall Street Journal, February 19, 2011), I kept thinking how more and more people are finding themselves cast away on remote islands of life, having to figure out how to survive and overcome tough times. With the typical balance of "less than one-quarter of what is needed in that account to maintain" a "standard of living in retirement," it is no doubt a shock to countless individuals to discover that a trip down easy street won't come any time soon. Whether starting too late or saving too little or both, the net effect is the same. With rare exceptions, current monies are insufficient to support early retirement. To the contrary, working longer may soon become the new norm.

Like Tom Hanks whose rescued film persona looks to the future, learning from the past, attitude is everything. According to "'I'll work till I die': Older workers say no to retirement" by Jessica Dickler (, September 28, 2010), some individuals refuse to exit the labor force, even if they can afford to do so. Citing a study by Barclays Wealth, "nevertirees" choose to earn a living for as long as they can.

Tom Hanks is a fine actor but he too must be sensing a sea change in how people live their lives. Later this year, he plays Larry Crowne, a middle-aged man who "reinvents himself by going back to college" after losing his job. I've read that he also bought the movie rights to "How Starbucks Saved My Life: A Son of Privilege Learns to Live Like Everyone Else" by Michael Gates Gill. This former executive and now best-selling author says that "losing my job turned out to be a gift in disguise." See "Fired exec: 'Starbucks saved my life'" by Lola Ogunnaike, February 5, 2009.

As French entertainment legend Maurice Chevalier said, "Old age isn't so bad when you consider the alternative."

Retirement and Death

Having been confronted with the sad passing of both my mother and my stepmother this fall, my sister and I are fast learning that death can be an organizational mess. It's amazing that so much is written about effective retirement planning yet there is scant "how to" information about preparing for your parent's inevitable event. At a time when those left behind are grieving the loss of older loved ones (parents, "not 21" partner, etc), searching for missing documents, if they exist at all, is tough.

In a quick survey about death preparedness, only one of my colleagues expressed confidence about leaving his spouse in great shape. Apparently, he and his wife have documented "need to know" information in one central location, should one or both of them meet their demise. They are debt-free so their vital paperwork emphasizes savings accounts and insurance policies. Others confessed that they have more work to do and were glad for the prodding.

While this blog is not typically focused on personal financial planning issues, I'm including some thoughts herein as I believe it is critical to take steps NOW to protect your family. At a certain point, it's too late!

Here are a few of my thoughts about advance planning, with a strong caveat to seek professional financial guidance. My comments are parent-centric but could certainly apply to other individuals as well.

  • Make sure that wills are signed, notarized and duly executed. Some states may not recognize a will as legitimate if it has not been properly processed. My mother had two wills, neither of which are recognized by Florida as "acceptable."
  • Buy term life insurance to cover your outstanding debts, at a minimum.  
  • Create a binder of relevant documents, including account names and numbers.
  • Obtain a long-term care policy and encourage your parents to do likewise. Some states provide tax incentives for this type of purchase. Even if no tax savings apply, it's nice to know that a loved one need not lose all assets as the price for getting needed care.
  • Inform relevant persons of your desires about granting a power of attorney (limited or full) to others so that everyone is fully informed, before the fact, and in agreement about who has control over funds. 
  • Talk to each of your parents when they are healthy, and not in mourning, about the life style they envision as a widowed single.
  • Ask if plans have been made for the care of pets.
  • Try to supportive if you are lucky enough to have time with an ill parent, putting your sadness aside "for now." My stepmother died rather suddenly so I was unable to say goodbye. With my mother, I am grateful for the few weeks I had with her before she went into hospice. If you have a sibling(s) with whom you can take turns being the "strong one" during the last days, you are fortunate indeed.
  • Take care of yourself and try to look on the bright side, to the extent possible. My sister and I were amazed to meet so many extraordinarily kind nurses and elder care professionals - true heroes in every sense of the word, doing their job with grace and reassurance.

When the time comes, and it will happen to us all, it will be tough enough to settle financial affairs in a timely fashion. Why make it harder when some advance planning can help ease the pain for everyone?

Editor's Notes: The items below may be of interest. Not everyone will have a large pool of assets to warrant formal estate planning. However, that should not discourage having candid discussions with your aging parents and other loved ones about money.

  • Click here to access "Estate Planning: How to Get Started."
  • Click here to read "Organizing your finances when your spouse has died."
  • Click here to visit "Planning For Death - Make Your Wishes Known."
  • Click here to read "Your toughest retirement puzzle: Long-term care."

Not 21 But Lots of Great Opportunities Ahead

A man is not old until his regrets take the place of dreams.
- - - - John Barrymore, "Good Night, Sweet Prince" 1943

If Betty White can rock Saturday Night Live to its highest ratings at the age of 88 and Sunset Daze is media gold for the senior reality television set, there is hope for anyone who wants to stay in the game rather than "retire" from the mainstream. In "Famous folks launched careers after 50" by CNN's Ethan Trex (May 16, 2010), more than a few individuals have realized great commercial success as seniors, including Colonel Sanders (of Kentucky Chicken fame), President Ronald Reagan and Takichiro Mori (twice reported by Forbe's as the world's richest man "with a net worth of $13 billion").

Good news is everywhere for the gray haired set if you accept current research about preservation and growth. In "Creativity and successful brain aging: Going with the flow" by Susan Krauss Whitbourne, PhD (March 23, 2010), having friends, enjoying leisure activities such as bridge or dancing and developing a "flexible mental attitude" are three hallmarks of a productive and enjoyable "later life."

At a time when the world is getting older, employers are challenged with managing the costs of providing post-employment retirement benefits as well as having skilled and experienced workers in place.

In a summary slide show, Business Insider excerpts from the 2009 EU Ageing Report to paint a sober picture of how age impacts gross domestic product ("GDP"), assuming that retired persons truly exit the economy and are given no opportunity to continue working in some fashion. (Keep in mind that official statistics do not fully capture actual employment.)

Country Pension Cost compared to GPD in 2007 Estimated Pension Cost compared to GPD in 2035 Estimated Change in Working Age Population by 2020
Netherlands 6.6% 10% -4.3%
Luxembourg 8.7% 17% -1.1%
Denmark 9.1% 11% -4.3%
Bulgaria 8.3% 9% -5.6%
Czech Republic 7.8% 7.6% -8.3%
Belgium 10% 14% -3.5%
Poland 12% 9.3% -5.7%
Hungary 11% 12% -5.0%
Italy 14% 15% -3.0%
Sweden 9.5% 9.4% -6.0%
Malta 7.2% 9.7% -7.1%
Greece 12% 19% -3.9%
France 13% 14% -5.5%
Finland 10% 14% -8.5%
Slovenia 9.9% 15% -6.6%


Things are not too much better in the United States with respect to financial solvency and unfunded retirement benefits. According to "The Market Value of Public-Sector Pension Deficits" by Andrew G. Biggs (Retirement Policy Outlook, American Enterprise Institute for Public Policy Research, April 2010), "public-sector pension plans have only a 16 percent probability of being able to cover accrued benefit liabilities with current assets."

The ramifications are huge in so many ways. Increased taxes, rescinded benefits or both are vote killers so you have to know that THE demographic time bomb is going to become political radiation in short order.

Until then, if you are healthy and able to continue working or are otherwise financially independent, enjoy the good life. Way to go!

Wives and the Checkbook


According to "New Economics of Marriage: The Rise of Wives" by Pew Research Center analysts Richard Fry and D'Vera Cohn (January 19, 2010), women are besting men "in education and earnings growth." Their statistics are noteworthy for countless reasons.

  • An observation that "marriage rates have declined for all adults since 1970 and gone down most sharply for the least educated men and women" suggests that those with degrees (and therefore statistically likely to earn more over their lifetime) are walking down the aisle.
  • For Americans between 30 to 44 years of age, there are more females than males with college degrees.
  • Three out of ten unmarried women with college degrees realize greater economic gains versus only fifteen percent of unmarried male who had gone on for higher education.
  • Household incomes grew for three out of ten married men with only a high school diploma. Less than two out of ten unmarried males with no college under their belts saw their checkbooks get bigger.
  • In both 1970 and 2007, 53 percent of survey-takers report that husbands and wives had the same level of education. In 2007, 28 percent of households declared that wives had more education versus 20% in 1970.
  • When the wife earns more money, only 21 percent of the respondent households claim the husband as the primary financial decision-maker versus 46% of situations where the Missus gets to choose. When the husband earns more, the number climbs to 35% in terms of final say on investments and purchases. In 36% of homes, the female better half decides.

