Our guest today is Nevin Adams, the Chief Content Officer for the American Retirement Association, where he is responsible for all marketing and communicating for the organization along with ASPPA and NAPA. Nevin is one of the most well-respected and thoughtful industry commentators within the retirement space, and I am thrilled to have him on the show.
In this episode, we discuss the current ERISA litigation environment and what this means for the future. Listen in to learn about the potential impact of a financial transactions tax and student loan debt, as well as the possibility of capping deductibility of retirement contributions for high earners and more.
“Bad ideas never really die—they just wait for the next administration.” - Nevin Adams
“In almost all cases, plan sponsors, if they screw up, it’s an act of omission, not an act of volition.” - Josh Itzoe
“If you accept the premise, the math is pretty simple.” - Nevin Adams
Josh Itzoe: Nevin Adams, welcome to The Fiduciary U™ podcast. Thanks so much for being a guest today.
Nevin Adams: Hey, Josh. Glad to be here, man.
Josh Itzoe: Well, I think we're going to have a far-ranging discussion, talk on a lot of different topics. As we were preparing, you said that you spent a lot of time talking on this show, and so remind me again what that was. Regulation, legislation, and what was the third?
Nevin Adams: Litigation.
Josh Itzoe: Litigation, so I think we're going to wind up talking about a number of different topics in those areas. Maybe we can start with the litigation angle. In 2020, and continuing into 2021, litigation is just exploding. I think in 2020, I saw from Groom Law Group that there was an 80% increase in new cases filed in 2019 and double what there was in 2018. I think there were 200 cases they said that were filed in 2020. There's a number of new plaintiffs' attorneys firms, I think in particular, Capozzi Adler, which brought almost half the cases I believe, and they're getting into the game. I think they've taken kind of the Schlichter playbook and they're trying to figure out how to use that or add on to that. Most of the cases, the cornerstone, the foundation is like in the past excessive fees, but there's also, I think, investments, bad fund choices, underperformance, bad plan design, and so on and so forth. What are your thoughts on the litigation environment? How are you seeing arguments evolve in these cases?
Nevin Adams: Well, actually, I would say in terms of the arguments evolving, for the very most part, the sheer volume you're talking about, I think it's ironic in a time of COVID when so many people were working from home, sheltering in place, not getting out and all this kind of stuff. To your point, litigation, it was like these plaintiffs already didn't have anything better to do, so they thought they'd spend time putting together lawsuits against plans. For years, our industry is talking about the suits that are coming against big plans are going to be directed to little plans, you need to be aware of that. They're coming down market, but they're not coming down market very quickly or very much. Pretty much still, if your plan doesn't have at least a half a billion dollars in assets, you're not likely to actually find yourself in the crosshairs of one of these suits. Now, that could change, but so far, even for some of these new plaintiffs firms, even some of the smaller plaintiffs firms, I mean, you know how the contingency fee works, and it's a percentage-
Josh Itzoe: 30%.
Nevin Adams: Yeah-
Josh Itzoe: 30% makes it worthwhile. I actually think that's why I don't subscribe to the fact that it's going to come down below market. I think maybe it gets down to a quarter of a billion, maybe a hundred million dollars, but the cost and the time involved. because there's no unit of damages under ERISA, you're just not going to see 10 or 15 or 20 or $50 million plans get sued in my opinion regularly because the plaintiff's attorneys can't make 30% of a smaller number. It's just not going to be worth the time and the headache in my opinion.
Nevin Adams: No, you're right. They're more likely to find themselves in the crosshairs of the Department of Labor, but that's a whole other thing. There have been a lot more lawsuits filed and there have been an increasing number of them settled and they're settling faster than they used to. It used to be the original cases were out there for a decade or more before they came to any conclusion, termination, whatever, so there's a quicker turnaround on that. Again, trust me, that's going to do nothing to disincentivize plaintiffs attorneys from filing these and using the proceeds from one settlement to go out and do the other. I will tell you that the quality of the filings has definitely declined. It's the kind of thing when the first ones came out in 2006 and the industry laughed at them because it was clear they didn't understand the law, they clearly didn't understand what was going on. Honestly, I see a lot of that. They're shorter than they used to be. They're more conclusionary than they used to be. The good news is, in a couple of cases recently, the courts have basically taken them to task on that and have thrown them out. I think that's good news, but the bad news is if you're a plan fiduciary, you're still going to end up wasting time and engaging the services of the council to go to court to do that filing for summary judgment, to probably go through some level of discovery and things like that. It's a real pain and it's a monetary thing. It's a distraction, It's not a good use of planned fiduciaries' money, but unfortunately, there's not going to be much you can do about it. Now, obviously, to state the obvious, again, we're being redundant, the Schlichter Law Firm is the one to keep an eye on. They're the ones that they're not just repeating what they've done before. In fact, a lot of the other firms, they're just copying what they did for this client A they're doing to B. In some cases, they have literally copied... I guess there's no plagiarism law when it comes to litigation. They've literally copied some of the Schlichter firm's filings, whole sections of text including... There's one case, I don't remember which one it was, but there were some typos in the filing and they literally copied the typos. It's like that's putting a fingerprint right there. The Schlichter Law Firm is the one that keeps pushing the edge of things. They're the ones that have introduced this notion of participant data as a planned asset, for instance, and kind of hung that out there as a possibility. They're the ones that have also gone in and done the things about the use of planned data for other purposes. They're the only ones so far that I've seen that not only win a cash settlement, but they actually win on acquiescence procedures. You commit for like for the next three years, you're going to do an RFP, you're going to impose these restrictions on the person, the RFP, and they basically stay in a position of oversight for like three years after the settlement. Even in a settlement, they're actually bringing about some changes in plan design. That's a very interesting development, I don't doubt in some ways that presents a new and diverse stream of income for them, but it's different and it's one of the things that, from my standpoint, makes them worth watching because they are going in different places, and maybe in some places where plan fiduciaries have become complacent and shouldn't, so...
