4 Things That Make Me Go ‘Huh?’

Ours is a business where surveys and trends often shape not only perceptions, but policy — though sometimes the conclusions drawn, and even the premise itself — make me go “huh?”

Here’s a sampling:

Citing a drop in deferral rates as a failure of automatic enrollment.

Every so often a personal finance writer will stumble across an industry survey that shows that the average deferral rate in 401(k) plans has declined, a problem they attribute to automatic enrollment adoption. We all know what is going on here; individuals who take the time to fill out a form and enroll in the plan manually tend to defer at a higher rate than do those who are automatically enrolled, the latter typically at a modest 3% rate. On the other hand, automatic enrollment has a dramatic impact on raising the participation rate. The rest is just math — more people, saving at lower rates = a lower average deferral rate.

Now, those individuals automatically enrolled at a 3% rate may draw down the average deferral rate of a plan, or the industry, but it’s almost certainly true that most people who are now saving 3% without automatic enrollment would likely have been saving — nothing at all.

Equating retirement confidence with retirement readiness.

Seems as though every other month we get yet another take on how Americans feel about their retirement prospects — and it’s never very reassuring. The Retirement Confidence Survey conducted by the nonpartisan Employee Benefit Research Institute (EBRI) and Greenwald & Associates has been chronicling that sentiment for a quarter century and over that span of time has tracked movements in confidence that mostly seem to mirror the markets, rather than any real cognizance of retirement preparations. Indeed, the RCS has routinely found that fewer than half of the survey respondents have made even a single attempt — including guessing — to ascertain their retirement needs.

It’s not that confidence about one’s retirement prospects isn’t a relevant consideration — but we shouldn’t equate an uninformed sense of that status with reality.

Comparisons of DB versus DC investment returns.

If ever there was an apples-and-oranges undertaking, it’s the comparison of defined benefit and defined contribution plan returns. The former is, of course, the return of a portfolio representing a single overriding investment philosophy designed to achieve a specific aggregate objective, and one overseen by a plan fiduciary (or plan fiduciary committee). The latter is little more than an aggregation of individually managed (or more frequently unmanaged) portfolios.

And yet, every so often someone wants to offer a comparison of the returns between the two as some kind of evaluation as to which is “better.”

In many of these comparisons, defined benefit portfolios have fared “better,” and the underlying explanation (implicit or explicit) for that differential has tended to be diversification (or “better” diversification), and in more recent years, lower fees have been credited. What we’re apparently supposed to draw from that is that DB plans are better-managed in terms of asset allocation by professionals, better able to negotiate lower fees than their DC counterparts, and generally provide a better return on investment. In other words, DB plans are “better.”

Now, I’m not saying that all, or even most, of those individually directed DC plan allocations are as well designed or maintained as those put in place by a DB investment committee, and however well negotiated it is, it’s hard to imagine that a DC plan with all its inherent complexities could (or should) get as good a deal on price as a DB offering. In fact, unless your defined benefit plan has a single participant, those programs have completely different objectives and timeframes.

You might as well be comparing a sports car to a Hummer; which is “better” depends on the distance, the terrain, the length of time you have to complete the journey, how much fuel you have — and how many people you have to transport.

Using average 401(k) balances as a proxy for retirement security.

If there is one number I wish our industry would quit publishing, it’s the average 401(k) balance. Here you have participants who may (or may not) have a DB program, who are of all ages, who receive widely different levels of pay, who work for employers that provide varying levels of match, and who live (and may retire) in completely different parts of the country. Frequently it is based only on the accumulations that have occurred during their tenure at an individual employer, and often only the balance that is found on the single recordkeeping system that is publishing the result. But in preparing this number, those widely varied circumstances are all slopped together to create — mush.

Worse than mush, actually. Because it is an average of so many varied circumstances, the result is almost never “enough” to provide anything remotely resembling an adequate source of retirement income, a point that is reiterated somewhat incessantly (and generally without the caveats about what it is an average of) in the press.

I’ll allow that some of the permutations of this calculation — such as when we see that average broken down by age demographic — can be instructive as to longer-term trends, but an average 401(k) balance is akin to an average reviewer rating on Amazon.com.

As with everything else on my “huh?” list, it’s mathematically accurate — and nearly completely useless.

Add Your Comments

7 Comments

  1. url url'>Tom Kmak
    Posted February 2, 2016 at 10:31 am | Permalink

    Absolutely 100% spot-on analysis…well done Nevin.

  2. url url'>Dorann Cafaro
    Posted February 2, 2016 at 12:07 pm | Permalink

    Great conversation. Adding to your “Huh?’ thoughts.
    1. Deferral rates as a failure where you point out it is increasing the number of people actually deferring while perhaps not showing well as an average. The trend being cited by the surveys has helped increase auto escalation which is a good thing as often that low initial auto rate is too low to achieve real retirement goals. Yes better than zero but we do not want participants to equate the auto deferral level with retirement success.
    2. Lack of confidence does reflect markets and the economy (often their personal economy like do I have a job). This is not the same as retirement readiness but what it does point out is the fact we have done a poor job giving people a way to see the reality of their retirement readiness.
    3. DB verse DC investment returns may reflect fee or allocation differences but really should not be treated as an apple-to-apple comparison since they have very different objectives and time frames. Correct on an individual basis but what about on a plan level where the objectives should the same. Perhaps the DC is “better” because it allows the person retiring soon to invest differently than those retiring in 30 years while many DBs fail to directly consider the demographics into their allocation decision.
    4. The “mush” of average 401(k) balances is not very useful although often quoted as a proxy for comparisons across different countries. And there are countries that offer similar DC structures but with mandatory contributions thus highlighting the weakness of a voluntary structure or better the reality of human behavior, behavioral finance realities.
    5. Personal “Huh” – why do we use generic investment data to identify the most suitable plan investments for a specific need? Is good for everyone valid and how did we determine that we made the correct decision if it was not personal. My mother would have said, “just because everyone else did _______doesn’t mean you should do it.”

  3. Nevin E. Adams, JD
    Posted February 2, 2016 at 7:48 pm | Permalink

    Thanks, Tom and Dorann!

  4. Murray Cleaner
    Posted February 5, 2016 at 2:07 pm | Permalink

    So true Nevin. Thanks for bringing these to light. Yet another reminder why it’s so important that plan sponsors have a knowledgeable retirement plan advisor who can sift through the “noise” and provide proper perspective and guidance.

  5. Nevin E. Adams, JD
    Posted February 6, 2016 at 6:30 am | Permalink

    Murray – couldn’t agree more. Though, frankly, I’ve heard advisors get caught up in this “noise” as well. I think as human beings we are (too?) naturally inclined to pick up on, and spread “research” that validates our thinking, often without regard to the rational underpinning for those conclusions. Critical thinking is key, in this, as all things.

  6. Ellen Lander
    Posted February 6, 2016 at 1:05 pm | Permalink

    Nevin, you continue to be a breath of fresh industry air.

  7. Nevin E. Adams, JD
    Posted February 7, 2016 at 4:20 pm | Permalink

    Thanks for the kind words, Ellen!

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