In "She Works, They Are Happy" (New York Times, January 24, 2010), Tara Parker-Pope offers that divorce rates have dropped from 23 per 1,000 couples thirty years ago to 17 today, in part due to the ability for women to earn a living without help from a spouse. The result, she avers, is a change in how much time men spend on domestic chores and earning the bacon. While not yet an equal split, today's "to do list" at home is a far cry from the plaudits of Arlie Hochschild. In her still popular book, The Second Shift, this University of California - Berkeley sociology professor laments the imbalance between working men and women when it came to childcare and housework.

Demographic research about men, women and money always provokes thought and is great fodder for cocktail party chats. That's not all. The ramifications for individual financial planning, retirement plan policy-making and industry-wide sales and marketing efforts are immense. Women tend to live longer which necessitates a large enough piggy bank to pay bills over a longer period of time. Then there are all sorts of studies about how lifetime decisions are influenced by gender, age, education and income. Marketers cannot ignore the fact that their pitches must encompass the "who" and "how" of sales for IRA, mutual fund, annuities and insurance.

As the female earnings landscape is altered, office dynamics are not immune to change. In The Male Factor: The Unwritten Rules, Misperceptions, and Secret Beliefs of Men in the Workplace (December 2009), author Shaunti Feldhahn describes the results of a large-scale survey of men to better understand how they judge the opposite sex in a business environment. Not surprising perhaps, she finds that emotions and long-winded discussions (not getting to the point) are looked upon poorly by respondents. This begs the question - Will women change by being more like their male counterparts or will men learn to go with the flow and willingly accept communication differences? Will it depend on whether the boss wears a skirt or gets the coffee instead? 

As always, your opinions count. Email or add a comment to this post.

Editor's Notes:

Pension Crisis: Fact or Fiction?

Investment Governance, Inc. wants to hear what you think about the current state of retirement readiness. Click here to answer a short survey of six questions. The survey is identical to one we ran a few years ago with one exception. This time, we added a question about whether corporate and government leaders should receive generous pension packages during hard economic times.

I will post results to this blog in a few weeks.

To refresh your memory, the results of the original survey are shown below.

  • Sixty-two (62) percent of respondents said there is a pension crisis looming.
  • When asked who was responsible for the crisis, board members (32%), chief executive officers (30%), governors and other state officials (27%), pension consultants (24%), plan fiduciaries (38%), regulators (33%) and U.S. Congress (41%) took the blame.
  • When asked who can fix things, 54% of respondents listed the U.S. Congress first, followed by plan fiduciaries (34%), regulators (29%), board members (28%), chief executive officers (25%) and governors and other state officials (25%).
  • A whopping seventy-five (75) percent of respondents acknowledged a Social Security crisis.
  • Fifty (50) percent of survey-takers strongly agreed that most people are ill-equipped to invest their own money for retirement planning purposes with thirty-two (32) percent moderately agreeing that people are literate with respect to retirement readiness.

Investment Ethics, Balloon Boy and Sizzle

A colleague called me the other day, after attending a recent Connecticut event that addressed "too big to fail" concerns on the part of state regulators. In response to her comment about the large crowd size, I queried her about whether a forum on investment ethics would likely be a similar draw. Somewhat surprising to me she said "no" with nary a hesitation in her voice. Teasing her for more information, she simply declared that the topic of ethics is boring. Is she right?

Is ethics too dry to appeal, even to those tasked with compliance and investment best practices? Should we even compare ethics hounds to those of us who watched the silver spaceship-like balloon, floating above the Colorado countryside a few weeks ago, wondering if Balloon Boy was safely tucked inside? (Go on, admit it. You took at least one peek to hear whether a 6-year old really can fly, unsupervised, 8,000 feet above ground.)

Let's assume for a moment that celebrity and quirky news stories trump discussions about ethics and governance. Should we care? 

I've long maintained that carrying out one's professional duties with integrity does indeed impose a need to pay attention to what is right. Yet recognizing that one should be "ethical" is a necessary but insufficient condition. One can acknowledge the need to act properly yet do nothing about it, exposing ultimate beneficiaries to potential ruin. Then there are those who embrace the mantra but are blind to the gap between "investment best practices" and compliance. One can adhere to the letter of the law and yet fail miserably in terms of improving internal controls (and much more) so that investment risk is mitigated.

Since compensation levels are in the headlines of late, I'd like to repost an article that my colleague Wayne Miller and I wrote several years ago. Though written for retirement plan executives, the issues we discuss in "Do Fiduciaries Need Better Incentives to Make the Retirement System Work?" ring true today and will apply tomorrow. The primary assertion is that individuals behave according to incentives in place. The rewards must be clearly positive and attainable for anyone who rightly walks the extra mile on behalf of beneficiaries (mutual fund investors, retirement plan participants, etc).

What will entice my friend to race to a meeting to learn more ethical behavior, along with hundreds of others? Free wine and cheese or a true belief that comprehensive risk management is simply the only course of action for high-integrity stewards of other people's monies? Alas, she may not soon have a choice. Regulators and politicians will not be handed the next Madoff scandal on their watch.

According to her October 27, 2009 speech to attendees of the SIFMA Annual Conference, the SEC Chairman Mary Schapiro has created a new Division of Risk, Strategy and Financial Innovation and has its sights set on "new products - particularly those related to retirement investing." She emphasizes the need for "simple, clear disclosure" in lieu of "complex fee arrangements or product descriptions...Already on the radar screen are target date funds and securitized life settlements."  Click to read "The Road to Investor Confidence."

Is the SEC focus a faux reward? Comply and stay out of trouble (a carrot of sorts) but not necessarily map actions to best practices (hence one runs into a proverbial brick wall with attendant pain). How will good players be differentiated from bad but lucky investment professionals? Alas, this is a topic for another day.


Bon Appetit or Indigestion As We Age?


Photo Source:

Having just returned from a showing of the new movie about Julie Child, several things struck me. First, I had no idea that she worked so tirelessly and persistently in order to publish her magnum opus entitled Mastering the Art of French Cooking. Second, I hadn't realized that she was a late bloomer and in fact started her culinary career with zest after 50. Third, if the movie is true to life, she seemed to enjoy a happy relationship with her diplomat spouse. 

Being of a certain age other than 21, stories of late bloomers are certainly inspiring and not a moment too soon. According to "Pension age 'could rise further'" (August 8, 2009), the BBC reports that UK pensioners may soon be forced to postpone retirement until age 68. David Norgrove, chair of the Pensions Regulator, thinks that number will eventually be exceeded.

I don't think this news is surprising one bit. Longer lifespans around the world leave governments little choice. After all, at a certain point, you can only tax citizens (those who are working) 100% of what they earn in order to support everyone else. 

Mark my words. We are going to be working until very late in life and no doubt be giving up much more of our disposable income to finance retirement. 

Julia Child is a good example of working late in life and having fun at the same time. As for the rest of us, saving can't start soon enough for our "second lifetime." Let's hope our meal is a culinary delight and not crackers and beans.

Disappearing Trash Can and 401(k) Withdrawals


The other day, I visited our local Blockbuster store to rent a fun movie (anything for a pick me up with this gloomy market) and I noticed something missing. The trash can that I would ordinarily use in disposing of my weekend coffee cup was gone. In chatting with the video store manager, I was surprised to hear her say that the shopping center manager had deemed it a luxury and had it carted away. At $400 a month to empty, no more waste container. A true sign of the times no doubt but a bit disconcerting nonethless.

Retirement accounts have been likewise impacted by hard times. In "401(k)s Hit by Withdrawal Freezes" (May 5, 2009), Wall Street Journal writer Eleanor Laise describes what must be a horribly uncomfortable situation for plan participants. Unable to transfer their money out of funds invested in illiquid instruments such as real property or securities such as Lehman Brothers debt, individuals are confronted with lack of liquidity at the same time that they are watching the value of their holdings plumment. More than a few 401(k) plan fiduciaries are scratching their collective heads, wondering how otherwise "safe" alternatives could have been invested in "hard to value" securities or financial arrangements in the first place.

In defense of the asset managers, their claim is that unwinding positions to facilitate redemptionsfor some would place an undue burden on remaining investors. This is a familar theme. More than a few hedge fund managers last fall put the kabosh on redemptions by defined benefit plans, even when contractually permitted.

In "More People Tap Retirement Accounts" (May 7, 2009), Wall Street Journal reporter Arden Dale cites a recent Watson Wyatt study that chronicles an increase to 44% of the "number of companies reporting early withdrawals for hardship from 401(k) and 403(b) plans. Penalties for early withdrawal, taxes and the opportunity cost of not being able to earn interest on interest makes such requests expensive. However, if someone is laid off or asked to accept lower wages, it is no surprise that pull-outs are occurring now on a regular basis. Advisors suggest taking out a loan against defined contribution holdings if possible. 