Josh Itzoe:Yeah, I definitely... I think you saw in the Vanderbilt ruling is when they had advanced the participant data as a planned asset and part of the non-monetary relief, which I think is what you're talking about, in addition to the cash settlement, that non-monetary relief. I believe Fidelity might have been the record keeper on the Vanderbilt plan, but I'm not ... it escapes me. The recordkeeper agreed for a period of time not to use that participant data unless-
Nevin Adams: Well, and-
Josh Itzoe: ... a participant had opted in, if you will. I saw recently in the Shell case, Shell Oil-
Nevin Adams: ... where Fidelity was the recordkeeper.
Josh Itzoe: ... where they were is that the court ruled that since ERISA, there were a number of things, but it seemed like the crux of it is that ERISA talks about investments as a planned asset, but not data, which isn't surprising because it's almost 50 years old and I don't think it was contemplated back then. Fidelity was able to successfully fend off that claim of participant data as a planned asset. Now, that being said, I think you'll continue to see probably that argument get advanced. At a minimum, it may come down to where plan sponsors now just negotiate instead of... You now, maybe there's not a legal basis, per se, but it's more of just a best practice where we're going to negotiate with our recordkeeper and make sure that there are kind of rules of engagement in terms of how they use that data. It's funny that you mentioned just the quality declining. I really think like if you look at the early Schlichter cases, they were coming up to speed and learning about ERISA and early on they had had some... They were unsuccessful but it seemed like with every additional case they kind of honed their craft a little bit, got smarter, got better. You're seeing a lot of these. I saw, I think, in the Estee Lauder case the plaintiffs contended that recordkeeping costs should have been like $5 per year. Now, I am all for like... I'm big on fees, but that just seems insane to me at five bucks a participant. I don't know what your thoughts are about that.
Nevin Adams: Well, I mean, as you well know, what's reasonable is really a facts and circumstances thing and it's going to depend on the plan. The fallacy, and you see this in the most recent things, they go grab an average fee. They used to go to the 401(k) Averages Book, and they still go there. Now, there's a lot of people use 401(k) Averages Book for different things. It's got some limitations. We don't need to go into them. They are-
Josh Itzoe: Right-
Nevin Adams: ... but-
Josh Itzoe: ... but they're real, those limitations are real.
Nevin Adams: Yeah, and it's a published source, and so it's easy to... It costs you 95 bucks to get a copy of it and it gets cited, and so if you're a judge who doesn't really know much about doing these plans or anything like that, it looks like a credible source. After all, it's averages. People like averages. They're used to compute, all that kind of stuff, and so they... More recently, what people have been doing is they've been going to comparable-sized plans in terms of assets and they've been listing them out. Now, they're listing them out and they're going to the 5500 form to get the fee information. They're doing the quick division now. You and I both know the limitations that go into the form 5500 for that data, but again, it's a government source of information and the math is pretty straightforward. If you accept the premise upon which it was put forth, the math is simple and, again, you don't study a lot about ERISA in law school. Judges are not going to be... I mean, actually, unless you pursue it, you don't study anything about ERISA in law school. That's a whole different thing, but that's the thing, so that's the case they're presented with. Again, even if the plans are a comparable size, there's nothing that really says that there's comparable services or things like that going on, but again, all they're trying to do is get past the summary judgment, the notion that you go to the court and you say, "They haven't made a case, so throw it away." They're just trying to get past that summary judgment because the odds once you get past that initial court rebuff, and that'll take a year, sometimes two to even get to that point, your odds then of being able to negotiate to the point of settlement go up a lot. That's the game they're playing. I think in a lot of cases, they're not playing to win, they're playing to settle because their collection... Even if the amount that they get is a fraction of what they alleged to the damages were, to your point earlier, they're going to easily collect between a quarter and a third of that value and they'll get all of their expenses back.
Josh Itzoe: It really becomes a business decision, I think, for plan sponsors. Obviously, the optics are not great, and that's why I think in all of these settlements, the planned profit, the fiduciaries don't allege that there was any wrongdoing or whatnot, but that settlement... The optics are bad, but it does become just a business decision. I agree and I'm a champion for participants, but I'm also a champion for plan sponsors, and I think a lot of times with these cases, very, very few times in my career, in fact, I'm not sure I've ever... I've only come across it in one situation where there was a plan sponsor, it wasn't a client, but was very cavalier with... Didn't really care about the plan, didn't care about the participants. In most cases, in the vast majority, almost all cases, plan sponsors, if they screw up, it's an act of omission, it's not an act of volition where they intend to do it. A lot of times, I think these plaintiffs' attorneys... While on one hand, I really do... I find myself agreeing with a lot of Schlichter's arguments. Not all of them, but I do think there's a lot of common sense that they brought over the past 10 or 15 years that I think have elevated the game of fiduciaries and advisors and so on and so forth, but-
Nevin Adams: That'll end up in their filing. "Josh Itzoe-
Josh Itzoe: Whoops. What happened? Well, but I do think there is a lot of-
Nevin Adams: No, the only issue there is-
Josh Itzoe: ... a lot of this is common sense.
Nevin Adams: ... what's being alleged. You're right, their arguments are solid and they have gotten better over time.
Josh Itzoe: Right.
