A start on How to focus on Professional Practices

Earlier this year, Pete Swisher of Unified Trust was interviewed by the CFDD for its' internet broadcasting station. The topic discussed was New Directions For Professional Practices. The discussion centers around how recent Health Care legislation may impact the 'M & A' activity in this industry and the impact on Qualified Plans as a result. It also touches upon the unique plan design sales opportunities. It is worth the listen. Below is the link.

click here

In Plan Roth Conversions

The Small Business Jobs and Credit Act, which was signed by President Obama in September 2010, permits 401(k) and 403(b) plans that have a Roth deferral program in place to also provide for an in-plan Roth rollover provision. This will be extended to 457(b) plans for plan years beginning after December 31, 2010.

An in-plan Roth rollover feature allows a participant who is eligible for a distribution to roll any vested amount to an in-plan Roth rollover account. If amounts are converted in 2010, the taxpayer can choose to recognize the income in 2011 and 2012 instead of in the year of the roll over.

Previously, a participant who wanted to convert to a Roth had to do this outside the retirement plan by rolling the money to a Roth IRA.

For more general information on implementing this feature, please follow the link to more frequently asked questions. Click here.

Dynamic Asset Allocation Strategies

Dynamic Asset Allocation strategies are very useful policies for defined benefit plans. What does this type of policy entail? Well, it means that the investment manager is actively looking at a defined benefit plan’s actuarial valuation and using that information to then develop an independent measure of funding status in the interim, on a quarterly basis – an analysis uncommon in an industry focused on capturing alpha or liability driven investing alone.

Funded status is the primary driver of the plan’s allocation within the plan’s Risk Category (or fixed range of allowed equity exposure). This process allows the investment manager to swiftly take action whenever market conditions change through tactical adjustments to the plan’s allocation. This should be fully defined in the IPS and reported in the Fiduciary Monitoring Report; as such, it eliminates the need to obtain approval at the committee level for a change in the plan’s investment strategy every time market conditions drastically change versus the parameters prescribed in the plan’s IPS. The process is documented and anticipates a prudent course of action ahead of these changing market conditions. The focus stays on the funded status of the plan and not simply capturing investment performance.

This is an important approach when investing in a liability driven environment such as the retirement market. Our clients are widely diversified demographically speaking, and present us with a variety of goals that they hope to accomplish within a very real and finite period of time. It's usually less time than is necessary. By focusing on the anticipated liability of a pool of assets (such as defined benefit assets) or individual participant accounts, it is much easier to implement a strategy that either helps the client achieve their goals, or at least, helps them narrow the gap between where they currently are and where they wish to be in the future. Dynamic asset allocation strategies and managed participant accounts not only assist the client with determining where they currently are with regard to meeting their goals, but they vastly improves the probability of reaching their goals, as well. It's compelling evidence for a client, and a service provider, to know that an actual solution is being provided.

Ding, Dong the prospectus requirement is finally dead, dead, dead!!! - Participant Disclosure Regs

The DOL just published the final regulation on participant disclosures, completing a process started several years ago with a three part regulatory initiative to improve transparency:

1. New disclosures required on Schedules A and C of the Form 5500, effective in 2009

2. 408b-2 point of sale disclosures, published recently and effective July 16, 2011

3. Participant disclosure rule, effective sixty days from today, but with disclosure requirements that don’t kick in until plan years beginning after November 1, 2011 (2012 for most plans).

The rule is a “final” regulation, and appears to track the Bush administration’s version closely. One key element: the Bush administration decision to eliminate the 404(c) prospectus requirement survived the final regulation. No more “forced” prospectus requirement. Good riddance. Fiduciaries will still need to provide prospectuses on demand, but that’s easy.

What does this new rule mean to advisors? Not much. The real burden will be on plan providers like Unified Trust, who will need to retool systems to deliver information in the prescribed format. It’s worth noting, also, that the basic nature of this rule is that it puts the burden of compliance on plan fiduciaries, not providers: DOL interpreted ERISA Section 404(a), the Fiduciary Duties, especially the prudence and exclusive purpose rules, as requiring disclosure to participants. Realistically, however, the burden is on providers, and there are provisions allowing sponsors to rely on data providers give them.

Here’s a link to the DOL website, where you can download the full regulation and the Fact Sheet: http://www.dol.gov/ebsa/. Stay tuned for more info on what it means to you, your clients, and your business.

- Original Content credit to Pete Swisher, Unified Trust Company.