Let's hope that financial woes are soon contained and that individual retirees are not asked to continue subsidizing decisions by others, over which plan participants had no control. The inconvenience of a disappearing trash can is one thing. Disappearing retirement accounts is a far more serious situation.

Honest Work is Good Work

Photo Source: Oakland Public Library

I put myself through college and graduate school. It was a tough road, strewn with bumps, potholes and lots of worry about what the future would hold. If someone can advance his or her career without the stress and uncertainty of bootstrapping, I say "go for it." Who needs the aggravation? That said, and in the spirit of searching for the silver lining in every situation, I like to think of myself as a survivor of sorts. Where others see failure, I see opportunity. Don't get me wrong. I've had a few pity parties but I try keep them as short as possible. Acknowledging that many of us are graduates of the School of Hard Knocks, where do you go with "woe is me?"

Tonight's blog inspiration (not necessarily tied to pension decision-makers alone) is a CNBC television show entitled "Finding a Job Now: What It Takes In This Economy." During this hour-long program, employment experts and commentators offered helpful tidbits for downsized executives including, but not limited to, saying yes to low-paying work, even if it entails underemployment for awhile.

In "Downsized Executives Forced To Take 'Survival' Jobs," Michael Luo (New York Times, March 1, 2009) provides a case in point, i.e. a former security manager who currently works at a friend's cleaning company. While there is no question that the dichotomy between career desires and reality can be punishing, financially and emotionally, one has to applaud this man's work ethic and sense of integrity. He gets a gold star in my book.

Countless headlines excoriate Wall Streeters for getting bonuses tied to sub-par performance. Yet others go about the business of life, quietly and without fanfare. That such noble folks take responsibility should bring a smile to everyone's face, don't you think?

Reading, Rithmetic and Retirement?

Bravo to Nathan Dungan and the person who hired him to teach seniors about the importance of saving. As shown in a recent Wall Street Journal video, this President of Share Save Spend asks students to think hard about "needs" versus "wants" as a way to better allocate scarce resources. According to "Teaching Money Values in School," only a handful of states mandate personal finance courses. For young people who live in the remaining 36 states, they are on their own, unless Mom and Dad practice thrifty habits at home.

As a former college professor, I was always aghast at the availability of credit to students who were barely of age. Easy sign-up tables with free gifts were a common sight on campus. Until about six months ago, money havens such as Greenwich, Connecticut were chock ablock with evidence of conspicuous consumption, even for toddlers.

Don't get me wrong. Parents with means have every right to spend their hard-earned money on whomever and however they choose. Yet one wonders. Will instant gratification as a youth challenge Generation X later on in life?

Someone told me recently that sales of board games are on the rise. Imagine. Spending time around the kitchen table playing Scrabble or Trivial Pursuit is seen by some as novel. As hard as things are for more than a few households, might some young adults benefit from having to learn the value of money and being encouraged to connect with others? (Don't get me started about the kids for whom the cell phone is an obsession. What ever happened to quietly reading on the train or plane?)

Editor's Note: Mark your calendars. April 21, 2009 is "Teach Children to Save Day." Until then, here are a few sites that provide information about teaching children how to save.

2008 Letter to Pension Santa

Dear Santa:

I've worked hard this year so I hope I get something other than a lump of coal or a pink slip. It's been a tough year, with market volatility, investment complexity and unexpected large-scale fraud making me nervous about allocating monies to anything other than cash and zero return government IOUs. What happened to the era of big bonus paychecks and change to spare?

I need a few goodies to keep me going. I'll won't forget you. The cookies and milk are waiting in the usual spot by the fireplace.

Here's my wish list.

1. Steady returns that don't cost me a fortune in terms of hidden fees or excessive risk

2. Independent service providers who take risk management seriously

3. Someone to help me plan for a retirement before I'm too old to enjoy it

4. Someone to help me figure out how to get a job at 70 if I can't afford to retire by then

6. Someone to explain why the U.S. national debt clock had to add extra digits

7. Lawmakers who give me the straight skinny on the financial health of national safety net programs

8. Matching contributions to my 401(k) plan

9. A meaningful chance to replenish my broken nest egg

10. An occasional chuckle now and then as a break from very somber economic and financial news

By the way, I heard that even the North Pole is cutting back. Maybe you can unfreeze the elves' pension plan when things rebound.

Hang in there Santa!

Hard Working Person

P.S. If you want a bit of silliness, "elf yourself."

Editor's Note: Drop us a note and tell us what is on your wish list for 2009 and happy holidays!

A Dog or a Reindeer: Does it Matter?

After taping an interview about pension issues for CNN Money, with about an hour before my next meeting, I walked the streets of New York. A great city at any time, Manhattan seems especially pretty around the holidays. So here I was, walking down 34th Street, about to enter Macy's for a bit of holiday shopping, and lo and behold, I see a bunch of tourists snapping photos. No less curious than the average bear, I walked over to take a peek at what held such appeal. To my surprise, a large dog with reindeer antlers affixed to his head, held the audience in awe. Don't get me wrong. The dog was adorable but I kept wondering why people stopped to watch. Wasn't it clear that this was a regular dog with an obvious holiday add-on? Yet a crowd had stopped long enough to watch, take photos and linger over this canine equivalent of Rudolph.

This furry trompe-l'oeil got me to thinking.  If a dog can entertain as a faux reindeer, can a troubled pension plan be seen as financially sound? Are optics more important than reality? Cosmetics (of the financial variety) was in fact one of the topics discussed with anchor Poppy Harlow. In response to her question about possible Congressional relaxation of the Pension Protection Act of 2006 - in order to provide immediate relief to underfunded defined benefit plans - I cautioned that short-term reporting often has little to do with the structural integrity of a plan. We might end up with lovely numbers, due in part to temporary "never minds" when a plan dips below a certain funding status.

Should retirees breathe a sigh of relief when "good" numbers are published and/or the rules are changed to forestall cash contributions or plan freezes when the funding status drops?

Unless you think that a dog is magically transformed into a reindeer by simply adding an antler cap, it is unlikely that a financially solid retirement scheme derives from a modification of Congressional mandates.

Instead, inquiring minds should ask about a plethora of influences such as cash on hand, the plan sponsor's operating cash flow, current asset allocation mix, the ability to identify risks and then act on them before things get out of hand. To repeat one of my favorite mantras, "process is everything" (good process that is). Change the rules of the game and you'll get a reindeer. Look close and you still see a dog. That's not necessarily a bad thing unless the dog bites.

Editor's Notes:

Disappearing 401(k) Match - What's Next to Go?

According to "Some Firms Suspend Their 401(k) Match" by Wall Street Journal reporter Jilian Mincer (November 12, 2008), cash-strapped employers are moving quickly to decrease 401(k) plan benefits, shut down 401(k) plans or not create pension incentives in the first place. Ironically, several studies suggest that small companies are in a better position to attract and retain employees if they offer benefits, notably healthcare expenses.

As we tally the cost of the credit crisis, count 401(k) plans as part of the fallout. Healthcare benefits are on the chopping block too. On November 9, 2008, New York Times reporter Nick Bunkley wrote that General Motors is getting rid of lifetime health care coverage for those who had long ago assumed they were all set. In its place, the large auto manufacturer is said to be beefing up pension payments to help offset disappearing medical care goodies. (See "Some G.M. Retirees Are in a Health Care Squeeze.")

If the defined benefit plan is going the way of the dodo bird and now 401(k) plans and health care benefits are leaving town, what's left for the beleaguered employee? Is it possible that benefits will soon become passe? Will individuals be able to cope by quickly saving more, reducing their own costs or both? If not, how is public policy likely to be impacted by a growing class of persons who no longer think of retirement as the "golden years?"

Pension Tension Blues - In Case You Missed It


Launched earlier this year, our music video message about pension issues has been viewed by many. Given the rout in the market and recent comments made by House Education and Labor Committee Chairman George Miller ("Miller Declares 401(k) System Paralyzed," Defined Contribution & Savings Plan Alert, October 27, 2008), I'm republishing "Pension Tension Blues." My co-creator Steve Zelin (The Singing CPA) and I hope you enjoy it.

Reader's Comment: How Can We Possibly Save?

In response to the October 20, 2008 post entitled "Happy National Save for Retirement Week," one reader captures the sentiment of many. Do you agree? Email your thoughts.