Nevin Adams: The issue that I always have, and I've gotten to the point where when we write about this stuff I put a caveat at the bottom, which is, "You're getting one side of the issue." This is what's being alleged, and in classic, whether you're in the debate format or whether you're in a court style, you're putting everything forth completely skewered and tilted towards one side, and in the absence of knowing what actually going on, your putting it forth is for a reasonable assumptions-type thing. That's the way you do it. That's the whole role of advocacy on this kind of thing, and so you just always have to understand that whatever they're putting forth as what happened here may not actually be what happened and may not actually have the full content of what did happen. Sadly, because of the way this works, even in our reporting of it, we very seldom see that other side of it. It's all happening sort of in the discovery process or things like that. If it actually gets to trial is the only time we really get to see that kind of discussion and people sort of bringing together both sides, which is why there's The American Century v. Wildman case, which was decided in favor of and it was proprietary funds and it was active management and it was higher fees than others and all of this kind of stuff. It was all of the little check boxes that have become kind of the litany for you can just count on being sued if you do these things. They won and they won because they had a process, they had due diligence, they had it documented. They were very solid. They did all of the things that an ERISA fiduciary is supposed to do and, as I said, did it in writing kind of thing and won. Now, again, they had to go to trial to win on this thing, and that's the important thing because what that means is that time and treasure is being expended defending something that ends up not having merit at all. That's why I think, to your point, I think that's why a lot of the settlements happen, but the cases for these plaintiffs' attorneys are winning, unless you want to count settlement as winning, and many do as money changes hands, but if you look at actual court victories, they are minuscule. They just don't happen. Usually, if the plan sponsor/plan fiduciary takes it to trial, it may only be those cases where they actually have a good case, but in any case, if it goes to trial, the fiduciaries do seem to prevail. It's like the case-
Josh Itzoe: You're going to pay a price to prove your innocence-
Nevin Adams: Oh yeah.
Josh Itzoe: ... and I had Diane Gallagher in 2020 and was really interesting just to get her perspective on... She's become kind of the poster child in the industry for like how you successfully defend yourself because that case was fully adjudicated, but it-
Nevin Adams: There's nothing like having your name being on the list of those getting sued, you know?
Josh Itzoe: Right-
Nevin Adams: I think-
Josh Itzoe: Right.
Nevin Adams: ... it's we always deal with it kind of intellectually, but the reality is when you're actually named and you get... I've had the opportunity as an expert witness, you probably have, too, but that's a rough process to be a part-
Josh Itzoe: Yeah.
Nevin Adams: ... of, even if you're testifying on what you think is fairly uncontroversial and sort of matter-of-fact, like, "This is just data. This is the way it is." I mean, that's a tough process, so-
Josh Itzoe: Right, absolutely, absolutely. Well, it doesn't seem like the pace is going to be slowing down, like you said, anytime soon, and it goes back to what we always talk about is you've got to have a process and you got to make sure it's documented and you have to make sure you're having the conversations and you can prove it. If it's not documented, it didn't happen.
Let's shift gears and just briefly talk about... It's interesting how certain members of Congress are always wanting to rob the retirement kind of kitty, if you will. Senator Bernie Sanders and Representative Barbara Lee recently introduced legislation to make public colleges and universities free by levying a financial transaction tax. What I saw was it would be 50 basis points on stock trades, 10 basis points on bonds, and then five basis points on derivatives, and they estimate it would raise something like $220 billion in year one and about $2.4 trillion over a 10-year period.
Now, this isn't the first time. It was reintroduced and then brought up before. Just kind of what's your take on that? Do you think it has legs? Do you think there's a real possibility of... I think what people don't realize, a lot of times Congress people, they don't realize that many, many, many Americans, not the one-percenters, but participate in workplace retirement savings plans and that this would impact them as much or more than it would impact probably the people that they want to target, which is the wealthy. What are your thoughts on that transactions tax?
Nevin Adams: Well, let's face it, a lot of us, I'll put myself in that basket as well, are really angry about what happened in 2007, 2008, and 2009, things that led to the Financial Crisis. The notion that we didn't see anybody go to jail, it's like there was something really wrong there. Somebody should have paid for it. Somebody... Then, of course, and you've heard more recently being talked about not only did nobody go to jail, but a lot of the people who seemingly were at the crux of this ended up coming out of it pretty well, you know, through bonuses and things like that. I think there's still even though it's been more than a decade, I think a lot of people are still sort of saying, "Somebody should have paid for that."
That's kind of the other prong of this in terms of it being brought up, the idea that there are fat cats on Wall Street that are profiting at the expense of the rest of us, and you see it. It comes up in things like the whole GameStop, the short selling and kind of thing and all of this. It is a sense that really hasn't gone away and, to your point, it was a big deal. It became sort of one of the stock answers to the folks running for the Democratic nomination. It was their answer for, "How are you going to pay for that?" There was Medicare for all or free college for all, or extending Obama... Whatever the reason was, it was a quick answer to, "Well, how are you going to pay for that?" This, of course, pre-COVID when we still worried about things for government outlays.
It was that kind of answer, and so it's a win-win because you're going after those fat cats on Wall Street and you're paying for something good. You're funding some sort of societal benefit. You're taking... Literally, I'm stealing from the rich and giving it to the not-so-rich, giving it to the poor, that kind of thing. It has a certain resonance there. To your point on how it's positioned as that Wall Street tax, it's for fat cats and all those kind of things, but it's fundamentally driven out of people not really understanding particularly how 401(k)s work.
If you think about it, people say... Think about even how it's described, stocks, bonds, derivatives. Well, who do you know that owns stocks, bonds, and derivatives? Well, you probably buy them, but most of my retirement wealth is in mutual funds. Now, do you see any mutual funds on that list? No, I don't see mutual funds on that list, but what are mutual funds made-
Josh Itzoe: What do mutual funds own? They own stocks and bonds, right.