Automatic Savings: A Case Study

Recently, Dan Ariely (author of The Upside of Irrationality) published an article in the Harvard Business Review. In this article, linked at the bottom, he describes a public pension system in the country of Chile that looks very familiar to a mandated version of the provisions the Pension Protection Act of 2006. It seems that Chile subscribes to the notion that if they can remove emotional bias from the equation, the net effect would ultimately be an increase in retirement income adequacy for their citizens.

....In Chile, by law, 11% of every employee’s salary is automatically transferred into a retirement account. Employees select their preferred level of risk, with the following restrictions: They may not choose either 100% equities or 100% bonds, and the percentage of equity that they can select diminishes as they age. When employees reach retirement, their savings are converted into annuities.....

That sounds a lot like Automatic Enrollment and QDIA usage. Good ideas, no doubt. Behaviorally, it recognizes that inertia in decision making regarding money is a very real problem. Forcing the savings and forcing the reduction of risk over time probably seems like a diminishing of freedom in the absence of an opt-out clause. However, in the U.S. over the past 25-30 years, the data on retirement readiness never changes. Participants covered by plans are on a path to failure (inadequate income replacement rates) to the tune of 4-1, that's a rough composite stat, but you get my drift. The article points out that people are not good at two aspects of financial planning for retirement:

1.) deciding to save and
2.) eliminating risk in later years

We think that participants in retirement plans have more challenges thant that. After deciding to save, it is difficult for them to determine how much is truly affordable and how much is truly necessary. Additionally, participants are challenged in general when it comes to investing even with a little (or more) education. Common mistakes range from investing 100% in cash (overwhelmed behavior) to overly aggressive investing (gamblers behavior, aka performance chasing). The Chilean system, however does something very smart. It acknowledges that people who enroll in retirement plans are reasonably good at managing their own risk. So, while the investment choices are left to the individual, the choices are limited exclusively to asset allocation portfolios with a fair degree of diversification.

I think I once heard someone say that the safest plan is one that is 100% invested in QDIAs. Now that was in the context of fiduciary safety, so perhaps not directly applicable, however, the elimination of fear based and gambling based decision making by limiting the options only to models is a terrific idea.

This type of design structure is available in the U.S. today inside of 401(k) Plans. At my firm, we call it The Success Pathway. But unlike in the Chilean system, the participants still will have the freedom to opt out of the plan or any of its auto provisions.

We applaud Chile for taking a strong position on embracing a plan design that shows it leads to better outcomes for the folks it serves.

Please click here to see the full text.

Senate Passes Roth 401(k) Rollover Provision!

Today, the Senate passed a small-business jobs bill, H.R. 5297, which among other things would allow employers to amend their 401(k) plans immediately to allow participants to roll over pre-tax account balances into Roth 401(k) plan accounts.

The House has not yet acted on the proposal, and it remains to be seen if this will make into law. However, this step by the Senate is a very encouraging sign that this feature will at some point make it into law whether attached to this bill or some other.

According to the bill, it would also allow for some spreading of immediate tax over several years. For example, if a participant were to convert their pre-tax deferrals to a Roth 401(k) this year, taxation could be elected to be paid in 2011 and 2012.

We see this as a big step in increasing tax flexibility to be in line with what is currently available in IRAs. Additionally, another very real benefit is that in 401(k)s, often times the institutional pricing structure of the underlying investments makes this a better deal than for those in IRAs where mutual funds and the like are generally retail priced and thus more expensive. If passed, this could be a strong incentive for investors to finance their retirement from their 401(k) Plans rather than rolling to IRAs and financing that way. Every bit helps especially with the coming wave of retiring baby boomes.

Impact of the elimination of 12b-1s on retirement plans

The SEC recently published new rules governing 12b-1s and sales charges in general. These are proposed rules and will be in their comment period until November 2010. Final rules are unlikely to be effective sooner than two years from now due to the substantial cost and effort of transition. These are big changes for the brokerage industry, much less so for retirement plans.

Basics of the New Rule:

• 12b-1s Are Dead
These are replaced with 12b-2s and 6c-10s. The 12b-1s are being phased out and replaced with a combination of a 25bp “marketing and service fee” (the “12b-2 fee,” though SEC wants everyone to stop describing it using a Rule number) and an “ongoing sales charge”.

• Lower Lifetime Cap
The maximum ongoing sales charge will be capped at a level lower than what is currently possible under FINRA rules, representing a slight pay cut for brokers under certain circumstances. The change is mainly procedural except in that it eliminates C shares and alters the profile of B shares slightly.