 "Let me get this straight. Congress, after voting to give bailouts to all the movers and shakers, now has the audacity to pass a meaningless Resolution admonishing We the Sheeple to SAVE for retirement?

With joblessness and debt encumbrances at an all time high, just how do these brain trusts up there on the Hill think there is going to be a lot of "saving" going on? Incredible!!!!"

Editor's Note: The House and Senate resolutions to formalize this holiday are dated late June 2008.

Happy National Save for Retirement Week

Given the market rout of late, with 401(k) plans taking more than a tumble, this week's celebration of thrift is especially relevant. Supported with a U.S. House and Senate resolution to encourage financial independence, October 19 through 25 mark the "National Save for Retirement Week."

Expect to read and hear more about the dwindling retirement money pot for millions of individuals. The socioeconomic, political and regulatory ramifications are significant.

New Study Suggests That Few Are Ready to Retire

According to a new study, retiring at age 67 may not be in the cards for many individuals, partly by choice. Tracking desires and expectations of American workers, a newly created Sun Life Financial UnretirementSM Index suggests that 8 out of 10 persons want to continue working as a way to "stay mentally engaged." Other results are not surprising. Fewer than half of the respondents feel they can afford to stop working. One-third of survey-takers worry about the financial viability of Social Security. One coping mechanism, cited by 82 percent of the sample group, is to reduce their spending with about two-thirds of respondents saying they will lower their debt as a way to "improve retirement prospects" For more information about this attitudinal metric, click here.

Nice as it is to have choices about when to retire, the recent market rout makes it difficult at best for some to consider anything else but continued employment (assuming no layoffs by their employer). Yahoo! News references Congressional research that "Americans' retirement plans have lost as much as $2 trillion in the past 15 months." Making matters worse, economic conditions that result in lower wages make it difficult for some to keep saving for retirement, if they did so in the first place. Click to read "Retirement accounts have lost $2 trillion" by Julie Hirschfeld Davis, October 7, 2008.

In an interview with PBS, Peter Orszag, Director of the Congressional Budget Office, explains that "two-thirds of the assets that are in 401(k) plans are in stocks," exposing plan participants to fallout, just like institutional investors. He adds that economic problems are already impacting defined benefit plans. As the value of their asset portfolio drops, companies will need to "put in more money, and that will come out of either their shareholders, their workers, or they'll try to pass it along to their consumers." Click to read "Market Turmoil Puts Squeeze on Retirement Savings," October 9, 2008.

This blog has covered changing demographics and retirement angst for months. One can only hope that the current market malaise is short-lived and that individual savings goes up (or at least excess leverage goes down), to the extent that individuals can afford to put monies aside for post-employment consumption.

Reader's Comment About Retirement Fallout

In response to this blog's September 23, 2008 post entitled "Retirement Fallout - Breaking the Bank, Piggybank That Is," we received a link to an opinion piece, published in The Baltimore Examiner. Sent by editor Frank Keegan, the first part of the piece, entitled "Public pension panic," is shown below.

<< It’s pension panic time. Panic early. Panic often. Demand reform. Public employees must take control of their financial destinies. Politicians have made promises they never can keep. They and the union bosses who fleece workers don’t have to worry about it because they figured by the time the inexorable mill of reality turns up their deceit, it all will be somebody else’s problem. They counted on being long gone with millions – maybe billions. Well, the day of reckoning arrived a little earlier than they anticipated. >>

Wall Street Retirement Nest Eggs - Splat

According to, to "put your all your eggs in one basket" is "to risk losing all at one time." This notion is oft-touted in the mainstream press for the benefit of non-financial readers. Logically speaking, one would expect the maxim to resonate with investment banking staff who should, by the nature of their work, have a good command of diversification principles.

According to "Wall Street Lays Egg With Its Nest Eggs: Retirement Lessons of the Dumb Moves by 'Smart Money',"  it appears that the lessons of Enron and other costly examples of excess concentration have been lost on some. (Wall Street Journal, September 27, 2008). Pundit Jason Zweig regales readers with a litany of bad news bears, including the following:

  • "At the end of 2006, Merrill employees had 27% of all of their retirement money in Merrill shares" with losses this year close to $400 million.
  • Morgan Stanley employees have "lost some $500 million on their 401(k) holdings of company stock in 2007."
  • "At Lehman Brothers Holdings, employees saving for retirement lost 'only' about $200 million on their shares" in the last 18 months.
  • "Twelve out of every 100 people whose 401(k)s can hold company stock have at least 60% of their retirement money riding on it."

Generally speaking, employees should heed "excess" concentration that could take several forms, including, but not limited to:

  • Company stock in 401(k) plan
  • 401(k) company match in form of company stock
  • Company stock as part of profit-sharing plan
  • Company stock match as part of a dividend reinvestment plan ("DRIP")
  • Company stock options
  • Career risk tied to fortunes of employer
  • Employee ownership via an ESOP
  • Company stock in defined benefit plan ...

Wall Street firms are not alone in encouraging employee ownership and that is not necessarily bad, as long as everyone fully understands the risks.

According to the National Center for Employee Ownership, statistics updated in February 2008, suggest that:

  • $1.5 million participants were tied to 748 401(k) plans that were "primarily invested in employer stock" with an estimated value of $133 billion
  • 10,000 ESOPs and stock bonus and profit sharing plans were "primarily invested in employer stock," with an estimated value of plan assets exceeding $928 billion and impacting 11.2 million workers
  • 3,000 broad-based stock option plans encompass 9 million participants
  • 4,000 stock purchase plans cover 11 million workers.

What are you doing to track your diversification potential, or lack thereof, as relates to your current employment situation?

Omelette anyone?

Treasury Program to Buoy Money Market Funds

New York Times reporter Tara Siegel Bernard cautions that some money market funds do not represent a safe haven. Who would have thunk it? Several asset managers have now broken the buck, reporting Net Asset Values less than a dollar. See "Money Market Fund Enter a World of Risk" (September 17, 2008).

With everything else going on, perhaps it is no shock that the U.S. government has responded with a quick fix. In "Temporary Treasury Program to Support Money Market Funds," readers learn that this new measure seeks to "enable money market funds to maintain stable $1.00 net asset values." Click to access Notice 2008-81, effective September 22, 2008.

Details are still evolving though Deal Book adds that the U.S. Treasury Department will "use $50 billion to back money market mutual funds whose asset values fall below $1." Those who pay a fee are eligible to have their holdings insured. See "Treasury to Backstop Money Market Funds," September 19, 2008."

Federal insurance is likely to be good news for 401(k) plan participants who are busily shifting funds to what they hope are safer choices. The impact on taxpayers' wallets is yet to be determined.

Retirement Fallout - Breaking the Bank, Piggybank That Is

According to financial reporter Jennifer Levitz, a dismal trifecta accounts for recent retirement withdrawals. Rising unemployment, stricter credit conditions and a sagging equity market make defined contribution piggybanks a tempting target. Despite a 10 percent penalty for early withdrawals, participants are tapping into their post-employment savings to make ends meet. In addition, and not surprisingly, some employees are reallocating away from equities into money market funds.

Overall, "Investors Pull Money Out of Their 401(k)s" (Wall Street Journal, September 23, 2008) paints a gloomy picture of the retirement landscape. Keep in mind that traditional defined benefit plans are no longer a reality for countless individuals. A dwindling 401(k) plan balance spells real hardship since many participants will be unable to "make up" any monies taken out before they exit the workforce.

On the topic of 401(k) plans, ERISA attorney Stephen Rosenberg vents about poor plan governance as described in Fixing thte 401(k) by Joshua Itzoe (earlier reviewed by this blogger). Alleged excessive fees, poor investment choice selection and not controlling plan costs are a few of the ills he deems important yet beyond the reach of plan participants who "have neither the power, responsibility nor authority" to address fiduciary problems by themselves. Click to read the Boston ERISA & Insurance Litigation Blog.

Comments from Readers About Financial Tumult

In response to our July 19, 2008 post ("Doris Day, Scarlett O'Hara and Financial Market Tumult"), a reader with thefinance_section adds "Freedom certainly isn't free. I think you are only truly free once you can live off your passive income, i.e. income from investments."

In response to general market volatility, the chief actuary of a major retirement services firm writes the following:

"The market will continue to find instruments to dampen the losses from the large bubble of speculative loans created over the past three years. Government will also act to smooth the market. Congress & the Executive Branch cannot allow the full chaos that comes from destroying the equity of so many lenders by forcing them to write off the bad loans quickly. This is similar in scope to the issues of the S&L crisis of a prior generation, and the market should be watching closely to see how the industry and govt will follow the old pattern or try another approach.

