There could be a lot more riding on Sunday’s Super Bowl than you think.

If the results of the Super Bowl exert any influence on the markets – as proponents of the so-called Super Bowl Theory claim – then 2012 could prove to be truly tumultuous.

For the "uninitiated," the theory (invented/popularized by the late New York Times sportswriter Leonard Koppett) says that a win by a team from the old National Football League is a precursor to rising stock values for the year (at least as measured by the S&P 500), but if a team from the old American Football League (AFL) prevails, stocks will fall in the coming year.

This year we have a team from the old NFL (the NY Giants) taking on one from the old AFL (the New England Patriots, who once were the AFL’s Boston Patriots). So, if the Giants prevail, 2012 should be a good year for stocks – and if things go the Patriots’ way, well…

On the Other Hand…

Of course, as even loyal proponents will admit, this theory used to work a lot better than it has in recent years. The most obvious (and recent) proof of that was Super Bowl XLII, where these same two teams met – and the underdog New York Giants pulled off a remarkable victory – but the S&P 500 still shed…well, we don’t really need to relive that here (particularly for Patriots fans).

Last year’s contest brought together two classic NFL teams; the Pittsburgh Steelers (representing the American Football Conference) and the National Football Conference’s Green Bay Packers. Both those teams had some of the oldest, deepest, and yes, most “storied” NFL roots, with the Steelers formed in 1933 (as the Pittsburgh Pirates), and the Packers, founded in 1919. So, according to the Super Bowl Theory, 2011 should have been a good year for stocks (because, regardless of who won, an NFL team would prevail). But, as you may recall, while the Dow gained ground for the year, the S&P 500 was – well, flat.

On the other hand, 2010 turned out pretty well – a year when the New Orleans Saints bested the Indianapolis Colts, though it was, after all, also a Super Bowl featuring two teams with NFL roots. And it was also the case in 2009 when both Super Bowl teams - the Arizona Cardinals and the Pittsburgh Steelers – had NFL roots (the Arizona Cardinals by way of one time being the St. Louis Cardinals), AND in 2007 when the S&P 500 rose 3.53% as the Indianapolis Colts beat the Chicago Bears 29-17. That also turned out to be the case in 2006 when the Pittsburgh Steelers (yes, again) defeated the Seattle Seahawks in another battle of two legacy NFL clubs. That turned out to be a good year for equities, with the S&P 500 closing up more than 13%.

Except When It Doesn’t…

Of course, as even loyal proponents will admit, this theory used to work a lot better than it has in recent years. The most obvious (and recent) proof of that was the aforementioned Super Bowl XLII where the New York Giants pulled off a remarkable victory – but the S&P 500 still shed…well, we don’t really need to relive that again (particularly for Patriots fans).
Times were better for Patriots fans in 2005 when they bested the NFC’s Philadelphia Eagles 24-21. According to the Super Bowl Theory, the markets should have been down for the year. However, in 2005 the S&P 500 climbed 2.55%.

Of course, the 2002 win by those same New England Patriots accurately foretold the continuation of the bear market into a third year (at the time, the first accurate result in five years). But the Patriots 2004 Super Bowl win against the Carolina Panthers failed to anticipate a fall rally that helped push the S&P 500 to a near 9% gain that year, sacking the indicator for another loss.

Consider also that, despite victories by the old AFL Denver Broncos in 1998 and 1999, the S&P 500 continued its winning ways, while victories by the NFL legacy St. Louis (by way of Los Angeles) Rams (with the just-retired Arizona quarterback Kurt Warner calling plays) and the Baltimore (by way of NFL legacy Cleveland Browns) Ravens did nothing to dispel the bear markets of 2000 and 2001.

Winning “Streaks”

All in all, the Super Bowl Theory has been on the money more often than not – much more often than not, in fact - but in true sports fashion, has had some winning streaks and some rough patches. Consider that it “worked” 28 times between 1967 and 1997 – then went 0-4 between 1998 and 2001 – only to get back on track from 2002 on (purists still dispute how to interpret Tampa Bay’s victory in 2003, since the Buccaneers spent their first NFL season in the AFC before moving to the NFC).

As for Sunday – the oddsmakers are giving the nod to the Patriots – though not by much.

It looks like it could be a good game – and that, whether you are a proponent of the Super Bowl Theory or not – would be one in which whoever wins, we all will!