Nevin Adams: ... and not just one. They all want something. In fact, that's the whole purpose behind investing in the mutual funds, that diversification, getting access to lots of different stocks and bonds and the mix of it. Think about target date funds, which even more so than your average mutual fund have really got an investment purpose, the ongoing rebalancing and all of that kind of thing, and the transaction of the stocks and bonds and things like that that transact over time because unlike the good old days when you just sort of bought and sat on it, now you've got professional money managers helping you invest that money and do that rebalancing.
Then, think about every time you make a payroll contribution and you go in and you buy some of this stuff and that happens again. When you pull money out, a loan, a distribution, retirement, again, you're buying and selling stocks, and so without question, this is a handy way to make money and it's buried in, so it's a little bit like an embedded fee. You won't see it, but it's insidious in terms of its effect on people's retirement and an initial way, none of these proposals... We've had these discussions with people on the Hill before about, "You need to set aside retirement planned investment. You need to look at that differently." This is not-
Josh Itzoe: Do they get that? Do they get it?
Nevin Adams: Some do, most don't care, and the irony on all of this is that some of the folks who understand that and have had that pointed out to them would say basically one of two things, but the more scary thing is they're like, "Well, it's not very much," which is ironic given how they're touted. It's like, "We're going to hammer it to the big fat cats on Wall Street," but the answer is-
Josh Itzoe: Well, we're going to raise $2.4 trillion over a decade. That sounds
Nevin Adams: ... but it's not-
Josh Itzoe: ... like it's a little bit more.
Nevin Adams: Well, and Vanguard's done some studies on this to suggest that the tax applied, it would extend people's retirement averaging in like by three years, you know-
Josh Itzoe: I know, it's incredible.
Nevin Adams: ... would eat up over the period of time we're talking about, you'd have to delay your retirement by three years, so yeah, I think a lot of them don't get it, but sadly, I think a lot of them even when they do get it, they are looking for quick, relatively easy sources of a big pot of money that, again, can be positioned as an attack on Wall Street rather than on Main Street. We keep bringing that point up and we do it every time. We've done it again with Senator Sanders bringing it up again. That's the crazy thing about Washington. Bad ideas never really die, they just wait for the next administration, so-
Josh Itzoe: Right, interesting. You know, especially if you're a Vanguard or you're a BlackRock, you're seeing massive asset inflows, but many asset managers, especially on the active side given with kind of the Vanguard effects are facing this dual pressure of they're having to lower fees and they're seeing assets flow out. What's going to happen? They're certainly not going to eat these additional transaction taxes. They're going to pass those through ultimately to the investor in the form of-
Nevin Adams: Well, and-
Josh Itzoe: ... higher and higher-
Nevin Adams: ... honestly-
Josh Itzoe: ... expense ratios.
Nevin Adams: ... and the other argument that you hear is that because they're doing all of this trading and this will slow that down and, therefore, basically you may even save money because now there's going to be less of this unnecessary trading, but again, I think it ends up being one of those sort of artificially imposed things. I don't think it slows anybody down. To your point, I think it just gets passed along. It'll be like an extra commission kind of thing and I think the person who ultimately will pay for it is going to be Joe and Suzie 401(k) Participant.
Josh Itzoe: Main Street, not Wall Street.
Nevin Adams: Yep.
Josh Itzoe: Well, let's talk about a different topic that is obviously coming to the forefront. Heard it from... You know, there's a lot of pressure on Biden to forgive various amounts of student loan debt. You guys recently came out in support of The Retirement Parity for Student Loans Act, which allows plans to make matching contributions to workers as if their student loan payments were salary reduction or retirement contributions.
There were some good things in that legislation. One, I don't think it impacts non-discrimination testing, so plan sponsors wouldn't have to worry about that, and this was really the ... I think in 2018 there was a private letter ruling where the IRS essentially were one plan gave the green light that they could do this. Then, that's where this has come from. Could you talk a little bit about that Act and why you guys chose to support? What did you think of it?
Nevin Adams: Sure. The employer you're talking about is Abbott Labs, I believe, and they announced it out, and I think what happened was we hear a lot about the impact of college debt. There's been any number of surveys and anecdotal evidence to suggest that for particularly younger workers who come out of college with enormous amounts of college debt, they are basically forestalled. It's keeping people from contributing to their retirement plans.
Anyway, Abbott Labs had this idea and because, again, their workforce was being forced, if you will, to choose between putting money into their retirement plan and getting a match or paying off their college debt and, of course, obviously, saving for retirement is voluntary and paying off your student loans, despite all of the forbearances here lately is not really voluntary. They need to make that payment. The idea was that people who were not saving for retirement were basically losing out on an employer-provided benefit because they were being forced to make this choice.
The idea is that at some level your education it's sort of part of an investment in retirement and that kind of thing and because the employers don't want to force people to make that choice between it. They don't want to sort of disadvantage people who've come out with that kind of debt and things like that. They want to basically say, "Well, if you're paying off a college loan, that's an investment in your retirement as well and, therefore, we'll be able to match that contribution as though you'd made it." Without legislation, it could create nondiscrimination problems, for instance, for right now, so that's why that provision is really important.
The idea, again, is that whatever the IRS did, and the problem, too, was that the IRS did this for Abbott Labs. They did it for like one person, but once the word got out, there was a lot of confusion about, "Can I do it? How can I do it? Why can't I do it?" It made for a lot of legal discussions about how the law works. This legislation will clear a lot of that up and make it possible. It's not the first time this kind of legislation has been introduced. Again, what happens is that it tends to come out in a Congress, but every time the Congress reforms, you basically hit the reset button.