In some respects, this crisis follows the prior bubble problem with tech stocks. A large number of people who get paid for activity (commissioned stockbrokers) were guilty of pushing "POS" investments in the late 90's. A large number of people (mortgage brokers and bank loan officers) were guilty of pushing more loans through the system in this decade. Both were speculative bubbles in the classic Holland Tulip style of the 1700's but both also had regulators to punish the truly criminal operators. Who will emerge as winners?

However, the sharper investment managers will try to find the higher performing assets of firms that are less exposed to the losses. Are there enough quality investments for those who are running to quality? Will this create another surge to buy from the banks least affected by the loan crisis? Who will seize the initiative? Who will be able to make timely value-style investment choices? The swift and the brightest will continue to prosper, and may even pick up some bargains along the way.

What will be the new "due diligence" rules for pension trustees?" 

Financial "Independence Day" is Not a Reality for Some

July 4 marks the U.S. version of Independence Day, a celebration of America's break from colonial England. Click to learn more about Independence Day in other countries.

Naturally, the question arises. How many of us are truly independent when it comes to financial resources? A recently published study, courtesy of the American Association of Retired Persons ("AARP"), suggests that a significant shift is occurring in terms of financial distress for individuals. Entitled "Generations of Struggle," authors Deborah Thorne, Elizabeth Warren and Teresa Sullivan make some worrisome observations:

  • "Americans age 55 or older have experienced the sharpest increase in bankruptcy filings.
  • The average age for filing bankruptcy has increased.
  • The rate of bankruptcy filings among those age 65 or older has more than doubled since 1991."

Factor in another weak element of the three-legged U.S. retirement stool - the huge economic drag due to ballooning post-retirement entitlements - and things look grim indeed. A soon-to-be released documentary entitled "I.O.U.S.A." sounds the bell clear and loud. This 232 year old nation is on the verge of a financial meltdown. Visit to hear what director Patrick Creadon says about the serious message of his movie. The expected impact on the younger generation is undeniable. (Read our April 2, 2007 post entitled "New Fiction Book Advocates Radical Solution to Pension Crisis" for a quick synopsis of Boomsday by Christopher Buckley.)

In "The State of the Union's Finances: A Citizen's Guide to the Financial Condition of the United States Government" (June 2008), the Peter G. Peterson Foundation reports that entitlement spending is on the rise, with a 213% increase in what they call "Implicit Exposures: Future Benefits," between 2000 and 2007 (i.e. $13 trillion to $40.8 trillion). Putting this in context, the "Size of the Individual Burden Imposed by Major Fiscal Exposures" is currently about $400,000 per full-time worker. Refresh the U.S. National Debt Clock site several times to see how quickly the number climbs in just a few seconds. (The reported daily average increase in the U.S. national debt is almost $2 billion.)

So while we all enjoy a hotdog while watching the fireworks, it is worth asking - How independent are we truly, when our collective debt obligations resemble a runaway train?

It's a Dog's Life - Literally...Puppy Pension Slashed. How is Your Nest Egg?

According to New York Post reporter Dareh Gregorian ("Screw the Pooch," June 16, 2008), Leona Helmsley's furry friend will have to make do with a paltry $2 million trust fund. Allegations that Helmsley may not have had full faculties when she wrote her will, and a single stroke of the pen by Manhattan Surrogate Judge Renee Roth, takes $10 million away from Trouble's nest egg. The remainder goes to the former hotelier's charitable foundation. For pet lovers, don't despair. Apparently, this still leaves ample money to cover her annual expenses of $190,000 for the expected remainder of his life (10 human years or 70 dog years). By the way, the lion's share of per annum costs go for security ($100,000) and guardian fees ($60,000). 

If you are a member of the baby boom generation (and the Federal Reserve Bank of St. Louis counts "79 million Americans born between 1946 and 1964" in this category - plus countless others outside the U.S.), $190,000 per year looks mighty good. With fewer and fewer workers to support national safety net programs, private savings and employer-provided benefits take center stage. Ask yourself this. How "retirement ready" are you? Will you be living in style or struggling to make ends meet? Check out this online retirement calculator, courtesy of the AARP (American Association of Retired Persons).

For pension fiduciaries, a critical question is whether (and to what extent) you have responsibility for empowering your workers to sufficiently fill the piggybank. Even in the absence of legal mandates, how does an organization attract and keep good workers when talent is in short supply around the world? According to a March 2008 survey, conducted by Deloitte Consulting and the International Society of Certified Employee Benefit Specialists, "A shortage of skilled and talented workers has become the most pressing concern among employers." Other worries include "the cost of providing retirement benefits to employees" and the appeal of company reward programs to "attract, motivate, and retain the talented employees" needed to "effectively run" an organization. Click to read the "2008 Top Five Total Rewards Priorities Survey."

If you are a taxpayer, you may be putting money aside for your personal rainy days at the same time that you pay taxes to help finance public pension programs (state, county, city). And if Social Security, Medicare and/or the Pension Benefit Guaranty Corporation needs a bail-out, who ya gonna call? Tax Busters (taxpayers)! 

According to then U.S. Comptroller General, David Walker, "A tsunami is building and ready to hit future generations, but this one won't be set off by earthquakes or other natural disasters. Instead, it will be a fiscal calamity created by the failure of government and business leaders to deal with the financial drain of millions of retiring baby boomers." (Walker now serves as President and CEO of the Peter G. Peterson Foundation.)

So Trouble may be literally living a dog's life but her retirement plan, albeit reduced, will keep the furball cozy. We could all be so fortunate!

Generation Gap: What's HR to Do?

According to 60 Minutes, some 80 million "millenials" are descending on Corporate America with aplomb. Tech savvy and self-obsessed, these 20 somethings are creating all sorts of challenges for button down HR departments. Key questions arise.

  • What kinds of retirement plans make sense, especially if your workforce is an age barbell (with more younger and older workers and fewer in between)? 
  • How does a manager motivate the "me" moguls in waiting? ("No, you won't be promoted by the end of the week.)
  • What kind of financial education must a plan sponsor provide when the younger set overspends and believes in now power? According to acclaimed author of "My Reality Check Bounced: The Gen-Y Guide to Cashing In On Your Real-World Dreams," Jason Ryan Dorsey repeats what many surveys show. Few individuals under 30 think Social Security is a reality for them.
  • For parents and their employers, how do you properly plan for looming retirement when grown-up children have returned home to nest for awhile?

Despite a job slump in some industries, the future is going to be grim for those employers who fail to recognize the coming demographic time bomb. Watch "The Age of the Millenials" (May 25, 2008, and learn about youth power in the workforce.

Do You Have Your Own Fiduciary? If Not, Why Not?

 New York Times reporter Alina Tugend ("Pick a Planner Who Can Spell ‘Fiduciary’," April 26, 2008) writes about the importance of doing proper homework when it comes to selecting an investment advisor, stockbroker or financial planner (consultant). Her rule? Ask someone you are thinking of hiring - Are you willing to wear the hat of fiduciary? Since not everyone is required by law to embrace the fiduciary mantle, and some do so only in exchange for additional compensation, the question is far from trivial. She quotes Sheryl Garrett, author of Personal Finance Workbook for Dummies (John Wiley & Sons, 2007) as urging individuals to document agreed-upon terms, including those that relate to the discharging of fiduciary duties such as care and loyalty. Fees and conflicts of interest are other considerations. For example, a compensation structure that includes commissions may encourage the sale of unsuitable securities to small investors.

As more employees migrate (by choice or force) to defined contribution plans, investment literacy is critical. Interested readers may want to check out the following resources:

New Research on 401(k) Plans and Amassing Wealth

As companies and government employers shed their traditional defined benefit ("DB") plan offerings, defined contribution schemes become absolutely and proportionally more important to individuals. In two new papers published by the National Bureau of Economic Research ("NEBR"), authors James Poterba, Steven Venti and David Wise conclude the following:

  • Self-directed retirement assets will outflank DB plans by 2010, "even though defined benefit plans remain the most important source of retirement assets for federal, state, and local employees."
  • The growth in self-directed retirement assets are influenced by a number of factors. These include (a) expected stock returns and bond yields (b) number of employees permitted to participate (not currently enrolled) and (c) asset allocation mix.

Citing data from the Survey of Income and Program Participation ("SIPP"), the research trio reveals that "only 5.8 percent of 44-yers old had 401(k)-type accounts" some 20 years ago. In 2003, that number had escalated to 44.3 percent. In 2000, per capita retirement assets for individuals about to exit the labor pool, and in their mid-60s, averaged nearly $30,000. A decade from now, available assets are projected to rise to $90,000 (in terms of year 2000 dollars). In 2040, the prediction is that nest eggs will topple $269,000.

