Pods, Prides and Norcs

Whales cohabitate in pods. Lions thrive in prides. Owls congregate in parliaments not to be outdone by a murder of crows.  So what collective noun will be used for gatherings of aging Homo sapiens?  The answer may very well be "norc".  But first, a thirty second discourse on evolution and anthropology.

Humans are tribal simply because it was the best way to survive that daily trek from cave to water hole.  Non-conformist Neanderthals who chose to wander off may very well have won the admiration, if not astonishment, of their fellow hunter-gatherers.  But Nature took a harsher view of these iconoclasts who were summarily eliminated from the gene pool by the local saber tooth tiger.

Fast forward to today and look no further to the fanaticism engendered by sports teams, political parties and religious sects to see tribalism taken to the extreme.  This extends to the business world as well where group-think is a time-honored way to maintain one’s station.  Think about it, when was the last time you were in a meeting where a mid-level manager contradicted a high-level executive…? Exactly.  And those with the temerity to do so are inevitably given the opportunity to contemplate their IRA rollover options.

We are hard-wired to survive and thrive in groups.   But this remains problematic for an aging population as families become separated by work force mobility and societal norms (at least in the United States) that consider the elderly a burden.  So rather than get left behind on the savannah to fend for themselves, what is there to do for older Americans?

Naturally Occurring Retirement Communities (NORCs) are not-for-profit, grass-roots entities that are helping to solve the dilemma faced by the elderly who very much want to remain independent and above all else, avoid a nursing home.  Think of NORCs as a combination of AARP and Angies’s List brought down to a local level.  Essentially, NORC members pay annual dues (typically several hundred dollars) and in return get access to multiple services that can empower them to remain in their homes much longer than they might have otherwise; a major objective of most retirees. 

NORCs can provide access to pre-vetted repairmen who will work at discounted rates.  Ride share programs are available that can help that visit to the doctor or physical therapy much easier.  And beyond these practical services, NORCs provide a social outlet through academic lectures, trips to local cultural institutions and seminars ranging from how to navigate a smart phone to long-term care and estate planning (Wake up financial services industry!).  This is not to be discounted as more and more elderly Americans, and women in particular who tend to outlive men, are forced to live in social isolation.   This in turn makes the elderly increasingly vulnerable to financial scams so there truly is strength in numbers.

It’s surprising that the power of NORCs has yet to be embraced by the financial services industry which has a significant stake in the lifestyles of the elderly and their families (code for cross-generational marketing).  An organization with vision can help jump start the creation of NORCs by providing coordination among local hospitals, universities and social services. Imagine the loyalty that would result from helping a high net-worth client’s parents maintain a dignified retirement lifestyle.  Instead, the industry remains obsessed with the arcana of alternatives and other highly speculative investments.

 

If asked what is more important, the beta of their bond portfolio or avoiding a nursing home, the answer from most seniors would be quite clear.  Something to contemplate as that gaggle of geese flies overhead.

Ode to ERISA

It's just too easy these days for the armies of pundits, bloggers and tweeters to criticize in no particular order, the President, Congress, the Fed or any other person or institution that may appear overwhelmed by a world in turmoil.  So in the spirit of looking at the positive, this post will offer a bit of praise to an incredibly successful piece of retirement legislation that doesn't receive the recognition it deserves - The Employee Retirement Income Security Act.  Granted, it's hard to imagine John Keats waxing poetic about pension reform.  But there's integrity in this seminal legislation that for the most part has delivered beyond expectations.

Before ERISA, it was open season on pension fund assets.  There were no funding guidelines or fiduciary standards and as a result many plans were underfunded, subject to onerous vesting or simply pilfered.  (Think of handing over your retirement savings to Johnny Friendly - the union boss played by Lee J. Cobb in On the Waterfront). Then the Studebaker Motor Company went bankrupt and most pensioners discovered they would be lucky to get fifteen cents on the dollar.  That occurred in 1963 and the outrage that followed heralded the birth of ERISA in 1974.