Nevin E. Adams, JD


Note:

Other exceptions included: 1970, when AFC Kansas City won, and the S&P index gained 0.1%; 1984, when AFC Los Angeles Raiders won, and the S&P rose 1.4%; 1990, when NFC San Francisco prevailed, and the S&P lost 6.56%; and 1994, when NFC Dallas triumphed, but the S&P index fell 1.53%.

About a month ago, the Department of Health and Human Services (HHS) released a bulletin outlining proposed policies that it said would “give states more flexibility and freedom to implement the Affordable Care Act.”

It did that by proposing to allow individual states to select a single benchmark to serve as the standard for qualified health plans inside the Exchange operating in their state – and for the plans offered in the individual and small group markets in their state. The Patient Protection and Affordable Care Act requires that health insurance plans offered in the individual and small group markets, both inside and outside the ”Affordable Insurance Exchanges” (Exchanges), offer a comprehensive package of items and services, known as “essential health benefits(1).” This benchmark would set the standard of the items and services included in the essential health benefits package called for in PPACA(2).

Acknowledging that “[t]There is not yet a national standard for plan reporting of benefits,” HHS also noted that PPACA does not provide a definition of “typical,” and it therefore gathered benefit information on large employer plans (which account for the majority of employer plan enrollees), small employer products (which account for the majority of employer plans), and plans offered to public employees (3).

In releasing its proposal, HHS noted that “[n]ot every benchmark plan includes coverage of all 10 categories of benefits identified in the Affordable Care Act” and that “the most commonly non-covered categories of benefits among typical employer plans are habilitative services, pediatric oral services, and pediatric vision services.”

However, HHS did at least suggest some boundaries, noting that states “would choose one of the following health insurance plans as a benchmark”:

•One of the three largest small group plans in the state (4);
•One of the three largest state employee health plans;
•One of the three largest federal employee health plan options;
•The largest HMO plan offered in the state’s commercial market.

HHS is soliciting public input on this proposal – though comments are due by January 31, 2012. You can send comments to EssentialHealthBenefits@cms.hhs.gov.


Nevin E. Adams, JD


The essential health benefits bulletin is online at http://cciio.cms.gov/resources/files/Files2/12162011/essential_health_benefits_bulletin.pdf

A fact sheet on the essential health benefits bulletin is online at: http://www.healthcare.gov/news/factsheets/2011/12/essential-health-benefits12162011a.html

The Institute of Medicine’s report on Essential Health Benefits is online at http://www.iom.edu/Reports/2011/Essential-Health-Benefits-Balancing-Coverage-and-Cost.aspx

Note: The HHS bulletin addressed only the services and items covered by a health plan, not the cost sharing, such as deductibles, copayments, and coinsurance. HHS noted that the cost-sharing features will be addressed in future bulletins and cost-sharing rules will determine the actuarial value of the plan.

See also Paul Fronstin and Murray N. Ross, “Addressing Health Care Market Reform Through an Insurance Exchange: Essential Policy Components, the Public Plan Option, and Other Issues to Consider,” EBRI Issue Brief, no. 330, June 2009.

(1)Beginning January 1, 2014, qualified health plans sold in health insurance exchanges must cover all essential benefits. In addition, new plans sold in the individual and small group markets must cover essential benefits, regardless of whether plans are sold inside or outside of state health insurance exchanges.

(2) The following benefit classes are identified as essential benefit classes
◦Ambulatory patient services
◦Emergency services
◦Hospitalization
◦Maternity and newborn care
◦Mental health and substance use disorder services, including behavioral health treatment
◦Prescription drugs
◦Rehabilitative and habilitative services and devices
◦Laboratory services
◦Preventive and wellness services and chronic disease management
◦Pediatric services, including oral and vision care

(3) HHS noted that it has considered a report on employer plans submitted by the Department of Labor (DOL), recommendations on the process for defining and updating EHB from the Institute of Medicine (IOM), and input from the public and other interested stakeholders during a series of public listening sessions. In 2010, Paul Fronstin, Ph.D, Director, Health Research & Education Program at the Employee Benefit Research Institute (EBRI) was appointed to the Institute of Medicine (IOM) Committee on Determination of Essential Health Benefits. For more information on the essential benefits proposal, you can contact him at Fronstin@ebri.org.

(4) an Illustrative List of the Largest Three Small Group Products by State was just published by HHS at http://cciio.cms.gov/resources/files/Files2/01272012/top_three_plans_by_enrollment_508_20120125.pdf.

There is an old adage that cautions about the consequences “when you assume…”

And yet, the business of retirement planning is replete with any number of so-called “common wisdom” rules of thumb. Doubtless many have well-intentioned origins – to make complicated concepts easier to grasp, and thus to address.