Click here to order "Rise of 401(K) Plans, Lifetime Earnings, and Wealth at Retirement" (NBER Working Paper 13091) and "New Estimates of the Future Path of 401(K) Assets" (NBER Working Paper 13083).

Wall Street Journal reporter Jennifer Levitz offers a competing, albeit grim, reality. In "Americans Delay Retirement As Housing, Stocks Swoon," she writes that graying Americans favor longer work lives for a variety of reasons. Preservation of health benefits is one factor. Sagging equity returns in 2000-2002 didn't help, especially for those employees who had allocated a big chunk of their savings to stocks. Of course, no trend exists in isolation. A delay in retirement means younger workers will face more competition for promotions or even jobs though the impact is uneven across industries. Skilled workers are nearly always welcome, being indispensable for many knowledge-oriented businesses. Though written on April 1, her description of a brave new world is no April Fool's joke. Companies are fast being forced to reckon with changing demographics and altered employment patterns.

As a colleague aptly bemoans, the retirement trifecta (Social Security, juicy defined benefit plan payouts and hefty salaries, let alone a job) is a fantasy for most everyone still in the work force. For those who expect to live as well as your grandparents or parents, good luck. Start pinching those pennies hard and often.

Role of Emotions in Saving for Retirement

According to Money Magazine, retirement planning is tough going. In "Can't save? Blame your brain," new research supports the notion that individuals are loathe to think long-term when it comes to investing. The lure of a large short-term payoff is hard to resist.

Citing three recent neuroscience studies, reporter Jason Zweig explains that instant gratification arouses the brain. Only the "promise of a much bigger reward" later on has a similar impact. As Professor George Loewenstein (Carnegie Mellon University) offers, "When our emotions are charged, we have a hard time waiting."

An already low savings rate and longer lifespans (resulting in the need to stockpile dough) add to the ill effects of any emotional resistance to put away for a rainy day. The current credit crisis has prompted some individuals to withdraw funds from their 401(k) accounts in order to avoid foreclosure. In "401(k)s tapped to save homes," USA Today reporter Christine Dugas describes this technique as expensive, once taxes and penalties are taken into account. Some employers prohibit participants from contributing to their accounts for six months thereafter, another deterrent to saving.

The message is clear. Whether hampered by an emotional reluctance to plan ahead or an urgent need to tap their post-work piggy bank to pay bills, the number of individuals who are retirement-ready is low.

Editor's Note: In 2002, the Nobel Prize in Economic Science was awarded to Professors Daniel Kahneman (Princeton University) and Vernon L. Smith (George Mason University) for their work in pyschological and experimental economics, respectively.

Bill Gate's Last Day in the Office - Retiring in Style?

Unfortunately, few of us are ready to retire. Savings rates are low. Credit card debt is large. A pronounced migration away from traditional pension plans puts more responsibility on the employee to save early and often.

As you plan what we hope are your golden years (as opposed to financial struggles), consider mogul Bill Gates' fictional last day in the office. The video is a lighthearted look at this Microsoft superstar's transition into retirement.

U.S. Debt Level at Record High

There is something for everyone when it comes to U.S. national debt. Unfortunately, that "something" is a gigantic IOU to the banks, insurance companies, mutual funds and international investors who buy our government bonds and bills. Click here to access statistics about ownership of U.S. government securities. According to "National Debt at Record $9 Trillion" by Associated Press International reporter Martin Crutsinger,  "It took the country from George Washington until Ronald Reagan to reach the first $1 trillion in debt."


Lest you confuse the deficit with debt, the U.S. Treasury offers Frequently Asked Questions that describe the deficit as "the fiscal year difference between what the United States Government (Government) takes in from taxes and other revenues, called receipts, and the amount of money the Government spends, called outlays." In contrast, the total debt includes accumulated deficits "plus accumulated off-budget surpluses." Click here to read other factoids about our crushing economic situation.

Ignore the finger pointers in Congress who explain why U.S. debt is racing past $9 trillion (that's 12 zeroes). Focus instead on the school of thought that taxpayers (especially younger ones) are on the hook. According to the U.S. debt clock site, "the estimated population of the United States is 303,509,977 so each citizen's share of this debt is $30,036.47."

In retirement land, this slice of Uncle Sam's spending frenzy hurts. With more than a few companies, and state and local plan sponsors, cutting back on benefits, taking on more debt has as much appeal as getting a tooth pulled, without novocaine. Click here to see how quickly national debt is mounting. Refresh your screen several times to appreciate the speed with which we are being pushed into an economic hot zone.

For companies seeking to grow, increased national debt crowds out other borrowers. This in turn has the effect of raising the cost of capital which typically means lower profits and decreased share price. Why is this important to plan participants?

Simply put, the probability of payout at current benefit levels critically depends on the plan sponsor's financial health. Additionally, troubled companies are not likely to hire. For those retirees seeking a return to the workforce, that's unwelcome news indeed. Don't forget the pension asset-liability management challenges associated with excess leverage. To finance its funding gap, the U.S. government issues more bonds and/or raises taxes. The former impacts the shape and magnitude of the yield curve, which affects a plan sponsor's ability to manage interest rate risk. The latter impedes new spending and truncates growth, dragging corporate earnings downward.

The bottom line is that none of us escapes this problem. What a mess!

Happy National Save for Retirement Week

Did you know that Congress has officially mandated a national weeklong holiday devoted to saving for life after work? Click here to read the June 21, 2007 press release that earmarks October 21 through October 27 as a time to "put those pennies away."

According to the Boston College Center for Retirement Research, anything to encourage saving for post-employment comes none too soon. Their National Retirement Risk Index suggests that "43 percent of households sampled in 2004 will not be able to maintain their standard of living in retirement even if they retire at age 65, which is later than the current average retirement age." Authors Alicia H. Munnell, Anthony Webb and Francesca Golub-Sass point out that early retirement and "reluctance to annuitize 401(k) balances or tap housing equity" increases the number of persons who are unlikely to be able to sustain a decent post-retirement existence. 

Click here to read "Is There Really a Retirement Savings Crisis? An NRRI Analysis" by Alicia H. Munnell, Anthony Webb, and Francesca Golub-Sass (August 2007). 

For this holiday, celebrate by not going out. Focus instead on how much money you are not spending.


Retirement Planning for Career Builders

You can probably never start saving soon enough for retirement. Estimated longer lifespans and competition for scarce disposable dollars are critical factors. Making matters worse, countless "Career Builders," fresh from college, are deep in debt. According to the American Association of State Colleges and Universities, "the average borrower graduating from a public college owes $17,250 in debt" while "one in four finishes school owing at least $22,822. Particularly worrisome is that the number of college graduates with at least $40,000 in student loan debt has increased 10-fold in the past decade." The problem is worse for those who do not earn a degree.

For financial advisors, the challenge is significant. Busy with work and families, how do you get the attention of 25 to 34 year olds?

Enter the American Institute of Certified Public Accountants (AICPA)and state-level CPA societies. In partnership with the Ad Council, they have created a new website called Feed the Pig™, replete with videos that convey the importance of thrift. The main character, Benajmin Bankes, even has his own My Space page.

Get Your Hands Off My Retirement Piggybank

Some things never change. On November 27, 1994, I wrote an op-ed piece for a local newspaper entitled "A prescription for Social Security" in which I warned of the entitlement mentality and the crushing debt load soon to be foisted upon young people everywhere. According to the editor, my suggestions for funding reform were not well-received, as evidenced by a flood of letters with the same message. "Keep your hands off my federal piggybank" and let someone else pay the price. (Like many others, I am an advocate of phased-in privatization for those who prefer to save on their own.)

Recognition of big problems ahead is certainly not unique to me. In his 1993 book, Generational Accounting: Knowing Who Pays, and When, for What We Spend, Dr. Laurence J. Kotlikoff warns of the great divide between the young and old. In their 2005 book, The Coming Generational Storm: What You Need to Know about America's Economic Future, Kotlikoff and co-author Scott Burns tell a grim tale of what has been chronicled many times before. A disproportionate number of persons are retiring from the work force, leaving those who remain to bear the staggering burden of a "pay as you go" system in the form of Social Security and Medicare.

Published last May, the 2006 Social Security Trustees Report states: "Over the 75-year period, the Trust Funds require additional revenue equivalent to $4.6 trillion in today's dollars to pay all scheduled benefits. This unfunded obligation is $600 billion higher than the amount estimated last year."