There's a lot of employers out there I think will be very happy with this, and I think a lot of advisors who've been trying to answer the questions to their employers about, "Why can't I do this?", and all will either be glad to finally answer that or also just to be able to come to the plan sponsors and saying, "This is being looked at. This is a possibility." Again, it's legislation that's been introduced. There's a lot of things going on at Capitol Hill right now. Many of them don't have anything to do with actual cogent legislation being passed, so we'll see, but you can't get anything done if there's not a bill introduced, and so now we have a bill to work with.
Josh Itzoe: Got it. What are your thoughts on... You know, you've heard a lot from the Biden Administration and this idea of capping the amount of deductions, this concern that essentially that wealthier people when it comes to contributing to retirement, they get an outsized benefit versus somebody who's in the 10% bracket. They're getting a much smaller benefit than someone who's in the top bracket, and I believe that there was discussion around capping the deduction amount was, I think, at 26%, something along those lines to kind of try to equalize and that would be for everybody. What's your thought on that? What have you heard about that recently? Does that still have legs? Where does that stand? Where do you think it's going to go?
Nevin Adams: I suspect that, like the financial transactions tax, is something that's going to linger out there. I think the problem that the people on the Hill have is, first off, they see everything through one of two prisms, basically revenue generation, and taxes is a way to generate revenue, and deferral of taxes is being a way to sort of get back... to undefer them is a way to get revenue back.
The pitch that's long been made is what a big deal it is for employers to get this big, ginormous tax advantage, this pretax advantage. Again, when the number of working Americans is... the number that actually pay federal income tax is getting smaller and smaller, the idea is all of that benefit of pretax deferral is going to wealthier people and there are better ways to spend money. Those people are going to save anyway. We do not need to incentivize them to save. They'll do it anyway. What we need to do is we need to sort of recapture that money and deploy it in different ways.
The problem is there's a fundamental lack of understanding about how the incentives to offer a plan and to sponsor a plan and to contribute to a plan are all sort of tied in to a motivation. We also know that if people don't have access to a plan at work, they don't save for retirement. You've probably seen our data about-
Josh Itzoe: Right.
Nevin Adams: ... people being 12 times more likely, AARP has put it at 15 times more likely, to save for retirement if they have access to a plan at work than if they don't. THat's just because they could open an IRA these days. I mean, you can go online and open an IRA. You don't need to go even down to the bank to do it, but people just don't do it, so the plan is really important.
The big gaps that we've got really in terms of coverage, in terms of people having access to a plan are at the smaller end of the market, and that's particularly where those tax incentives... A lot of times, those employers, they view their retirement as being their business and one of these days they're going to take that business and sell it kind of thing. They don't feel any particular motivation to set up a plan. They probably don't even know how to set up a plan.
What they tell you routinely is nobody's asking them to do it. Their employees are not banging on their door because their employees are probably lower income, more tangential workforce, part time, part year, that kind of thing, so, of course, they're not going in and saying, "I want a 401(k) plan." They don't have the plan. Well, you take away those tax advantages, the employer doesn't offer the program in the first place, and then people don't have access to the plan and they don't save for retirement.
Plus, we have all of these nondiscrimination rules. We have top-heavy testing and things like that, but then all of this stuff is really complicated and we all know this kind of stuff, but folks on the Hill, they have to be sort of a jack of all trades. They don't really sort of wade into those waters, so they don't understand that at some level this is all interconnected and that what keeps higher income individuals and business owners from taking an unfair advantage of these programs is all of those nondiscrimination rules and tests that have been put in place to do just that.
When you look at that data, they've actually done a pretty good job of keeping contribution levels in parity with salary levels, so it's actually done a really good job of what it's supposed to do, but that's complicated. It's hard for people to understand and, as I said, there's a natural tendency anyway to sort of make it as simple as possible. It's just easier to say, "The small end of the spectrum is not getting any of the benefit of pretax and, therefore, it's all skewered to the higher income people." That's not how it actually works in real life.
Josh Itzoe: That's not actually the case, yeah.
Nevin Adams: No, plus, you ask anybody whether they would like the opportunity to put off paying their taxes, and even people who don't pay taxes now will tell you, "Yes, I would like to keep my money. I'm good with that."
Josh Itzoe: Right.
Nevin Adams: So...
Josh Itzoe: I'm re-reading a book right now called Made to Stick. I bought it, it was like 10 years ago, the Heath brothers. I started re-reading it. This is a total tangent here, but it actually ties back to this making the complex simple. We need to do that for participants and plan sponsors, but it sounds like we actually need to do that for folks on the Hill as well, and the beginning of the book, the introduction, it talks about the not true, the urban legend, but the guy who meets an attractive woman in a bar and winds up waking up the next morning in a bath tub full of ice with a tube protruding out of his back and a message to call 911. It's about like harvesting kidneys, and their whole point was that that's an urban legend, but there are a bunch of different variations.
Once you hear it, you essentially can probably retell it. It's got that hook and it's catchy and it's memorable, and a lot of times we make things... I think it was Albert Einstein who said that it's... Actually, no, it was Woody Guthrie who said, "It's simple to make things more complex, but true genius is being able to make the complex simple." We need to do a better job of that in the industry, not just for the people that we serve, but it sounds like in some ways coming up with some of these ideas that make it less complex for people on the Hill. I don't know if it could work, but maybe there's some marketing and branding ideas to be able to advance the industry's perspective.
Like you said, nondiscrimination testing I think is one of the best things that has been able to effectively create a give to get situation where you don't have businesses and business owners who are basically screwing over the little guy or little gal and taking all of the benefit for themselves.