One of the more pervasive notions is that a realistic target for retirement savings can be determined by accumulating a sum that will provide an income stream equal to a percentage of one’s pre-retirement earnings – a sum that is generally expressed as 70-80% of what you earn prior to retirement. This starting point - generally called
a "replacement ratio" - includes any number of imbedded assumptions, perhaps most significantly that the individual will need to spend less post-retirement, generally understood to be on things such as taxes, housing, and various work-related expenses (including saving for retirement).

Moreover, the replacement rate approach represents, at best, an indirect approach in evaluating whether retired workers can maintain their standard of living in retirement – because what matters is not how much you have to spend, but how much you need to spend. A recent research report sponsored by the Society of Actuaries’ Pension Section, “Moving Beyond the Limitations of Traditional Replacement Rates”, also highlights the limitations of relying on replacement rates. A recent paper published by the Center for Retirement Research at Boston College (“How Much to Save for a Secure Retirement”) acknowledges that “the most direct approach would be a comparison of household consumption while working with consumption after retirement” – before launching into a discussion that instead draws on a relatively simplistic series of assumptions , not the least of which is that the goal of retirement saving is a replacement rate of 80-percent of one’s pre-retirement income.

The problem is that these assumptions are just that – and, as a result, in some cases that 80% will be more than is required – and for some it will, unfortunately, be less. Furthermore, most of the assumptions underpinning such replacement ratio targets are implicitly using a 50 percent probability of success.

Additionally, these replacement rate models tend to ignore one – or more – of the most important retirement risks; investment risk, longevity risk, and risk of potentially catastrophic health care costs.

The reality is that there is no “correct” single replacement rate, but the factors that undermine those simplistic rules of thumb are quantifiable. Those factors, and the importance of probabilities in retirement planning are detailed in “Measuring Retirement Income Adequacy: Calculating Realistic Income Replacement Rates (EBRI Issue Brief No. 297).

After all, it isn’t what you have accumulated at retirement that matters, it’s how much you have left at the end of it.

- Nevin E. Adams, JD

One of the more pervasive statistics bandied around about the voluntary retirement system is that only about half of working Americans are covered by a workplace retirement plan.

It’s a data point that is widely and openly presented as fact—not only by those inclined to dismiss the current system as inadequate, but even by some of its most ardent champions, who see that result as a call to action for expanded access to these programs.

There’s only one problem: It doesn’t tell the whole story.

A 2011 EBRI report found that in 2010, 77.6 million workers worked for an employer/union that did not sponsor a retirement plan and 91.0 million workers did not participate in a plan. However, focusing in on employees who did not work for an employer that sponsored a plan, 9.0 million were self‐employed.

Of the remaining 68.5 million:

• 6.2 million were under the age of 21, and
• 3.7 million were age 65 or older.
• 32.0 million (approximately) were not full‐time, full‐year workers, and
• 17.2 million had annual earnings of less than $10,000.

Now, admittedly, many of these workers would fall into several of these categories simultaneously (they might, for instance be under age 21, make less than $10,000 in annual earnings, and not be a full‐time, full‐year worker).

But if you adjust these numbers so that only workers who work full-time, full‐year, make $10,000 or more in annual earnings, and work for an employer with 50 or more employees, only 17.4 million workers (or 26.7 percent) would be included among those working for an employer that did not sponsor a plan.

Of course, another way to look at this last number is that 73.3 percent of these workers with those characteristics worked for an employer that DID sponsor a retirement plan in 2010.

And that’s a lot more than 50 percent.

- Nevin E. Adams, JD

On Dec. 8, the Pension Benefit Guaranty Corporation (PBGC) convened a forum on “the Future of Pensions.”

The forum was structured around two separate panels of experts (including EBRI President and CEO Dallas Salisbury) who spoke to an audience of pension industry thought leaders on the current retirement landscape, as well as potential enhancements and solutions.

Among the insights/observations shared in the session:

• In 1975, among those over age 65, 23 percent had pension/annuity income; in 2010, that had risen to 33 percent.


• According to EBRI’s Retirement Readiness Rating (RRR) 57 percent of those under age 65 were considered to be at risk of not having sufficient retirement resources to pay for “basic” retirement expenditures and uninsured health care costs, a figure that had declined to 45 percent in 2010.