New York Times reporter Steven R. Weisman writes that Federal Reserve chairman Ben S. Bernanke is worried too, asserting that "Recent positive trends on the budget were a 'calm before the storm,' to be undone by huge deficits in federal entitlement programs. In "Fed Chief Warns That Entitlement Growth Could Harm Economy" (January 19, 2007), Weisman describes Senate testimony that sounds downright gloomy. "The longer we wait, the more severe, the more draconian, the more difficult the adjustment is going to be."

Unfortunately, as we know too well, attempts at entitlement reform are political folly and so the problem festers with little hope of short-term remedy

There are plausible solutions (hard ones but they do exist) IF only people would give up the ghost of an actual retirement piggybank in Washington, emblazoned with their names. In this case, Virginia - there is no Santa Claus.

Sorry kiddo!

Retirement for Three Hundred Million People

According to the Census Bureau, U.S. population now exceeds three hundred million people. In contrast, the headcount was roughly two hundred million in 1968.

Additional numbers are noteworthy. With one birth every seven seconds, a death every thirteen seconds and one net international migration occurring every thirty-one seconds, it's easy to see that population will continue to grow.

Shades of Thomas Malthus, the English economist who warned that more mouths would deplete the available food supply, or an opportunity for innovation due to additional brainpower?

It likely depends on whether you see the glass as half full or half empty. However, one thing is clear. The population is graying at a rapid rate and there is real concern about the economic well-being of seniors who exit the workforce and younger persons who will be called upon to support them.

According to William Poole, president of the Federal Reserve Bank of St. Louis, "Changing demographics make it impossible both to maintain that traditional retirement age, with the level of benefits defined in current law, and to maintain the current level of taxation on the working population to support the retirement system." Global Action on Aging provides a vast collection of country reports about pensions. The message is the same sobering sentiment. Fewer and fewer people are going to have sufficient funds for their later years.

News from the federal front is equally grim. In "Status of the Social Security and Medicare Programs, A Summary of the 2006 Annual Reports", the Social Security and Medicare Boards of Trustees report that "The fundamentals of the financial status of Social Security and Medicare remain problematic under the intermediate economic and demographic assumptions. Social Security's current annual surpluses of tax income over expenditures will soon begin to decline, and will be followed by deficits that begin to grow rapidly toward the end of the next decade as the baby-boom generation retires."

My friends and I have this discussion often. Our conclusions?

1. We will work for a long time, perhaps well beyond the "typical" retirement age.

2. An increasing number of people will move into poverty as national benefits are cut, taxes are raised and private pensions are reduced or terminated altogether.

3. Taxpayers will struggle to fund troubled municipal plans while trying to save for themselves.

4. Fewer companies will offer benefits to new employees, forcing a lifestyle change that requires diminished spending, increased use of debt or both.

5. Health care problems will soon dwarf the pension crisis.

6. There is a perverse incentive for politicians to ignore making unpopular changes that might help in the long-run but hurt voters now. (Besides which, when is the last time a legislator had to worry about his or her retirement account?)

7. Individuals must get smarter and better about taking responsibility for their financial well-being.

8. Effective financial education is paramount.

9. Many individuals favor immediate consumption in lieu of systematic saving.

10. No particular individual or organization seems to "own" the issue.

You get the picture. It's a veritable challenge to be upbeat about what is fast becoming a global retirement crisis.

Is there a sunny side?

Yes but only if one is receptive to making changes. There will be winners and clever investors who identify them early on will do well. Some industries are already showing continued robust growth as our population ages in both absolute and relative terms. Health care is an example. Some see the forced move towards economic individualism as a return to the "get up and go" attitude of our forefathers. (Self-employed persons are already familiar with paying for their own benefits.)

According to an ancient Chinese proverb, "Many grains of sand piled up will make a pagoda."

It's time to get started on a serious savings plan.

Retirement Paradise reports its 2006 picks for "best places to retire." Geographic lovelies such as Walla Walla, Washington and St. Simons Island, Georgia top the list. If your tastes run counter to editorial wisdom, you can find the best locale by clicking on favored attributes such as climate, job growth, commuting time and cultural activities and then pressing the Search button.

While I'm the first to say "have at it" and "enjoy", it strikes me that dreams of a halcyon retirement, especially one at a relatively young age, are simply not a reality for most folks.

Consider some recent headlines and ask yourself - "How ready am I?"

"Ford Offering 75,000 Employees Buyout Packages"
(New York Times, September 14, 2006)

"DuPont to cut pension contributions by two-thirds"
(, August 28, 2006)

"Tenneco Freezes Pension Plan"
(, August 23, 2006)

If hammocks, hobbies and fun trips with friends await you, congratulations on a job well done with respect to planning.

Everyone else?

Working during the golden years may be unavoidable. Is there hope of catching up? Well, that depends on many things, not the least of which is how much time remains until the paycheck stops coming on a regular basis.

If you aren't saving yet, start giving it some thought right away.

More Retirement Websites to Watch

Once our blog is upgraded in four to six weeks, we'll be able to include permanent links to other blogs and websites. For now, here are a few places you may find worth a visit. As always, please decide for yourself. These comments are not meant to be official endorsements of any particular site. We cannot guarantee the accuracy of the content or appropriateness of policies.

Thanks to a reader, Harold, I learned about another website for seniors, @Prime! The site describes iteself as "one of the leading age 50+ webservices designed to serve the more than 77 million Americans with the largest purchasing power of any single group in America today". Its creator, Mr. David J. Tananbaum "has been closely associated with the pre-retirement and, retirement industry for more than 35 years, and, is currently President/CEO of National Retirement Programs, Inc." and "a founding member of the American Society of Pension Professional and Actuaries." A nice feature is the array of articles about financial empowerment.

And speaking of which, Mr. Rick Meigs agrees with the view that people are saving too little and are in for a rude awakening when they finally decide to retire. (I had opined in the August 29 post that an average 401(k) account balance of $102,000 seemed meager at best, especially considering longer life spans.) President of, LLC, Rick and I had a long conversation about possible pension litigation trends in the aftermath of the Pension Protection Act of 2006. (Our sister company, Pension Governance, LLC wil be launching a pension litigation database in early fall.) You can go to the home page to sign up for a free newsletter that is chock full of links to other websites and timely articles.

An interesting site that looks at the impact of health habits on age is A "consumer-health media company and provider of personalized health information and management tools", RealAge, Inc. features a calculator to determine your "real age" versus your biological age. Their Scientific Advisory Board Members have written extensively on topics having to do with health. After all, expected life spans of employees have a direct bearing on a plan sponsor's financial obligations. is another good site. Geared to "the people who administer, give compliance advice about, design, make policy for, or otherwise are concerned with, employee benefit plans in the United States sponsored by either private or governmental employers", you can likewise subscribe to a complimentary newsletter about either welfare or retirement plans or both. A prominent feature is a benefits job center that seems rather comprehensive.

Retirement: Dreams or Reality?

Early August 2006 saw the launch of a new website, According to their press release, " has interactive games to build brain strength, news on entertainment and hobbies for older people, a personalized longevity calculator and tips to live longer." A great idea from the founder of, this networking community for the over fifty set boasts a section devoted to building a retirement dream list.(Thank you to the anonymous blog reader who sent us the URL. I later saw an article about this new site in Investment News.)

In stark contrast, a new study, courtesy of the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI), suggests that retirement dreams may be hard to achieve for the average person. In particular, Figure A6 paints a downright dreary picture, reporting an average 401(k) balance of only $102,000.

While some individual retirees will receive money from a defined benefit plan and/or Social Security, $102,000 is not much at all when you consider that large numbers of people are living well beyond fifty. While enjoying a short vacation in Arizona, I met several people who said they simply cannot afford to retire and are making adjustments. House-sharing, working more years and scaling back expectations are some of the options.

Eons' founder Jeff Taylor challenges seniors "to see how many friends and family you can inspire to live the biggest life possible. Be loud and be proud about your age." I hope people have the financial wherewithal to do what they dream, for as long as they can.

Uber Vacation Blues

A recent article caught this author's eye because it speaks to why the pension "problem" is likely to be with us for a long time.

The Associated Press reports that an official suggestion to cut back vacations in order to satisfy rising health care and pension costs has been soundly rejected by German workers. (See According to "Less Vacation? Germans Say 'Nein'", August 18, 2006). Apparently, Germans average twenty-four vacation days per year.

A related survey suggests that twenty-seven percent of more than 6,000 respondents take a vacation once a year while more than 1,400 persons claim to rest only once every two to five years.