It took some time but when you stop to consider the trillions of dollars that have become part of our retirement system and the relative lack of malfeasance relating to ERISA-protected plans, it truly is remarkable.  ERISA is much like a baseball umpire or football referee that you take for granted until a blown call. The regulations are far from perfect (not unlike instant replay) and provide lifetime employment  for legions of attorneys, pension consultants and actuaries.  And are they ever complicated (Every Ridiculous Idea Since Adam) as every plan sponsor, administrator and recordkeeper knows.

But for the most part ERISA has been effective in keeping the bad guys at bay at least from retirement assets. (No doubt Johnny Friendly's grandson is off the Jersey docks and managing a hedge fund across the Hudson.) It's especially remarkable when taking into account how complex 401(k) plans have become (daily valuation, loan provisions, self-directed brokerage, in-plan Roth conversions etc.) and the advances in technology that make it that much easier to separate retirees from their savings.

This is not about whether the shift from defined benefit to defined contribution plans has shortchanged retirees. Or that companies have put the needs of shareholders (code for the c-suite) ahead of employees by exploiting the ambiguities of ERISA.  And that too many well-meaning plan sponsors have been duped by the siren song of Madoff and his ilk over the years.

Sad to be sure. But given the magnitude of the assets at stake and the infinite cupidity that relentlessly stalks big money like a pride of lions, the guidelines have held up against enormous odds.  So whereas Keats had his Grecian urn, retirees have their 401(k)s to contemplate.   And they need to remember that even with ERISA, it never hurts to double check that statement now and then.

The New MPT

Retirement income planning isn't about making clients money; it's about making their money last.  This is the most fundamental change in thinking that investment advisors and financial planners must understand as clients enter the income phase of retirement.  Like it or not, relying solely on asset allocation and bucket strategies isn't the answer for most.  And yes, for many clients needing a guaranteed source of income, annuities can play a role. (A certain blogger will never forget his incredulous reaction when the concept of a SPIA was first explained.  The insurance company gets the money and the client can't get it back!)

But relying solely on annuities isn't the answer.  (That same blogger will never forget the incredulous reaction of an agent who asked in wonderment why anyone would choose a mutual fund over a variable annuity for their IRA rollover.  Mutual funds don't have a death benefit!)  And immediate annuities aren't a panacea for everyone with a retirement income need.  Like it or not, clients need a growth and income component in their portfolios free from M&E and surrender charges.  Clearly, the answer lies somewhere in between.

Income, not age, will trigger retirement for most.  But in spite of the focus on income planning, many advisors and Boomers remain at a loss. That's because transitioning a nest egg into an income stream is one of the least intuitive, but most important planning steps to get right.  Yet this is a generation that's been raised on margin, Magellan, and managed accounts.  In addition, income solutions (code for annuities) are complex and in many cases advisor / client objectives are not aligned (code for "annuicide").

Adding to the challenge is the fact that retirement income planning has no clearly defined process or end point. Accumulation planning has relative structure in the form of Modern Portfolio Theory and all those Greek letters.  Then there's salary deferral, contribution limits and a point in time when clients will at least stop working full time.  And the money making side of the equation also has iconic figures like Peter Lynch and Warren Buffet, not to mention the fictional Gordon Gekko. It's hard to imagine a Hollywood blockbuster based on an actuary or bond fund manager called Wall Street: Duration Never Sleeps.  The same wouldn't be said of the audience.

Income planning is like modern art; abstract, open to interpretation and with no clearly defined end-point (Modern Picasso Theory?).  But what's especially troublesome is that most advisors are significantly behind the curve when it comes to the basics of Social Security benefits, let alone the nuances required of quality income planning.  Bull markets allowed many advisors (and "self-service" investors) to get away with ham-handed, dart board accumulation strategies resulting in unprecedented  hubris and BMW sales. (The entourage of wholesalers, branch, regional and home office management also enjoyed the ride.) But that won't work given the compressed time horizons faced by retirees stretching for yield in a low interest rate environment. 

It's essential that advisors and agents play the role of docent by helping clients make sense of what they are looking at as they gaze at the distribution phase of retirement. Those same advisors and agents must open their minds and recognize there's much to learn before doing so.  Perhaps the first step is heading down to the local art museum.