• In fact, a world in which 30-year job tenure (and associated pension benefit) was never a reality for 80 percent of the nation’s workers. Rather, it was a myth that led “too many to do too little for too long,” leaving many with no retirement resources other than Social Security. Today, more Americans will retire at far more fiscally appropriate times, with more assets from which to draw.

• Financial insecurity looms large, but has increased consumer awareness of the situation, the need to prepare, and the possibility of scaling back retirement expectations.

• Today, about 18 percent of those over age 65 are still in the workforce; 10 years ago, just 11% were.

• People assume they will be able to work longer—but the data indicate they won’t be able to, for reasons outside their control.

• Regulation/legislation does impact/influence the decision by employers to offer workplace retirement plans.

• Employers are rational when it comes to offering benefits—and they consider both shareholder value and employees in their decision-making.

• Employees are also rational when it comes to making decisions; health care a more immediate concern for many than retirement.

• People make rational decisions, but they also tend to be inefficient about those decisions.

• Americans are far too optimistic—they assume that their pay will continue to increase, despite data that indicates that it plateaus for many in their mid-40s. They assume that they will save more later, but they don’t.

• National retirement plan participation rates of 50 percent include workers (part-timers, those under 21) that aren’t normally covered by these plans.

• Health care costs impact certainty/predictability of benefit programs and individual savings rates.

• It’s not how much you have at retirement, it’s how much you have at the end of retirement.

• Guaranteed returns are very expensive.

• The better we understand retirement risks, the better we’ll be able to mitigate them.

• Social Security offers universal defined benefit (DB) coverage—and offers a critical foundation for other retirement solutions to build on.

• If employers are going to take on the risk of offering a DB plan, there has to be some reward beyond just doing right by their retirees.

• Predictability is a key factor in employer decision-making on retirement plan designs.

• Regulations tend to be “one size fits all,” but employers are not, and vary greatly.

• “If you tell employers they can never take it out, they will never put it in.”

• Providing lifetime income in a low interest rate environment is very expensive.

• Employers care about retirement income—don’t drive them away from providing these programs.

• Investment risk, interest rate risk and longevity risk represent the major DB risks for employers. These risks are shifted to workers in the shift to defined contribution (DC) retirement plans, but the impact is very different. Investment risk and interest rate risk have an immediate impact on employer, but not on the individual saver. However, employers have the ability to pool (and thus mitigate) longevity risk—an option not available to individual savers.

- Nevin E. Adams, JD

While the headlines out of our nation’s capital are driven by talk of the looming budget crisis, concerns about the sluggish economy, and the impending 2012 elections, discussions about retirement, retirement savings, and ways to improve retirement savings have been the order of the day here in Washington.

The Women’s Institute for a Secure Retirement (WISER) recently convened its Annual Women’s Retirement Symposium, with a focus of the future of retirement (broadly defined) and the specific implications for women (who live longer, are frequently paid less than men, and whose working careers often include family interruptions in pay and savings). EBRI data surfaced in a number of presentations throughout the event, including references to gender participation rates (see http://www.ebri.org/pdf/FFE.192.21Mar11.RCS-Gender.Final.pdf, http://www.ebri.org/files/FS4_RCS11_Gender_FINAL.pdf), as well as differences in retirement confidence, and men’s and women’s response to opportunities such as the catch-up contribution.

Among information shared by those at the conference:

* American women are marrying and having children later.
* The longevity gap with men has shrunk – from eight years to five years.
* There is no gender gap in access to retirement savings plans, or in participation in those plans.
* Women tend to save at higher rates than men, though men have larger average account balances.
* Social Security provides half of women’s retirement income, but only a third of men’s.
* Only 11% of young women are confident of their ability to prepare/save for retirement.
* The top suggestion across all age demographics: provide motivation to learn about saving/investing for retirement, and make the topic easier to understand (41 percent of 20-somethings).
* Younger women were more likely to go to family/friends for investment help (those in their 40s were more likely to rely on a financial adviser)—but only 8 percent are actually talking about saving/investing with those friends/family.
* Most disabilities don’t occur at work.
* The leading cause of disability in the United States is arthritis.
* Healthcare costs impact certainty/predictability of benefit programs as well as individual savings rates.

All in all, the likelihood of significant change in the short term seems unlikely, with legislators and regulators hemmed in by budgetary constraints and concerns about the impact of change on private-sector hiring. However, today’s discussions could well set the stage for future change.

One of the things I enjoyed most about writing/publishing NewsDash over a 16-year span (12 years at PLANSPONSOR, and four before that as an internal email) was doing a weekly survey – on a wide variety of topics, both serious – and not-so-serious.