Nevin Adams: Yeah, I think... and I'll tell you, we work at that all of the time. Again, one of the problems we've had, the turnover on the Hill is just ridiculous, and-
Josh Itzoe: There's a constant re-education. That's like a retirement committee where they have turnover at the C-suite and you have to constantly resell your ideas and what you've done. It's tough.
Nevin Adams: It is, and let's face it, this is a complicated business, but the point we try to make is is this, if people don't have access a plan at work, they don't save. If you want them to have access to a plan at work, you have to provide incentives and encouragements for employers to offer those programs.
Josh Itzoe: Right.
Nevin Adams: One of the ways you do that is the tax advantages that occur to them for setting up the plan and for making contributions to employees' accounts to do that. How do you keep it from being abused? You have all of these nondiscrimination rules that bound them in and keep them in some sort of parity with the now highly compensated workers and the top-heavy…and then, again, make sure that the benefits of the plan don't skewer disproportionately, whatever. The problem is, as anybody who's ever sat down and tried to do a top-heavy test is, it's hard.
Josh Itzoe: Right, right-
Nevin Adams: It's-
Josh Itzoe: ... right.
Nevin Adams: ... and so you end up, as you said, you could lay it all out and you can lay it all out pretty simply, but at some point, particularly if you're sort of predisposed to not completely trust that, it's hard to make the case. The case is simple, but the proof of it is complicated.
Josh Itzoe: Yeah, that makes sense. All right, so in light of that, you mentioned coverage issues and I know there's been some state-run IRA programs and stuff around that, but I want to talk about J.D. Carlson's favorite topic, pooled employer plans. It is the new product and solution de jour. It's kind of like the Gold Rush and everybody and their brother is trying to create some type of PEP. I have my opinions, but I'd like yours. What do you think about this Gold Rush to create PEPs? Do you think they have the legs to succeed?
Nevin Adams: Well, the short answer to that is, what do you mean by succeeding? I think that's actually the $64 million or $64,000 whatever it is question. I think it depends, and if you were to say, "Where do you fit on this like spectrum of things?" I think a couple of things. I think the great hope for PEPs is that they will provide an engine of growth to bring in some of these employers who have not offered a plan so far and they will then offer a plan because the PEP makes it easier for them to offer it. It makes it less expensive for them to offer it, but easier is the big thing.
I think in a lot of cases what the PEP also provides is an opportunity for the provider of the pooled employer plan to make a profit at servicing smaller plans at that end of the market that normally wouldn't really be profitable for a period of years. It gives them an opportunity to get some efficiencies of scale on things like that and to do it in such a way so that it can be profitable and because it will be there and for profitable, they will have an incentive to go out and sell those programs.
Again, we say all of the time that plans at the smaller end of the market are sold and not bought, and I think that's really true. I think PEPs will provide sort of an engine of encouragement for selling to that market and will hopefully stir up some interest at that end of the market among people that don't have those plans right now. The problem, of course, if they don't have these plans right now, they're not going to have much in the way of assets, they're not going to make much in the way of participants, so the normal gauges of success on these things, which would be assets or participants, I think are going to be or would be pretty modest. The other thing is PEPs mostly solve problems that people who have never had a plan before don't even know are problems.
I think what you're going to see with the PEPs is you're actually going to see a lot more disruption among existing plans than you will about getting new people setting up plans, so there's definitely going to be some movement. There's definitely going to be some people who have an existing standalone plan right now who because they are tired of dealing with the accountings and the audits and they may be tired with dealing with some of the planned decision-making, maybe they're finally ready to sort of let go of that committee's ability to make that one investment inclusion that they probably really shouldn't but they really like it and all those kind of stuff. I think you'll see some movement among existing plans to these platforms and I suspect that you'll see more of that than people talk about, and I suspect-
Josh Itzoe: Really?
Nevin Adams: Yeah, I do, because I think they'll be well-sold on it and I think the PEPs solve some problems that existing plans actually do know about and are interested in not having anything to do with. I don't think it's going to take over the industry. I don't think every plan in existence is going to find a PEP works for them. I think some of them are going to go to a PEP and the after a couple of years they're going to decide that they don't really like it and they'll move away from it. I think there's going to be some movement, but ultimately when the day is done, I think PEPs expand coverage. Maybe not as much as their proponents think. Probably more than the people who paid the concept want to accept, but we have a coverage problem.
We know that not enough people have access to a plan, or we know that when they have access to a plan at work, you know, the participation rate even among people making 30 to 50,000 a year, Vanguard's data suggests that that's like 82%, 78% participation, voluntary participation. I'm not talking about automatic enrollment where it's much higher, but even voluntary participation among those fairly low income people is very strong, so we'll see how it plays out in terms of... Well, what it's supposed to do is give more people access to a plan, and far as I'm concerned, anything that does that is a plus and we should take it. We should use it-
Josh Itzoe: I think PEPs are being... I think they're going to be sold. I'm not sure they're going to be bought. I mean, I think a lot of the things that you're talking about, I've seen a much cooler reception by plan sponsors who... PEPs, I think the industry is kind of foaming at the mouth and I get on one sense, "Hey, we can kind of scale this and we can make it really profitable." My biggest concern with PEPs, number one, I don't really buy the call savings element. I think when you look at it and if you structure a plan the right way, I don't think there's a huge lift cost-wise.
I get your point about being able to offload some of the administrative work and if you set aside let's just say the audit, I think you can synthesize and create essentially a PEP. You can do it with a 338. You could have a 316 fiduciary on there. You can negotiate efficient fee arrangements. I think you can still synthesize all of it. My biggest concern, and I've heard from advisors what they like about a PEP is like, "Hey, I don't need to do all of these committee meetings now. I can just do like one committee meeting for the PEP."