• The “X-Share”
Creates a new “Account Level Sales Charge” option that allows ANY share class to be sold at NAV with no fund level sales charges, and a sales charge is instead assessed at the account level in the same way a fee is assessed. No limits on the amount of such account level charges—just like in the fee-based world.

• 5 Year Grandfathering of 12b-1s
Grandfathers existing share classes for five years after the implementation date, which is realistically about two years out from August 11, 2010.

• Some Forms of Revenue Sharing will Continue
Forms of revenue sharing other than 12b-1s continue to be acceptable, so shareholder servicing fees and sub-transfer agency fees are not affected. The new rules are concerned solely with sales charges. A fund can have a 25bp marketing and service fee, a 25bp shareholder servicing fee, and a 10bp sub-t/a fee, presumably all at once, without being affected by the new rules. But, remember that brokers can’t get paid by shareholder servicing and sub-t/a fees.

Impact on Retirement Plans:

• The Need to Track Share Lots…At Considerable Expense.
A side effect of the new rules is that, in order to keep track of the maximum permissible “ongoing sales charge,” recordkeepers will have to begin tracking share lots, which virtually no one in the industry does today. Building the systems to do this will be expensive and annoying, and will in reality have minimal impact given the relatively small percentage of funds affected. ASPPA Executive Director Brian Graff is considering a push for a retirement plan safe harbor that would allow a flat annual charge (e.g., 50bp) in addition to the 25bp marketing and service fee, and that charge could be perpetual so no share lot accounting would be required. Absent such a change or something with similar effect, recordkeepers will have a job ahead of them, the costs of which will presumably find their way to participants.

• Retirement Share Classes are Dead
R shares (or N shares, or whatever the fund families call them—think American Funds R3) are dead for new plans. They’ll probably be replaced by “X shares” (i.e., any share class that invokes the account level sales charge exemption) or fee-based accounts. The general trend toward fee-based work would seem to have been given a boost by the new rules.

• B and C shares are Dead
They never really belonged in retirement plans anyway.

• Share Class Conversions Will Chew Up Time for the Recordkeeping Industry.
Regardless of whether SEC creates a safe harbor for retirement plans, there will be a rush to do share conversions to share classes that allow brokers to continue getting paid for what they do beyond the grandfathering period. That’s a lot of work, sort of like the work the industry had to do when Rule 22c-2 was created (the SEC Rule concerning redemption fees and trading restrictions to limit market timing and other abuses). Work is cost, and distracts us from our mission, so it will have an impact, but it’s one-time.

• Impact Localized to Small Plans.
Naturally, the impact will be almost exclusively in the small and micro plan markets since those are the only places to find 12b1 fees above 25bp currently. But it’s important to remember that 80% of all plans have fewer than 100 eligible participants; so this change affects most plans.

Impact on Unified Trust Clients and Advisors

Our interpretation is that there will little to no impact to our business model. Our average revenue share from all sources tends to be way below 25bp, and we only trade a handful of funds (e.g., old American Funds R3 shares we’ve not yet converted to R5 for operational reasons) with 12b-1s greater than 25bp. Payments to advisors have nothing to do with the 12b-1s since we follow the Frost model with 100% fee recapture. Bottom line, the new rules are not a big deal for Unified Trust, its clients, and the advisors who serve them.

What to Do If You’re an Advisor

Accelerate your movement to a more fee-style model. Use this opportunity to approach all of your plans that have fund family products and evaluate if any changes make sense. Such as a move to Unified Trust.

Credit to Pete Swisher, Senior Institutional Consultant at Unified Trust Company, N.A. for above content.

Benefit Adequacy is the Focus

The DOL's Assistant Secretary for the EBSA is lighting a fire under the dialogue concerning retirement income for 401(k) participants (or the lack thereof). In a recent article published by Fred Reish, entitled, "Adequate Benefit and Monthly Income", the discussion is expanded to include topics such as benefit adequacy, success measurement, distribution planning, and more. Reish presents a number of questions that providers, plan sponsors, and participants need to be able to answer comfortably. For example:

-Is your 401(k) plan providing an adequate percentage of final pay for your employees in retirement?

-How is benefit adequacy measured for 401(k) plan participants and is each participant aware of where they stand?

-How much does a participant need each year in retirement, and how do they make it last for a lifetime?

-How much can a participant feasibly withdraw each year to make their income last a lifetime?

These are all good questions. It's our belief that Fred Reish absolutely nailed it for those asking questions like, "What is the prevailing concern for most participants and plan sponsors with regard to saving for retirement?" and "What should I look for in a provider to ease participant concerns over accumulating retirement income?"