My favorite of the “regular” surveys (and there weren’t many that repeated, even over all that time) was the annual survey of holiday movies. And while there were certain perennial favorites, it seemed like every year there was a real “battle” for the top slot among readers.

As for this year – well, the survey was admittedly a bit ad hoc – but the results were just as fun. So, here’s the top 5:

Christmas Vacation (26.1%)

It’s a Wonderful Life (15.2%)

Elf (13.0%)

How the Grinch Stole Christmas (4.3%)

A Charlie Brown Christmas (4.3%)

…asked to choose a second favorite, It’s a Wonderful Life and Elf tied for first, with 14% of the vote.

You can check out the NewsDash survey from 2010 at http://www.plansponsor.com/SURVEY_SAYS_What_is_Your_Favorite_Holiday_Movie_2010.aspx

Thanks to all who participated in this survey… and to all a good night! Check back here in 2012 for new blog posts…

Editor’s Note: There’s so much going on in the world of retirement saving and investing that I never feel the need (or feel like I have the opportunity) to recycle old columns – but this one has a certain “evergreen” consistency of message that always seems appropriate – particularly at this time of year.

A few years back—when my kids still believed in the reality of Santa Claus—we discovered an ingenious Web site.

This was a Web site that purported to offer a real-time assessment of your "naughty or nice" status.

Now, as Christmas approached, it was not uncommon for us to caution our occasionally misbehaving brood that they had best be attentive to how those actions might be viewed by the big guy at the North Pole. But nothing ever had the impact of that Web site - if not on their behaviors (they're kids, after all), then certainly on the level of their concern about the consequences. In fact, in one of his final years as a "believer," my son (who, it must be acknowledged, had been PARTICULARLY naughty) was on the verge of tears, worried that he'd find nothing under the Christmas tree but the coal and bundle of switches he surely deserved.


Naughty Behaviors?

One might plausibly argue that many participants act as though some kind of benevolent elf will drop down their chimney with a bag full of cold cash from the North Pole. They behave as though, somehow, their bad savings behaviors throughout the year(s) notwithstanding, they'll be able to pull the wool over the eyes of a myopic, portly gentleman in a red snow suit.

Not that they actually believe in a retirement version of St. Nick, but that's essentially how they behave, even though, like my son, a growing number evidence concern about the consequences of their "naughty" behaviors. Also, like my son, they tend to worry about it too late to influence the outcome—and don't change their behaviors in any meaningful way.

Ultimately, the volume of presents under our Christmas tree never really had anything to do with our kids' behavior, of course. As parents, we nurtured their belief in Santa Claus as long as we thought we could (without subjecting them to the ridicule of their classmates), not because we expected it to modify their behavior (though we hoped, from time to time), but because, IMHO, kids should have a chance to believe, if only for a little while, in those kinds of possibilities.

We all live in a world of possibilities, of course. But as adults we realize—or should realize—that those possibilities are frequently bounded in by the reality of our behaviors. This is a season of giving, of coming together, of sharing with others. However, it is also a time of year when we should all be making a list and checking it twice—taking note, and making changes to what is naughty and nice about our savings behaviors.

Yes, Virginia, there is a Santa Claus—but he looks a lot like you, assisted by "helpers" like the employer match, your financial adviser, investment markets, and tax incentives.

Happy Holidays!

--------------------------------------------------------------------------------
The Naughty or Nice site is STILL online (at http://www.claus.com/naughtyornice/index.php.htm ). An improved site and much better internet connection speeds produce a lightning fast response – more’s the pity. I used to like the sense that someone was actually going to the list, and having to check it twice!

After a dozen years here at PLANSPONSOR, effective November 1, I have joined the Employee Benefit Research Institute (EBRI) in Washington, D.C., as Director, Education and External Relations, and Co-Director of the EBRI Center for Research on Retirement Income.

I have long had a strong personal and professional admiration for the work that EBRI does in helping provide our industry with valuable and objective information and am thrilled to be able to be part of those efforts at this critical juncture.

It has been my great privilege over this past decade and change to share with you some of my thoughts and observations in this space. You have been generous both with your comments and commentary on those musings, as well as our publications overall.

While it’s not quite Thanksgiving, I thought I would dedicate this final “IMHO” to sharing some of the things for which I’m thankful:

I’m thankful that the vast majority of plan sponsors continued to support their workplace retirement programs with the same match and options as they had in previous years—and that so many of those who had to cut back in prior years still seem committed to restoring those original levels.