That is actually my major concern because I think, bias here, bias alert, I think a strong fiduciary advisor, and I've said this before, is the single most important service provider in the fiduciary ecosystem because it's typically a really good advisor that is going to have the strength of leadership and the courage to really push retirement committees to do the things that left to their own devices they wouldn't do. The wide road is a lot more comfortable to travel and I've said this before. The narrow road is a little more bumpy, but it's the road that's going to take you to the places that you really want to see.
My concern is this idea of a PEP is going to detach the advisor on an ongoing basis, not maybe a point of sale, but on an ongoing basis from being able to engage with committees. I actually think it could really have a negative impact in being able to have committees that take really ownership and embrace what it means to be a fiduciary and being really committed with accountability from an advisor to implement best practices over time. That's my biggest concern about PEPs is that you're taking away... It's going to be Kryptonite to advisors' ability to really steer committees and make the courageous decisions that their employees need there than just basically like, "Oh, here are the keys." That's my biggest concern about PEPs, if that makes sense.
Nevin Adams: No, it does, and I don't know... Honestly, I don't think you're wrong, but I would also say I think that's one reason that some plan fiduciaries are going to like the idea because I think a lot of plan fiduciaries are not when they sign on for this, and arguably they shouldn't be this way, but I think a lot of them don't realize what they've signed on for. I think the ones that are cognizant of what they've signed on for aren't always interested in staying signed on for that and, therefore, I think they might very well be interested in shuffling some of this off. Honestly, and unfairly, a lot of these plan fiduciaries think when they hire an advisor they have effectively done that. You and I both know they haven't, but they don't always know that and they frequently missassume that and I think that affects their behavior.
I think your concerns about what could happen with a PEP is absolutely spot-on, but it's also to say there's going to be somebody out there who's going to do a Bernie Madoff with regard to a PEP. They are going to... It's been done before. There is somebody out there that's going to do something bad with them. Hopefully not and hopefully they're caught early and before it does anything, but let's face it, there are human beings out there who are involved in things and inevitably they try to play too close to the edge and they really mess up. When that happens, let's not throw the baby out with the bath water.
Again, I think PEPs can be a positive force, but I think also to your point, you need to be careful about the decision to go into a PEP. You need to be careful about that PEP decision. As I said, I do fully expect that some of the people that do move in that direction will decide after a couple of years that that wasn't exactly what they wanted, either. Let's face it, there are questions about PEPs right now and we still need clarification from the Labor Department to actually step in and use these, so we got to see how this plays out.
Josh Itzoe: Yeah. Who I would argue with should be a tool in this whole box, not a hammer that thinks everything is a nail, and that's my concern when I hear about these pooled plan providers, these PPPs. Anyways, it'll be interesting to see how this evolves, but I agree with you that I think there's going to be uptick. I'm not sure. I don't think it's going to revolutionize... A lot of plan sponsors I've talked to, they're like, "Yeah. No, we're good." We actually... Now, that could be a function of being with a good advisor that has-
Nevin Adams: If you're happy... Why would anybody who's running a plan who's happy with the way it's running want to make any change at all? That's a pain. Oh my God, it's such a pain.
Josh Itzoe: It's disruptive, yeah.
Nevin Adams: Sure, and it disrupts the participants and disrupts you. It's like the litigation, it takes you off your marks. You have to focus on things you really don't have time to focus on anyway, so-
Josh Itzoe: Right, yeah.
Nevin Adams: ... yeah, I don't think anybody who's pleased with the way things are running would like, "Hey, I just can't wait to get into a PEP." I think it might be more a solution for people... As I said, we hope it is a solution for people we don't currently offer a plan, but also I think there are going to be people out there who are not happy with their current level of involvement and what they have to do in their program. I think they might see the PEP as more of a lift of a burden and they might very well appreciate that. We'll see.
Josh Itzoe: Yeah. It remains to be seen. All right, so let's as we kind of wrap our discussion, let's just talk about the updated guidance on the fiduciary role. The DOL recently issued guidance on fiduciary investment advice. Can you just share a little bit about... I know that you and Fred Reish had a conversation about this, I think, on like a podcast, but can you share a little bit about the new guidance and the impact on investment advice fiduciaries and what that's going to look like?
Nevin Adams: Sure. You know, at a high level, it's... Of course, the big surprise in all of that was this was after a lot of stern and angst going back to 2011, so it was like a decade and then it got sort of trashed aside and picked back up again in 2015. It was a big deal and lots of hearings and all this kind of stuff and got put into rule and then got dragged into the courts. Then, we had a change in administrations and right after the time change in administrations, the Circuit threw it out and probably because of the change in administrations, the idea was that the Department of Labor was not going to sort of pick that up and keep fighting that battle, but rather was going to step back from it and kind of do a rethink.
They did that rethink and they did that rethink with an eye towards what the Securities and Exchange Commission with their Reg BI was doing also. That had always been kind of an attempt that we wanted to sort of synchronize those, but I think what we had before was the SEC was kind of in one direction and the Labor Department was kind of in another direction. With the change in administrations, that is to say to the Trump Administration, they became a little more aligned intellectually. The Labor Department, I think was attentive to what the SEC had done by then because the Reg BI had been out. They had a chance to see it and sort of, if you will, kind of build on it. I think in large part they did.
