Opinions August 10, 2020

Barry’s Pickings: Retirement Finance and the Bonds Between Generations

Michael Barry, president of O3 Plan Advisory Services LLC, discusses how the “circle of life” relates to retirement security.

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Art by Joe Ciardiello

Art by Joe Ciardiello

“How sharper than a serpent’s tooth it is to have a thankless child!”—Shakespeare, King Lear

Retirement is such an ancient human challenge. As humans, we are faced with two bookends of dependency. As children, we are utterly dependent on our parents. And in our old age, we are utterly dependent on our children—or at least that is how it used to be. We have, over the last 150 years “socialized” these burdens to some extent (e.g., through state education and daycare and through Social Security) and, with respect to retirement, developed “utilities” (e.g., retirement plans) that permit us to some extent to provide for our own retirement.

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But let us imagine: a stone age hunter who manages to live a long life wakes up one morning to discover that he can’t hunt any more. Unless he has a child (or there is someone else’s child) willing to care for him (e.g., hunt for him), he is out of luck.

To a large extent that was how things worked for most of human history. And we developed a set of norms/values that emphasized this need for reciprocity between generations. The obligation on the part of parents to care for their children and for children to care for their parents.

Thus, the fifth commandment: “Honour thy father and thy mother: that thy days may be long upon the land.” (Exodus 20:12, KJV) You are to honor your parents (as a child) so that you may live a long life (e.g., in retirement). Reciprocity. Most cultures developed this reverence for the old, rooted in the child’s gratitude for the care her parents had given her.

It struck me, in talking to my son about King Lear, that this play was literally about retirement—and the dependence of the old on the young. Lear wants to stop working at his job (as king) and expects his daughters to take care of him. And Shakespeare’s subject is: where the relations between parent and child are disordered, retirement may become an existential catastrophe.

But, the Singularity

All of this is very biological. And we are living in an age in which the goal of many is, for very understandable reasons, to use technology to transcend biology. Most radically, in the pursuit of the singularity—consider Ray Kurzweil’s book “The Singularity Is Near: When Humans Transcend Biology.” Understandable in that this effort is driven mostly by a desire to relieve human misery and extend human life. So that our days might be long upon the land.

So, what happens when (as in our current situation) we stop having as many children as we used to, and there are (relatively) fewer children to care for more old people? Here is a chart of the rate of growth of the human population from the year 1000 projected to the end of this century.

Annual Rate of World Population Growth (Year 1000 – 2100)

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%

-0.5%

1300

1800

1960

2040

2080

1000

1600

1920

2000

Years

Source: Retirement Savings Policy—Past, Present, and Future, Michael Barry (De|G PRESS, 2018)

When we consider the implications of this trend for retirement finance, one question is, which way does the causal arrow point here? Does the precipitous decline in population growth (beginning around 1970) reflect an increase in our ability to provide for ourselves in retirement, through the development of state-mediated old-age security programs and private retirement plans? Or is the development of those retirement savings programs a response to the decline in population growth?

Interestingly, that super-algorithm—the use of technology to transcend biology—is crucial to this process. Because without technological progress, retirement saving, whether state-mediated or private, we will not solve the problem of retirement. Here’s the simple version: if, in the future, you have fewer working people and no increase in (future) productivity, you will be poorer. You’ll just be paying a smaller number of (young, working) people a whole lot of money to take care of you. Thus, there is no “real” retirement saving unless the money saved is turned into increased future productivity—either through increased population or improved technology.

The Need for a Bond Between Generations Never Disappears

Moreover, even if “the singularity is near,” we are still going to need those norms/values—the reverence for the old, rooted in their care for the young. Because the old will still (in the end) be dependent. And without that emotional bond between generations, there will be nothing to stop young people from simply adopting different priorities—different from keeping their parents alive—and turning off the machines sustaining them to save energy. Not everyone sees a large old-age population as a good thing.

Indeed, retirement savings programs can (in fact) exacerbate this challenge, of preserving the bonds between generations. Particularly in a period of declining population growth. Because, to “save for retirement,” assets must necessarily be diverted away from the young. This is easier to see at the macro level, with respect to state-mediated pay-as-you-go retirement systems, where younger, working people must, in a period of declining population growth rates, pay more and more to provide old age security benefits to their parents.

But it also happens at the micro level—e.g., in the reduction of the legacy that parents leave their children, instead consuming that legacy in retirement spending.

And, of course, the ultimate diversion of resources from the young to the old is to just not have any children. So you can save for retirement. I hope the emptiness of such a strategy, if implemented at the level of society-as-a-whole, is transparent.

In these conditions, the need for that deep, close bond between parent and child is, if anything, even more acute.