I’m thankful that participants, by and large, hung in there with their commitment to retirement savings, despite the lingering economic uncertainty. I’m especially thankful that many who saw their balances reduced by market volatility and, in some cases, a reduction in their employer match were willing and able to fill those gaps, in most cases by increasing their personal deferrals.

I’m thankful that most workers defaulted into retirement savings programs tend to remain there—and that there are mechanisms in place to help them save and invest better than they might otherwise.

I’m thankful for the time, cost, and effort employers expend each year on health-care coverage for their workforce—and continue to do so, despite the uncertainties still attendant with health-care legislation.


I’m thankful that those who regulate our industry continue to seek the input of those in the industry—and that that input continues to be shared broadly in open forums. I’m thankful that so many in our industry take the time to provide that input.

I’m thankful that so many employers have remained committed to their defined benefit plans and—often despite media reporting to the contrary—continue to make serious, consistent efforts to meet funding requirements that are quite different from when most initially decided to offer these programs.

I’m thankful that plan sponsors will soon have better access to more information about the expenses paid by their plans—and optimistic that it won’t be as bad as some fear. I’m thankful that we’re no longer talking about whether fees should be disclosed to participants and are now trying to figure out how to do it.

I’m thankful that the “plot” to kill the 401(k)…hasn’t…yet.

I’m thankful that we might—finally—be ready to have a national, adult conversation about retirement income and entitlement programs.

I’m thankful to have been given an opportunity to be part of something great here at PLANSPONSOR; to have seen a little internal e-mail publication called “NewsDash” come to reach—and touch—the lives of nearly 70,000 readers worldwide. I’m thankful to have been able, in some small way, to make a difference—and to have before me a marvelous opportunity to continue to do so.

I'm thankful for the warmth with which readers, both old and new, have embraced me and the work we do here. I'm thankful for all of you who have supported—and I hope benefited from—our various conferences, designation program, and communications throughout the years. I’m thankful for the constant—and enthusiastic—support of our advertisers throughout good times—and not-so-good times.

But most of all, I’m once again thankful for the unconditional love and patience of my family, the camaraderie of dear friends and colleagues, the opportunity to write and share these thoughts over the years—and for the ongoing support and appreciation of readers like you.

Thank you!

Nevin E. Adams, JD

My new email is nadams@ebri.org.

When I’m talking to plan sponsors (and advisers) about the challenges of being an ERISA fiduciary, I’m generally inclined to emphasize the awesome responsibilities that come with the “assignment”: the impact exerted on participant retirement savings; the admonition to ensure that fees paid by, and services rendered to, the plan are reasonable; the implications of the prudent expert rule; and the liability (and personal liability, at that), not only for your own acts, but for the acts of your co-fiduciaries (and hence an urgency around knowing who those co-fiduciaries are). I’m inclined to talk about the limitations of ERISA 404(c) in providing a shield against all that potential liability.

I’ll remind them that the Labor Department considers them responsible for all participant-directed investments outside 404(c)’s provisions, and note how frequently participant directions tend to fall outside those provisions. I’ll tell them how important it is to read the plan document, and to make sure the plan is operated according to its terms. I will remind them that the power to appoint members to the plan committee has been found to extend fiduciary liability to those who do the appointing, and I will, from time to time, remind them that company stock has been called “the most dangerous plan investment,” in no small part because a group of 401(k) participants is a class-action litigant’s dream team.

And then we get a court decision like the 2nd Circuit’s recent holding in Gray v. Citigroup, Inc., and I wonder if I understand ERISA at all.

The Case

Gray is a “stock drop” case (see 2nd “Circuit Affirms Dismissal of Citigroup Stock Drop Charges”), brought on behalf of Citigroup participants whose 401(k) balances were invested in the stock of their employer, stock that dropped precipitously in value in the wake of the 2008 financial crisis, in response to the collapse of the subprime mortgage market. As is common in such cases, the participant-plaintiffs alleged that the stock was retained as a plan investment option after it was no longer prudent to do so, and that those on, and who appointed, the plan investment committee were not only in a position to know that, but to know that well before the stock tumbled in value.

However, the 2nd Circuit noted—and supported—the determination of the lower court that “defendants had no discretion whatsoever to eliminate Citigroup stock as an investment option, and defendants were not acting as fiduciaries to the extent that they maintained Citigroup stock as an investment option.” Moreover, it noted—and supported the District Court’s determination that “even if defendants did have discretion to eliminate Citigroup stock, they were entitled to a presumption that investment in the stock, in accordance with the Plans’ terms, was prudent….”

