If You're the Smartest Person in the Room, You're in the Wrong Room!

This title is one of my favorite quotes that is so very wise.  It was originally said by a noted academic, Dr. David Weinberger.  By applying this adage to my professional life, I've almost universally been the better for it.  If it weren't for this philosophy, I never would have tried to write papers, blogs and the like, and thus would never have decided to create this blog.  I've recently realized, that this blog is really the only independent place where I can document all of the work I've done in my career.  So, here are a few of my notable papers in one place, the better ones co-written by someone who is most definitely the smartest person in my two person rooms, HA!  Hope you enjoy these.

Retirement Success: A Surprising look into the Factors that Drive Positive Outcomes - This is the very first paper I published in my professional career, originally published in the Summer edition of the ASPPA Journal in 2011.  Interestingly, this piece has been a weight baring beam in my career, a foundational notion for everything I've done since.  The smart co-author on this gem is David Blanchett (now head of Retirement Research at Morningstar) who took my original question and did 100% of the math! - September 1, 2011

Deconstructing the Fiduciary Models: 3(38) vs. Discretionary Trustee - In this piece, my very smart associate, Mike Samford and I try to tackle a highly nuanced area of ERISA fiduciary service, taking discretion over plan investments.  While I would change some of what I've written here nearly ten years later, most of this still holds.   - July 11, 2012

Third Party Fiduciaries; Myth and Reality- Occasionally, I managed enough nerve to write solo, and invariably the result never as good as when I've written with a partner.  This is my first ever solo piece, originally self published but picked up by Retirementsolutionsnow.com. - June - 2013 (Orig. Jan. 17, 2013)

Retirement Income—In-Plan vs. Out-of-Plan Solutions, Which Is Better?

Retirement Income - In Plan vs Out-of-Plan Solutions, Which Is Better?  - This is still today (in 2021) a hot topic, annuities in retirement plans.  We had this published in the Journal of Pension Benefits and it explores Retirement Income solutions, as they exist within 401(k) plans, whether individuals would be served better with those solutions or out-of-plan solutions and provides ideas for how to adequately deliver retirement income for retired Americans.  The 'smart' on this one was my co-author, Dr. Greg Kasten. - Feb. 1, 2013.

How 401k Advisors can Effectively Offer 316 Services - Here's a piece I authored in 401(k) Specialist which discusses the 'at the time' new spate of administrative fiduciary services and a model for retirement plan advisors to gain a competitive advantage.  No co-author on this one, AND you can tell! - June 14, 2016

- Jason Grantz, QPA, QKC, QKA, AIFA

.

Retirement Income Options - In Plan vs. Out of Plan, Revisited

 In a recent post on NAPA.net, author Nevin Adams posited five reasons why Retirement Plan Sponsors aren't offering retirement income options inside the plan.  Link to article here:

5 Reasons Why More Plans Don't Offer Retirement Income Options

The reasons offered are:

1. There is no legal requirement to provide a lifetime income option.
2. The safe harbor for selecting an annuity provider doesn’t feel very “safe.”
3. Operational and cost concerns linger.
4. Participants don’t take advantage of the option when offered.
5. Participants aren’t asking for it. 

I think that this is an interesting take.  If no one is asking for it, it isn't required and when offered isn't used, that's a pretty good way of saying that there isn't any demand.  So if no demand, logically why would one supply.  But I think there's a bigger issue which is in Item #3.

Even with the Safe Harbor of offering an annuity option in a plan, many (most?) in-plan solutions are quite expensive.  Since we are in an era of fee compression, or as I call it the race to zero.  Putting an expensive option into a plan seems like a bad idea, especially when income solutions are readily available post retirement outside of the plan.  The other issue has to do with portability concerns which there are various different types that come into play making these types of investments dangerous to put into plans.

Dr. Greg Kasten and I tackled this issue in a Journal of Compensation and Benefits piece back in 2013 titled 'Retirement Income - In-Plan vs. Out-of-Plan Solutions, Which is Better?'.  At the conclusion of our piece, it was determined that until this marketplace matures and all practical, fiduciary and operational issues are resolved (not to mention cost), the right format to utilize retirement income products is outside of the plan sponsored retirement plan.

- Jason Grantz

   

Hatch's remarks on Pension Reform - Financial Services Roundtable:

Really interesting read on where the thinking in this area is, the whole speech can be found in this article -->

http://www.stgeorgeutah.com/news/archive/2014/12/15/hatch-outlines-pension-reform-retirement-savings/#.VI9NpHuEzaV

Here are the parts on private Pension Reform:

"....The good news is that the private employer-based retirement savings system in the United States – particularly 401(k) plans and Individual Retirement Accounts, or IRAs – has become the greatest wealth creator for the middle class in history and represents truly shared prosperity.