At the risk of imposing on my readers, I would like to conclude with this meditation by George Oppen (from his poem “Of Being Numerous”) on this mystery (the same subject as Shakespeare’s Lear):

We seem caught
In reality together my lovely 
Daughter,

…

And in the sudden vacuum  
Of time ...

... is it not
In fear the roots grip

Downward  
And beget

The baffling hierarchies  
Of father and child

As of leaves on their high  
Thin twigs to shield us

From time, from open  
Time

Michael Barry is president of O3 Plan Advisory Services LLC. He has 40 years’ experience in the benefits field, in law and consulting firms, and blogs regularly http://moneyvstime.com/ about retirement plan and policy issues.
This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services or its affiliates.
Compliance August 10, 2020

More ERISA Plaintiffs Challenge Use of Active TDF Suit

A new lawsuit claims the defendants failed to compare the merits of active and index target-date fund suites managed by Fidelity.

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A new Employee Retirement Income Security Act (ERISA) lawsuit has been filed in the U.S. District Court for the Southern District of New York, naming as defendants the Omnicom Group and various individuals and committees who are alleged to be fiduciaries of the media company’s retirement plan.

The plaintiffs say these fiduciaries breached the duties of prudence and loyalty demanded by ERISA in their management and oversight of the plan’s investment menu. The complaint alleges ERISA breaches occurred when the company failed to fully disclose the expenses and risk of the plan’s investment options to participants; when it allowed unreasonable expenses to be charged to participants for administration of the plan; and when it selected, retained, and/or otherwise ratified high-cost and poorly performing investments.

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According to the complaint, which seeks class action status, the plan in question has nearly 37,000 participants with account balances and assets totaling nearly $2.8 billion. The plaintiffs specifically seek a declaratory judgment that an ERISA violation occurred, a permanent injunction prohibiting the practices described in the suit, and other forms of relief for further losses and/or compensatory damages. Like the many other ERISA suits filed in recent years, the plaintiffs also seek to have the defense pay any attorneys’ fees, costs and other recoverable expenses of litigation.

The text of the suit claims that, from at least December 31, 2009, through at least December 31, 2018, the plan offered the Fidelity Freedom Fund target-date suite.

“Fidelity Management & Research Company (Fidelity) is the second largest target-date fund provider by total assets,” the lawsuit states. “Among its several target-date offerings, two of Fidelity’s target-date offerings are the risky Freedom funds (the active suite) and the substantially less costly and less risky Freedom Index funds (the index suite). Defendants were responsible for crafting the plan lineup and could have chosen any of the target-date families offered by Fidelity, or those of any other target-date provider.”

The suit claims the defendants failed to compare the active and index suites and consider their respective merits and features.

“A simple weighing of the benefits of the two suites indicates that the index suite is and has been a far superior option, and consequently the more appropriate choice for the plan,” the suit claims. “Had defendants carried out their responsibilities in a single minded manner with an eye focused solely on the interests of the participants, they would have come to this conclusion and acted upon it. Instead, defendants failed to act in the sole interest of plan participants, and breached their fiduciary duty by imprudently selecting and retaining the active suite for the majority of the relevant period.”

The text of the lawsuit states that the two Fidelity fund families have nearly identical names and share a management team. The active suite, however, invests predominantly in actively managed Fidelity mutual funds, while the index suite places no assets under active management, electing instead to invest in Fidelity funds that track market indices.

“The active suite is also dramatically more expensive than the index suite, and riskier in both its underlying holdings and its asset allocation strategy,” the complaint states. “Defendants’ decision to add the active suite over the index suite, and their failure to replace the active suite with the index suite at any point during the class period, constitutes a glaring breach of their fiduciary duties.”

These allegations call to mind the various other ERISA lawsuits that have similarly questioned plans’ use of Fidelity Freedom Funds. These have seen mixed results, but most recently, the defense prevailed in the case known as Ramos vs. Banner Health—at least on the question of whether offering the actively managed suit indeed represented a fiduciary breach. That decision flatly states that the plaintiffs’ arguments about the performance of the active funds “fails to carry their burden to show that the Fidelity Freedom Funds were imprudent investment options,” such that the Banner defendants should have removed these funds as a plan investment alternative by the second calendar quarter of 2011.

It should be stated that Fidelity has not been named as a defendant in this case or in the other anti-active investment suits that have been filed. Still, much of the text of the lawsuit is devoted to criticizing the actively managed target-date funds’ cost and performance. Other funds and managers are also similarly called out by name in the complaint, including the Morgan Stanley Institutional Fund Inc. Small Company Growth Portfolio and the Neuberger Berman Socially Responsive Fund Class R6. The plaintiffs say these are examples of funds that consistently lagged their benchmarks but were nonetheless retained in the plan for extended periods.

The full text of the complaint, which also includes allegations that the plan fiduciaries permitted the payment of excessive recordkeeping fees, is available here. 

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