Please click here to view the article in its entirety.

New 408(b)(2) Regulations Released

In February of 2009 we sent out to you a notification (see below) regarding the White House’s decision to put on hold on all proposed regulations while the administrations were in transition. As you are aware, one of those regulations was the proposed 408(b)(2) amendments dealing with Fee Disclosure, Conflicts of Interest and Prohibited Transactions. In case you were not yet aware, this past Friday, July 16, 2010 the DOL released an “interim final regulation” under ERISA Section 408(b)(2) which will be effective on July 16, 2011.

After reviewing this new “Interim Final regulation”, in my view, these are some of the more important points.

1.) Written Disclosure instead of formal written contract or arrangement. This means that for all plans, the contracts in place now will not have to be amended or re-written, but rather a written notice should be sufficient.

2.) Clarified what it covers – Covers All Qualified DC/DB Pension Plans.

a. ERISA 403(b), 401(k), DB and Profit Sharing Plans are included.
b. SIMPLE IRAs, SEPs, IRAs, Non-ERISA 403(b), 457(b) and 457(f) are not included.

3.) There are now ‘Out Clauses’.
a. There is now a De minimis exemption for provider’s whose annual compensation is less than $1,000
b. There is also a “good faith” exception for providers who make a disclosure error as long as it acted in good faith and corrects the issue within 30 days of discovery.

4.) Conflict of Interest disclosures have been substantially reduced. The prior rule required explicit identification of all conflicts of interest. Instead, the DOL is relying on the compensation disclosure rules to address the issue. In other words, it is on the Plan Sponsor to identify the conflict based on following the money trail…..

5.) Fiduciary Status Disclosure – the new rule requires that only one reasonably expecting to be serving as a fiduciary or RIA clearly says so. The old rule required you to state in writing if you were or a fiduciary or were a not a fiduciary. This brings up the old issue of functional fiduciaries whose Broker Dealers do not allow them to serve as fiduciaries, thus the conduct of the rep is in conflict with their contract with the plan. Under these new rules, the registered rep must state if they are a fiduciary, and if their contract with the plan states otherwise, is that contract reasonable? This could be interpreted as a Rule 4975 Prohibited Transaction. See this article on The Broker’s Dilemma from 2008, for the full issue at hand.

For a complete interpretation of the new regulation and the practical impact of it, please link to the article by Pete Swisher entitled, ‘What the DOL’s New 408b-2 Rule Means”.

If you are looking for a more concise view of the main differences between what the previously proposed rules were vs. the important changes, please see this Bulletin published by Fred Reish and Bruce Ashton of Reish & Reicher by clicking here.

Unified Trust in HR Magazine

Unified Trust's Founder and Chief Executive, Greg Kasten, is a board certified anesthesiologist. In the mid-1980s, he brought the doctor-patient mindset to the realm of investment management with the purpose of providing high level fiduciary services to individuals and plan participants. He and Unified Trust, were recently featured in an article by HR Magazine, entitled, "A Higher Standard of Care". Click here to view the article.

IRS Is Auditing Retirement Plans Remotely (Sort of)

A quick client service tip, FYI:

On May 17, 2010, IRS sent questionnaires to 1200 plan sponsors. The questions cover the same ground IRS covers in an audit, but not comprehensively. If one of your clients receives one of the questionnaires, be aware of the following:

• This is not an audit, but it can lead to one.

• One risk to the sponsor is that an answer might lead to an audit, and once a plan is under audit it is no longer available for the self-correction or voluntary compliance programs (SCP and VCP, part of EPCRS, the Employee Plans Compliance Resolution System). They could be forced instead into Audit CAP, the penalties for which are much more serious. For this reason, it is best to treat the Questionnaire as an audit even though IRS says it’s not one.

• Clients will want help with these. If a Unified Trust client gets a questionnaire, we will complete it for them except for any information we do not have.

Here’s a link to the IRS overview of the project: http://www.irs.gov/retirement/article/0,,id=223440,00.html

Here also are some of IRS’s FAQ answers:

What is the 401(k) Compliance Check Questionnaire Project?

The 401(k) Compliance Check Questionnaire Project is a compliance check project being administered by the Employee Plans Compliance Unit (EPCU). This project is designed to be a comprehensive look into 401(k) plans to determine potential compliance issues, gain a better understanding of the reasons for noncompliance and determine any potential plan operational issues. This project will also assist us in developing additional education and outreach materials to improve future compliance and help us determine where best to focus our enforcement efforts.