Now, critics of Reg BI are probably going to have the same kind of issues with the DOL's rule. The real surprise for, I think, just about everybody is that the rule was out there and scheduled to take effect on February 16th, which was after a change in administrations. It's not unusual when there's a change in administrations for everybody to, as the Biden Administration did, to basically put a hold on everything and say, "We need to take a look at this. It hasn't gone into effect yet. Let us take a look at it."
The interesting thing is with regard to this investment advice or even a transaction exemption, the key thing that tells me it's not a rule, even though we call it all The Fiduciary Rule and we think of it that way, is it's technically not a rule. The idea was that the Biden Administration decided that they would go ahead and let this go into effect, which however you feel about the rule, from an industry preparation standpoint, I had to believe it was good news. Although we might have expected that nothing would happen with regard to it, one of the biggest problems about the developments with the change in fiduciary standards over the years is people made some really big business decisions about how they were structured, about who was offered service to a plan, about who could be a fiduciary within their group, about changes because if they didn't make a change, somebody was going to end up being a fiduciary.
They weren't ready for that kind of individual to be a fiduciary, so there was a lot of tumult that came up, so being able to sort of step off on February 16th, of course, it would have been nicer maybe if they hadn't waited until February 13th to tell us that, but at least to have that and say, "Okay, fine. Now, we can step off on this and we can kind of work with it." It's still basically going back to the old Five-Part Test, which if you've been in the industry you know what the Five-Part Test is, so you're still dealing with that.
It did a couple of different things. It tightens up some of the disclosures and gives you some level of specificity about what you're supposed to do. That's more importantly not so much in a set of recent FAQs that the Labor Department put out, that's where your helpful language about that, about the kinds of things that you need to be telling participants, particularly when you're dealing with a rollover. The rollover has been elements for us and for the NAPA, National Association of Plan Advisors, membership over time is because so many of those retirement plan advisors were working with a participant like their whole career and helping them save and that kind of stuff.
Then, they get to a point where they're ready to either change employers or just retire and they're going to take that accumulated balance and they're going to roll it over into, let's say, an IRA. Well, if you've been working with them all along based on the old Five-Part Test, your decision with your help with them getting into the rollover is a fiduciary decision. That has some entanglements, particularly since, generally speaking, investment in an IRA is more complicated and more service-intensive, if you will, than working with them in a 401(k), so reasonably, arguably it's a higher fee thing. Reasonably, arguably because it's a smaller pot of money, you might have different share class.
It might cost more money, that kind of thing, and it was problematic for a retirement plan advisor to help them make that transition as opposed to an advisor who never had anything to do with them before who just kind of wandered in or maybe saw a list of retirees or something like that, or just pick up the phone and cold call somebody and said, "Hey, I'll bet you can't invest in Bitcoin in your 401(k) plan," or, "I bet you can't invest in gold. Give me your money. We'll stick it in an IRA that I'm overseeing and we'll be able to invest a lot more passionately than maybe you can in your 401(k)."
That advisor, that kind of swinging in, grabbing the money and going out, that transaction wouldn't be a fiduciary transaction, so he or she wouldn't be subject to the same sort of restrictions and impediments in terms of offering the advice to do that a plan advisor would be. The FAQs make it pretty clear that if you're an advisor and you're doing that and you're swinging them into an IRA, even if that's the first contact you've had with them, if that's going to be sort of the beginning of a beautiful friendship, you sweep that in and that becomes a fiduciary angle.
It ends up putting an equal playing field, if you will, between retirement plan advisors and what we affectionately call rogue advisors who are out there who haven't had a prior relationship with the plan. That's really helpful because if you've been working with somebody as a part of the plan and you know their plan and you know them and you're working with them, you really shouldn't be at a disadvantage when it comes to helping them make that next big move kind of thing.
In fact, Fred Reish used to opine, said that, "If you are a retirement plan advisor now because you have that intimate knowledge of what's going on, you're actually better positioned to help that participant with the rollover decision because a part of your disclosures and your comparisons and like why this is a good decision and all of that is based on a deep understanding of their current situation so that you can effectively compare it to the new one that you're recommending." That's going to be harder if you're sort of a random advisor who's not working with the plan. That's going to be a lot harder for you to get your arms around that than if you'd been working with the plan already and you know the participant and their situation.
That's another piece of good news that I'll give Fred credit for because I hadn't thought about it, but when you talk to smart people, sometimes you'll learn.
Josh Itzoe: Fred is very smart, no doubt about it. Well, this has been a fun discussion, so let me just ask you why... At the end of every episode, I typically ask the guest, if you could give one single piece of advice to a list of fiduciaries, your best advice, what would it be?
Nevin Adams: Write it down, and I keep it simple. That's really it. We talked before about the importance of documenting the procedures and things like that, whether you're dealing with litigation or whether you're just trying to leave a legacy for the committee members that are coming on after you, or honestly, even if you're just trying to remember like, "Why did we do that anyway?" Writing it down is really important. You want to be careful about what you write down.Written things can be smoking guns, so again, you want to be prudent, but in my experience, particularly in the court of law, the courts are very accommodating to people who have tried to do the right thing and can prove that they tried to do the right thing.
You don't have to have 20-20 hindsight, you don't have to get it right every time. You can make a decision that in hindsight you might regret, but if at the time you did and you did it for the right reasons and you can prove that you did it for the right reasons, you're going to be much better off. As I said, that works all the way around, so if you're going to try and keep it short and sweet, that's what I'd say.
Josh Itzoe: I love it. You just made the complex simple. Write it down. That's the briefest and probably one of the best answers that I've heard when I've asked that question. Well, Nevin, thanks so much for your time and being on the show today. I know that listeners are going to get a lot of value out of it, so thank you.
Nevin Adams: Cool. Thank you, Josh. Great to talk to you.
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