Now, how is it that the plan’s committee had “no discretion whatsoever” to deal with the company stock investment? Quite simply, because the plan document called for that as an investment option.1 That’s right, apparently the court felt that the plan fiduciaries had no choice in deciding to keep that option in the plan and available because, to put it simply, “the plan document made them do it.”2

Presumption of Prudence

As for the alternative argument, the “presumption of prudence”? Well, it’s come up before in Moench v. Robertson, a 3rd Circuit decision not only cited here, but subsequently adopted by other courts. In Moench, the 3rd Circuit found that a plan sponsor that offered stock as an investment in an Employee Stock Ownership Plan (ESOP) was entitled to a presumption of prudence.3 Moench is an older case (1995), and from a time when suits based on employer stock investments were less prevalent than today.

More recently, such cases have become nearly as routine as a 100-point drop in the Dow, and the judicial system, honoring precedent, and what it has chosen to view as a Congressional endorsement for employer stock investment in these programs, has led a growing number of jurisdictions to summarily (if not peremptorily) dismiss many of these actions. Indeed, when all is said and done, it now seems as though the courts are comfortable imposing a less stringent review of the decision to invest in employer stock than in any other investment on the retirement plan menu.4

Moreover, for those that have, since Enron anyway, worried about the potentially conflicting duties owed by certain committee members to shareholders and plan participants, the 2nd Circuit provided a moment of unexpected “clarity,” resolving with a pen stroke a dilemma that has concerned plan fiduciaries for at least the past decade by declaring, “We also hold that defendants did not have an affirmative duty to disclose to plan participants non-public information regarding the expected performance of Citigroup stock….”

Ironically, it was this very 2nd Circuit that, just a few years ago, called to mind the notion that ERISA’s fiduciary standards of conduct are “the highest known to the law.”

Perhaps they still are, but, IMHO, this decision serves only to lessen that standard.

—Nevin E. Adams, JD

Footnotes:

1 More specifically, the 2nd Circuit noted that “[a] person is only subject to these fiduciary duties ‘to the extent’ that the person, among other things, ‘exercises any discretionary authority or discretionary control respecting management of such plan’ or ‘has any discretionary authority or discretionary responsibility in the administration of such plan.’” And then it went on to decide that the plan fiduciary’s obligation to honor the terms of the plan document effectively displaced that discretionary authority.

2 “When, as here, plan documents define an EIAP as ‘comprised of shares of” employer stock, and authorize the holding of ‘cash and short-term investments’ only to facilitate the ‘orderly purchase’ of more company stock, the fiduciary is given little discretion to alter the composition of investments.”

3 More than a year ago, I noted that “in effect, this ‘presumption of prudence’ seems to have become a magic talisman against which no claim of malfeasance can be successfully alleged, much less established, simply because the courts have discovered (a cynic might say created) a presumption that holding employer stock is appropriate.” (see “IMHO: Prudent Mien?”).

4 One needn’t read between the lines here. In the court’s own words, “We reject plaintiffs’ argument—endorsed by the dissent—that we should analyze the decision to offer the Stock Fund as we would a fiduciary’s decision to offer any other investment option. We agree with the Sixth and Ninth Circuits that were it otherwise, fiduciaries would be equally vulnerable to suit either for not selling if they adhered to the plan’s terms and the company stock decreased in value, or for deviating from the plan by selling if the stock later increased in value.” (In the court’s defense, plan sponsors have, in fact, been sued for selling stock that later increased in value in a couple of rare situations.)

The 2nd Circuit’s decision is available HERE.

You might also find the amicus brief filed by the Department of Labor instructive HERE:

I recently found myself driving in an unfamiliar city without the aid of a GPS (global positioning system).

Sadly, I had become so accustomed to having that device available, I hadn’t even taken the time to print out instructions from any of the usual Internet sources, and while there were maps in the vehicle, none were of the area in question. That didn’t matter, I told myself—because I had made that drive before, had a pretty good idea of where I needed to be and, armed with a pretty reliable memory for such things, I set out with only a little trepidation.

Just about the time I was getting pretty confident in my ability to navigate without all the high-tech “crutches,” I was thrown a series of curves. The primary route was closed due to construction, the rerouting didn’t seem to take into account where I was trying to get to, an unexpected one-way street suddenly emerged going the “wrong” way, and then I found myself directed onto a parkway whose designers had apparently never contemplated the need of a misdirected driver to pull off and turn around.