Vacations provide a great way to recharge and return to work, refreshed, productive and happpy. However, five or six weeks of vacation is arguably generous by most standards and even more so, when funding gaps exist. (Of course, Americans are often accused of "living to work" versus "working to live" and there is certainly a lot to say about living a well-balanced life.)

The U.S. Social Security Administration reports less than ideal conditions.

Sluggish economic growth, high unemployment, and worsening demographics are burdening Germany's public pay-as-you-go pension system, which currently claims monthly government expenditures of about 15 billion Euros (US$19 billion). The Social Affairs Ministry estimates that the pension system will have a deficit this year of 1.5 billion Euros (US$1.9 billion). Continued economic performance next year could result in not only a benefit freeze but additional actions being taken to fill the funding gap that the government estimates will reach 3.5 billion Euros (US$4.5 billion) in 2006.

Without massive reform, there is no way around reduced benefits, higher taxes or both.

Financial Independence Day

Americans will celebrate Independence Day on July 4 with patriotic tributes, picnics and parades. Wouldn't it be wonderful if some time was spent ruminating about financial self-sufficiency as well?

According to the national debt clock website, U.S. IOUs are growing by roughly two billion dollars each day. (Keep hitting the Refresh key for the full effect.)

Personal debt levels are staggering. In a report to Congress, the Federal Reserve cites credit card outstandings in 2004 at $644.8 billion. UK statistics are no less sobering with an estimated fifty-two percent rise in indebtedness over the last five years.

Eilene Zimmerman describes the adverse impact of debt load for Workforce Management, stating that "debt problems cause stress and anxiety that sap workers' productivity, cause health problems and increase the likelihood they will leave a job in search of better pay". Moreover, employees may tap into their 401k accounts prematurely just to stay even with bills.

What role do employers play? Besides plan design, educating employees about retirement choices and personal finance overall can boost morale and enhance a company's return on benefits spending. However, doing so puts companies between Scylla and Charybdis. In its survey about corporate-sponsored financial education programs, Ernst & Young reports that some employers worry about the liability of providing financial education while those that abstain do so for the exact same reason, fear of increased liability.

According to the U.S. Department of Labor "Some plans, such as most 401(k) or profit-sharing plans, can be set up to give participants control over the investments in their accounts. For participants to have control, they must be given the opportunity to choose from a broad range of investment alternatives" and "must be given sufficient information to make informed decisions about the options offered under the plan."

Whether an employer provides broad-based financial training or not, employees still bear the responsibility of paying their bills on time and arguably planning for their own future.

So enjoy the fireworks and picnic today. The debt diet follows.

Retirement Savings: Whose Responsibility Is It Anyhow?

I agree with Professor Paul Secunda, author of WorkPlace Blog. People have to start getting more serious about retirement planning. Relying on one source of capital is ill-advised. In its newly published "Reimagining America: AARP's Blueprint for the Future", a cogent argument is made in favor of supplementing traditional sources with income from continued employment. This opens a Pandora's box of issues for individuals, companies and governments.

1. Will people want to work late into their 60's and beyond?

2. Will individuals need retraining to maintain a competitive edge in an ever increasingly sophisticated world of technology and global pressures?

3. Who should provide resources to retool and retrain?

4. What industries are likely to welcome older workers?

5. How will taxpayers be affected by changing demographics and work patterns?

6. Will productivity be impacted by career mobility?

7. What are the policy implications for people who cannot work past a certain age?

These and many other important questions will soon climb to the top of the priority list for corporate leaders and policy-makers alike.

Eggs in a Basket

Diversify, diversify, diversify! No smart investor should do otherwise, right? Well suppose individuals are not even saving enough, let alone investing wisely. What then?

Sad to say, financial illiteracy is reaching crisis proportion. In a recent release, the Bureau of Economic Analysis (part of the U.S. Department of Commerce), reported a continued negative savings rate. This means that individuals are spending more than they earn. Not surprisingly, personal bankruptcies are climbing higher. According to the Administrative Office of the U.S. Courts, "bankruptcies filed in the twelve-month period ending December 31, 2005, totaled 2,078,415, up from the 1,597,462 petitions filed in the 12-month period ending December 31, 2004", reflecting a whopping 30 percent increase. Similarly significant, they report that "this was the largest number of bankruptcy petitions ever filed in any 12-month period in the history of the federal courts".

A faint glimmer of hope comes in the form of a new study from the Jump$tart Coalition for Personal Financial Literacy. High school students showed a tiny improvement in their understanding of topics such as budgeting and credit cards. Survey designer Dr. Lew Mandell acknowledges the gain but stresses the need for much more work in the area of pecuniary preparedness.

Couple these alarm bells with pension safety nets that are in serious disrepair around the world and the fact that many employers are rescinding or reducing benefits, if offered at all, and we are about ready to enter a maelstrom of unprecedented proportion.

What do you think? Crisis or not? Take this five-question survey and see what others think.

Retirement Oz

Welcome to Oz, a magical land of make believe. Citizens everywhere have plenty to eat and lots of money in the bank. Life after work is a halcyon time. People fish, travel and otherwise enjoy recreational activities and peace of mind.

Sadly, life does not always imitate art and so it is with retirement.

According to just released Retirement Confidence Survey results, the Employee Benefit Research Institute reports an astonishing disconnect between retirement expectations and reality. Now in its sixteenth year, this study of attitudes of American workers and retirees suggests a continued gap between what people need and what they have, with two out of every three workers citing a savings balance of less than $50,000. At the same time, respondents acknowledge a longer post-retirement life span of twenty-five years or more. "Nearly 6 in 10 (58 percent) of current workers say they and their spouses do not expect to receive any health insurance from their employers when they retire", validating the need to accumulate even more savings along the way. Adding fuel to the fire, approximately sixty percent of respondents professed a desire to enjoy a comparable life style to what they have now yet have done little to determine how to achieve their financial goal.

Couple these findings with the fact that an increasing number of employer-provided plans are being frozen, terminated and/or replaced with lower-yielding defined contribution plans, if offered at all, and visions of the yellow brick road come to mind. Unfortunately, we don't have an Auntie Em to make up the difference. Trustees report that the Social Security program fails to meet a "long-range test of close actuarial balance by a wide margin" and that "Medicare's financial difficulties come sooner--and are much more severe--than those confronting Social Security".

So what now?

It is virtually impossible to fix a problem if you don't recognize its existence. Like the lion, we need courage to save more and spend less today. This is easier said than done. Record debt levels reflect a consumer preference for immediate gratification.

Individuals are not alone in their false sense of security. Federal and statehouse leaders are similarly in denial. Witness the agonizingly slow pace of retirement system reform that would promote savings, encourage investor literacy and enhance safety net solvency.

Where is the wizard when we need him? By the time the blame game starts, millions of individuals will be out of luck.

Retirement: Dream or Nightmare?

Thinking about a fun retirement when you turn 65? Dream on. With so many questions about the financial health of the Social Security and private pension systems, working at eighty may be a reality for more than a few people. As I explain in "Pension Risk Management: The Importance of Oversight" (Risk Review, March/April 2005), ineffective leadership is far from trivial. According to the U.S. Department of Labor, there are approximately 730,000 private sector pension and 401(K) plans that cover 102 million individuals. Factor in the millions of people in state and city plans and it becomes painfully clear that a failure to meet retirement promises will put family and friends at risk.

One of the biggest problems is the extent to which people in charge may not know enough to ask the tough questions that allow them to properly carry out their duties on behalf of plan beneficiaries. These "fiduciary persons" frequently think they have completed their work once they hire outside companies to manage money or provide advice about self-directed plans. Nothing could be further from the truth. Even a non-lawyer knows that continued monitoring is paramount.

Experts are right to worry. Several years ago, the U.S. Department of Labor launched a training program called Getting It Rightafter discovering that many ERISA fiduciaries have other job responsibilities, leaving them little time or energy to focus on retirement plans. In some cases, they did not even identify themselves as fiduciaries.

Another problem is complexity. Someone who is uncomfortable with basic investment concepts is unlikely to know when and how to ask probing questions of a consultant or money manager. This is disturbing. Pension funds are increasingly investing in "alternatives" such as managed futures, hedge funds and venture capital. This may make perfect sense but only if decision-makers fully understand the risks. (To be fair, fiduciaries need to demonstrate due diligence for any type of investment. Moreover, funds are not created equal. Their riskiness depends on strategy, internal controls and market sensitivity, to mention a few factors. It's just that some investments are harder to value and less liquid and arguably require more care and feeding.)