The bad news is that the retirement of the baby boom generation is putting enormous pressure on public programs like Social Security and Medicare.

And, as part of the unending effort on Capitol Hill to find more revenue to pay for increased spending, some have proposed reducing the allowed contributions to 401(k) plans and IRAs.

That, in my view, would be both short-sighted and foolish. - GREAT LINE!!!

Some in Congress seem to have forgotten that this is well-covered territory.  Indeed, Congress has already examined this issue and made the policy call decidedly against contribution reductions.
In 2001, Congress increased the limits for contributions to 401(k) plans and IRAs.
Congress also added a catch-up contribution feature that allows workers to contribute several thousand dollars more per year beginning in their 50s, an age when many workers finally get serious about saving.



One thing we have learned over the years is that the key to successful retirement savings is participation by employees in a plan at work, and the key to convincing employers to sponsor a plan at work is a healthy contribution limit.


Since 2000, the year before Congress raised the contribution limits, retirement assets in defined contribution plans have grown from around $3 trillion to nearly $6 trillion, despite the market downturn in 2008.  Assets in IRAs have grown from $2.6 trillion to $6.5 trillion.

In fact, increased contribution limits worked so well that, in 2006, Congress made those provisions permanent, and the vote to make them permanent was overwhelming:  in the Senate, the vote was 93 to 5.

We have spent a lot of time in recent years defending the gains we have achieved in the 401(k) system.  But in 2015 we can, and in my opinion should, go on offense. Toward that end, we must encourage employers who don’t sponsor plans to set them up.  That’s why last year I introduced legislation to create the Starter 401(k), a plan designed for small or start-up businesses that are not in a position to contribute to a plan but still want to help their employees save.

A Starter 401(k) is a new kind of plan that does not come with all the administrative burdens or expenses of a traditional 401(k) plan.  The plan allows employees to contribute between $8,000 and $10,000 per year, which is a little bit less than what would be allowed under a traditional 401(k), but much more than an IRA.



I believe the Starter 401(k) plan in my legislation could help to revolutionize retirement savings for employees of small businesses throughout the country.  My bill also allows unrelated small employers to pool their assets in a single 401(k) plan to achieve better investment outcomes, lower costs, and easier administration.  This idea, which is called an “Open MEP” is one that many on both sides of the aisle in Congress support.  It’s an idea whose time has come.


Of course, we cannot talk about retirement savings without discussing the importance of lifetime income.  We have fought for years to enact policies that will encourage greater savings and investment.  But, I don’t think our efforts will provide much to comfort those whose retirement assets run out before the end of their lives.

That’s why the legislation I introduced last year encourages the purchase of fixed annuity contracts for retirement.  In fact, the bill is called the Secure Annuities for Employee Retirement Act, or the SAFE Retirement Act.

Why life insurance annuity contracts?  Well, lifetime income is a form of life insurance.  Most people tend to think of life insurance as insurance against the risk of living an unexpectedly short life.  And that is certainly true.  But life insurance also includes insurance for the possibility that someone might live an unexpectedly long life.

We call that form of life insurance a life annuity and it only makes sense to encourage the use of annuities to provide retirement security.

My legislation encourages the use of annuities in 401(k) plans.  First, we remove obstacles to adding annuity-purchase options to 401(k) plans and, second, we provide employers a liability safe-harbor.  That way, employers are encouraged to add annuity options to their plans and employees are encouraged to use them......"

Senator Hatch goes on a bit about public pension reform as well, but key takeaways from this.  There's a strong advocate for the proliferation of the 401(k) and future versions of it in Congress now, who's thinking smartly and creatively about ways to expand coverage, reduce barriers to usage and protect participants.  That's leadership that I can get behind.  Let's hope that these measures make it through and become law.

- Jason Grantz

Retirement Income Solutions - In-Plan or Out-of-Plan?

Very recently, we had a paper published in the Journal of Compensation and Benefits.  Dr. Greg Kasten is the primary author, and I had a small contribution to it.  You will find it linked here: 

https://www.unifiedtrust.com/documents/RetirementIncome-InPlan-vs-OutOfPlanSolutions.pdf

The paper deals with the recent trend of offering guaranteed income products, often in the form of a Guaranteed Income for Life Annuity, inside of 401(k) Plans.  The purpose of the article was to explore if real demand existed for such products and if so, were they better placed inside of a qualified retirement plan or outside of one?

Summary of findings:  Guaranteed Income for retirement, simply put, is a good idea.  However, the current availability of these products within the 401(k) space is poor.  The products are at an immature stage in their life cycle and are problematic for a variety of reasons.  Thus it would be advisable for a client to seek guaranteed income outside of their 401(k).  