In just a matter of minutes, I went from coasting along cool and confident to a state of growing concern (it felt suspiciously like panic) as I began to be drawn what I was sure was miles off my designed course, and heading further away all the time.

Then I remembered that I DID have a GPS on my phone. One that, admittedly, lacked the calm, reassuring voice of the more traditional version giving me step-by-step directions, but it was something. However, it wasn’t the ability of the device to offer routing instructions that I found most useful—the screen was too small (and my need to watch traffic too great) to do much with that feature.

The feature that saved me that day was the blue dot—that element of the GPS that, with a simple touch, will show where you are. That information, presented on the map of my surroundings, allowed me to not only find where I was, but to then visualize where I needed to be and begin heading in that direction. Oh, I missed a turn or two after that, but thanks to that locator “dot,” I quickly saw when I made those mistakes and was able to remedy them before going miles out of my way.

Most participants don’t set out on their retirement savings journey with a confident sense that they know where they are going, much less any real sense of how to get there. Nonetheless, by the time they sit through an education session (or two), make their way through the attendant materials, and try to complete the requisite enrollment forms, they may well feel that they are heading in the right direction.

And then, something happens—it doesn’t have to be an “event” like the financial crisis of 2008 (though it can be); sometimes it’s as simple as just not having had the time to pay attention to your account while the market decides to go on a losing (or winning) streak, or it can simply be a result of the preoccupations that come with those ordinary, but often unplanned, changes in your daily (and financial) life. It can be any of a series of things that pop up just about the time you think you have nothing but smooth sailing ahead; the things that crop up to suddenly “close for construction” the path you had thought you’d be able to follow for a long and uneventful journey.

At times like that—and, arguably, at any time—it’s important for participants—and plan sponsors—to have some kind of idea not only of where they want to be, but where they are relative to that destination.

Because, after all, it’s a lot easier to stay—and get back—on track the sooner you find out you’ve begun to drift from it.

—Nevin E. Adams, JD .

We spent some time this past weekend getting my eldest daughter squared away in her new apartment. It’s her first, and as with nearly all first apartments, there is a lot you need to get that you never needed in your room at home or in your dorm away at college. So we headed out to IKEA.

Those who have never had occasion to visit an IKEA store should check it out at least once. They are mammoth stores—big on the outside and seemingly even more massive on the inside. It’s the kind of store you can easily get lost in (not to worry, they have their own food court inside), and yet it’s very hard to simply get from point A to point B, even if you know what you want to buy. About the only way to get through the store is to wander along the winding path the IKEA folks have constructed that takes you—literally—through every display imaginable.1

But the really interesting thing about the IKEA shopping process is that you not only have to find what you want, you must write down the part number(s), and—at the end of your journey through this mammoth store—you must assemble the requisite pieces/boxes in the warehouse.2 You not only have to make sure that you have each of your purchases, you frequently have to make sure that you have all the (separate) boxes into which your purchase has been divided. Ironically, the consummation of that IKEA shopping experience is that you get to go home and put your purchases together.


Now, I’ve never met anyone who didn’t like the IKEA “experience.” Oh, some might not care for the quality of the furniture, or the selection—and surely I’m not the only one who wonders why I have to do all the work (I understand that it’s supposed to be cheaper, but I haven’t found it to be cheap). But it’s not for those in a hurry, and at the end of the night, I kept feeling like I should be able to present someone else with the bill!

As I was loading up the family van with our purchases, I wondered if this is how participants feel about the current structure of our voluntary savings system: one (still) fraught with a mind-numbing array of choices that have to be assembled at the point of enrollment by participants who want to do the right thing(s), but who find themselves stuck trying to follow an instruction manual they don’t quite understand, surrounded by people who seem to get it (but probably don’t, either), only to find themselves at the checkout counter wondering if they do, in fact, have everything they need—only to then have to go home and put it together themselves.

And I wonder if, when they tally up that bill, they too will observe that it’s probably supposed to be cheaper that way—but find that it’s not exactly cheap.

—Nevin E. Adams, JD

1 This turns out to be an interesting way to create the kind of “impulse” purchasing that most retail stores only have positioned at the checkout counter, as one continually wanders past interesting things that you hadn’t even thought you needed. On the other hand, the maps posted along the way that purport to show you where you are were not exactly reassuring to those in a hurry.

2 A place reminiscent of that last scene in “Raiders of the Lost Ark” (albeit with numbered shelves and aisles).