Sequence of Returns Risk

One of the greatest risks to a successful retirement is out-living your assets. This could be caused by unaccounted-for inflation, uninsured medical expenses, or just living a lifestyle your assets cannot support for the long term. But sometimes you can save tenaciously, plan fervently, live frugally, adhere to all commonly accepted investing principles and still have your retirement nest egg dwindle. One possible cause of this scenario could be the risk from your sequence of returns.

Sequence of returns risk can be summarized as the risk from the order in which investment returns occur and the impact it has on the longevity of withdrawals available during retirement. Table 1 shows a very basic example:Continue reading

Are you worried about compliance reviews?

People don’t always act rationally. You’ve, no doubt, experienced this reality many times in life. It will come as no surprise then to learn that retirement plan governance is not exempt from this proverb.

A recently released survey from Towers Watson (and reported on planadviser.com) says that 80% of defined benefit and defined contribution plan sponsors identified regulatory compliance as a top risk over the next two years; however, only one in four (26%) conduct regular compliance reviews.

Proper plan administration is so complex that it is virtually impossible to avoid every regulatory misstep. On-going compliance reviews are essential to identifying mistakes and correcting them timely. Conducting compliance reviews require time, energy and focus. We all struggle to find time, are usually tired as a result and therefore lose focus. So it’s really no wonder that so many plan sponsors irrationally worry about something that they do nothing about.

For those charged with running retirement plans worth millions and millions of dollars and hundreds or thousands of employees, it simply isn’t a risk worth taking. For your sake, your company’s sake, and the sake of all of the employees, take the time and commit to a regular compliance review. Seeking compliance guidance can be an enormous benefit in preparing for reviews.

It isn’t particularly rational to be seriously concerned about something and then fail to address it.

But, you knew that already.

PCI’s archived blog entries are dated, the rules and statutes referenced may have changed. The analysis or guidance within these blog entries may have become stale, dated, or no longer accurate. PCI will not update or change these entries to reflect the latest analysis or development.

Can you count on your financial adviser?

You should be more skeptical of the people that offer advice about your company’s retirement plan. Hopefully, you already knew that.

The Huffington Post has an article, Proposal to Protect Retiree’s Nest Eggs Becomes Lobbying Flashpoint, in their June 14th online edition that outlines the current problem and the Department of Labor’s efforts to correct it. Sadly, it accurately reflects the state of the financial services industry.

Few of the so-called financial advisers in the marketplace today have any intent of serving the client’s best interest. They are simply financial salespeople. Unsuspecting retirement plan participants may seek out their “adviser” only to be sold a product that just happens to be offering an extra commission to the salesperson for the next 30 days. Conflicts of interest? You betcha. Pretending to be one thing, but really being something else? Uh huh.

The Department of Labor is trying to help the deceptive practices by issuing proposed regulations that attempt to expand the definition of “fiduciary” in ERISA (see our response to their proposal). A fiduciary must act in the best interest of the other party or they become liable for the bad advice. The proposal, should it become final, would limit financial salespeople from taking advantage of unsuspecting retirement plan participants.

Regulations such as this can help consumers by forcing industry to change its ways. That’s a good thing. But with it comes not-so-good things. The burden that regulation adds to industry, and ultimately to consumers, is substantial costs. Which way the cost-scales ultimately tip is often unknowable and makes me leery in general. No doubt that retirement plan participants deserve to know if the person that is offering them help is a salesperson or a fiduciary adviser.

The financial services industry has been unable or unwilling to act in their client’s best interest en masse. Now the government is determined to fix it. I only wish that I had confidence in their ability to do it. How about you?

PCI’s archived blog entries are dated, the rules and statutes referenced may have changed. The analysis or guidance within these blog entries may have become stale, dated, or no longer accurate. PCI will not update or change these entries to reflect the latest analysis or development.