Going a little deeper:

1.) Retirement Income Products are desired to provide a regular guaranteed stream of income.

2.) Many 401(k) service providers are putting these types of products into their 401(k) plan products.

3.) Question: Will employers and participants be better served with these products in a 401(k) Plan or outside of it, post retirement or in an IRA?

4.) Concerns for In-Plan Solutions:

a. Fiduciary Prudence – Is it a good idea for an employer to endorse an income product by putting in a plan as a Designated Investment Alternative?

  i.     Time and resources required to satisfy regulatory requirements for specialized products
  ii.    Lack of benchmarking and monitoring guidance for new products
  iii.   Risk of fiduciary liability for failing to meet participant expectations
        
b.      Product Feature Issues:
 i.      In order for the participant to receive the full value of the Income Product – They must be held  to term.  In many cases, early withdrawal or cancellation can be excessively wasteful.

 ii.      Diversification Issue – Currently, the insurance carrier who supplies the Income Product typically will only offer one Income product, their own.  They will not allow fair competition for the employee to select the one that’s best for them.  It is like offering a 401(k) plan with one balanced mutual fund and a money market fund and saying if they want access to the market, they can invest in the balanced fund.  What if the balanced fund isn't appropriate for that participant?
                     
 iii.     Portability – In order for employers to exercise their fiduciary duty, they must periodically check the marketplace to ensure that what they have is still in the best interest of the participants.  Over the lifetime of a plan, it is likely that a service provider change will occur, typically every 5-8 years on average.  At present, these Income Products are not portable.  This presents a practical issue for the employer.

 Do they make a provider change and force the participant to sell their Annuity early and take a large loss?  If yes, that’s a big fiduciary risk.

 If no, do they operate the plan with multiple service providers, requiring coordination between vendors, excess fees to administer, etc.?

 Do they not make a change to avoid options 1 and 2?  This is akin to being held hostage by a bad investment arrangement.

 iv.     Rollover ability – If participants change jobs, these products can’t be rolled to another employer’s plan, and perhaps not even into an IRA.  For people who change jobs periodically, this presents another practical issue.  What does the participant do in the event of a job change?

 v.     Fee transparency and reasonableness – Because these are individual annuities, the benefit of pricing power from asset aggregation is lost.  As a result, these annuities are often expensive and opaque in nature.  Further due to what is listed above, they would fail the DOL’s definition of a fair or reasonable contract or arrangement.  Specifically, the DOL views a reasonable contract or arrangement as one that is explicit in fees,
written and that can be terminated in a reasonable time frame without fee or penalty.  These currently do not meet that standard.

 vi.    Survivorship -  Most of the current versions of these Income for Life annuities are participant only, meaning that they don’t extend benefits to the surviving spouse in the event of death.  Compared to income products that exist in the open market, this is a very big disadvantage.

5.) Based on the above, the advice is that Income for Life products are a good idea, but are immature in their product life cycle.  Guaranteed Income can be found elsewhere, i.e outside the 401(k) plan, with more advantageous features and benefits.  Until the next generations of these are created, it would be inadvisable to put them into a 401(k) Plan.

Retirement Income - Insurance isn't the only Way

Over the last several years as the Retirement Plan marketplace has matured, service providers have built out an array of services engineered to help participants and plan sponsors in different ways. Plan design in a post Pension Protection Act environment has led to increasing use of techniques such as Automatic Enrollment or Progressive Savings Escalators. But only recently has the shift focused beyond the accumulation phase. As the Boomer generation gets closer and closer to retirement, IRA Specialty providers and Employee Education providers are popping up everywhere. With this comes a new focus on Income Replacement including defining Income Replacement adequacy, strategies that start in the accumulation phase and work throughout life and even Insurance Based Guaranteed Income Vehicles.

Our philosophy has always been to create a more pension-like experience for the participant where the accumulation phase is targeted toward a range of possible retirement ages and amounts and managing that experience to fruition taking the least amount of risk necessary to achieve the goal. We call this style Defined Goal Investment Management. Recently, we’ve observed that several firms out there are starting to come out with their own spin on the ‘Pension-Like’ retirement plan experience. This article from Investment News titled 'Firms are Omitting Annuities in New Retirement Income Products, http://www.investmentnews.com/article/20110320/REG/303209976, does a good job in weighing some of the pros and cons of insurance-based retirement income products and non-insurance based retirement income services.

In the end, we believe the appropriate philosophy is that if we default the participant into an environment that gives them an adequate income replacement than the uptake on that would be much higher than if they had to elect to do it themselves. This is in line with our overall core philosophy, default the participant into all of the decisions that lead to the best outcomes and leave them there unless they choose to opt out.