Why was my plan selected?

The 1,200 plans selected to receive this compliance check were selected at random from 401(k) plans that filed a Form 5500 for the 2007 plan year.

Is this an audit?

This is a compliance check, which is neither an audit nor an investigation under IRC section 7605(b) nor an audit under section 530 of the Revenue Act of 1978. This is not a review of an organization’s books and records.

What is a compliance check?

A compliance check is a review by the IRS to determine adherence to certain compliance requirements under the Internal Revenue Code.

Am I required to respond to this compliance check?

Yes, a compliance check is an enforcement action which you must respond to. Failure to respond, or to provide complete information will result in further enforcement actions which may include an examination of your plan.

Hodge Podge, Loose Ends and Good Ideas....

Over the past few months there have been a lot of topics being discussed as various bills get proposed, some get passed, many sunset and others get extended. Some of the topics that have been written about repeatedly include “Roth or Not Roth”, the issues of the proposed participant-level advice regulations, the old argument of passive vs. active and even a resurgence in the question of which is better Collective Trusts or Mutual Funds. Each one of these could render itself to lively debate on its own. Instead, what we thought we’d do is put together a few different, smaller thoughts, in one place that on their own aren’t enough to make a full discussion. Here goes:

Idea #1: For those of us operating in environments where we are fiduciaries or permitted to act as fiduciaries, a good idea is to create a value statement that acts as a good faith agreement. This idea was cited recently online called a Fiduciary Oath. This type of statement, signed by you and by the client is a great way to cement expectations. Click here to view a sample of what that could look like.

Idea #2: Preaching process and procedure to Plan Sponsors is a great idea. Giving them a process and procedure is a better idea. Performing the process and procedure for them is the best idea. Click here to access a guide to good Plan Sponsor health and a list of best practices from which every plan can benefit.

Idea #3: Little known or discussed, but very important is ERISA §411 which discusses the limitations imposed by the code on who may or may not serve as a fiduciary to an ERISA plan. Most plan sponsors do not routinely perform background checks on providers they hire to perform services to their company, while they do when hiring someone internally. Coaching plan sponsors and providing them a mechanism to ensure that ERISA §411 is adhered to is a value-add service that also helps in cementing the trust relationship. Click here to view a form for this use.

I'm a Fiduciary, What Are You?

It’s interesting to observe how trends affect one’s life from time to time. Ordinarily when one thinks of trends, they think of it in the context of the social side of life. For example, trends in music, fashion, television, etc. Every now and then trends start to appear in the professional world as well. One emerged trend of the last several years in the 401(k)/Pension business is the trend towards offering fiduciary services. Of course with this comes the inevitable misusage of the term fiduciary and a variety of marketing terms and sales gimmicks intended to take advantage of the trend without actually providing anything in return. Through the course of travel my coworkers and I often get many of the same questions surrounding ‘fiduciary’. Confusion in this area isn’t surprising as there is a lot of market noise, from the marketing terms like Co-Fiduciary or the sales tools like Fiduciary Warrantees to the newest trend, the selling of specific code sections as the different flavors of fiduciary.

We’ve all seen the various new categories of advisor; ERISA §3(38) Investment Manager, Full-Scope §3(21), Limited-Scope §3(21) and so on. On Linked-In there are lively discussions about it, articles are being published on it on Morningstar.com and an unfortunate result is some general confusion from a lot of Advisors of ERISA plans on what all of this is and what they should or should not be calling themselves or doing, not to mention what they’re allowed to do or not allowed to do under their Broker/Dealer contract if they are a registered rep. For that reason, we have created a new piece as an attempt to simplify and consolidate the most recent array of terminology.

Select the following link to view the complete document – Fiduciary…A Different "F" Word.

What Drives ERISA Plan Service Provider Changes Now

The article recently published in PlanSponsor Magazine, entitled, "After the Storm: A year after the market meltdown, a new provider landscape emerges" elaborates on those factors now contributing to plan service provider changes within the ERISA clientbase. Some of the factors are highlighted below:

-“Flight to Quality” -- dependable partner
-Institutional credibility
-Committed to the business and demonstrating organizational strength and stability
-Most employers focusing intensely on their core business = less RFPs
-Fee benchmarking currently motivates many sponsors to begin a review
-Reluctance to jump ship just because of bad investment performance
-Personalize service delivery to participants
-Ease of doing business for sponsors and participants
-Fiduciary support and risk management
-Ensuring adequate investment monitoring