Thursday, November 17, 2011

Practical Differences of Various Fiduciary Services

Over the last several years, there has been a growing level of awareness surrounding the various roles that retirement plan advisors and consultants play when serving their clients. The increased awareness can be attributed to the establishment of organizations dedicated to promoting fiduciary best practices, as well as the increased exposure to content available at a growing number of industry conferences. Not surprisingly, this has led to the creation of new business models, new credentials and new expertise.

The sections of the ERISA dealing with fiduciary responsibility, in name, have evolved into marketing terminology. For example, ERISA §3(38) Investment Manager is now a bell or whistle made available by the advisor or the service provider. An unfortunate side effect of this trend is the wide disparity in the quality of the delivery system. Some claim to be ERISA fiduciary “experts” using ERISA fiduciary as a sales feature, when really their expertise is in sales or asset gathering. Even among genuine experts, there are many who lack the depth in understanding the many nuances that distinguish the roles. In a recent competitive situation we observed an advisor team, acting as an ERISA §3(38) Investment Manager, state to a client that they are equivalent to a fully Discretionary Trustee, but that they could do it for less. This claim, in the form of salesmanship, was plainly inaccurate and disappointing, yet it happens all too frequently.

While we find that the uptick in the use and discussion of the various fiduciary roles exciting on some levels, the misuse that occurs with client consulting can be problematic. In the example above, by that advisor claiming that selecting funds for their client is the same as a being a fully discretionary trustee, it substantially diminishes the robust list of services provided by a discretionary trustee that goes well beyond fund selection. Many of those services are equally, if not more, important to the Plan Sponsor and the participants. For that reason, we have created a comprehensive chart that explains the PRACTICAL differences for the various fiduciary services available in the market. Click here

Tuesday, November 8, 2011

401(k) Advice, Good but only if Used

There was an article in the Wall Street Journal yesterday titled 'Thanks but No Thanks on 401(k) Advice' found here.

The gist of this article is that more and more 401(k) plans are offering outside help in the form of participant level investment advice, but that uptake on this advice is generally low.

The fact that more plans are giving participants access to advice, in one form or another, is a very good thing or at least it should be. Many surveys show that formal advice leads participants to better decision making and that leads to better outcomes in the form of income replacement rates. However, if only 25% of the people who have access to advice through their retirement plans actually take advantage of it, then this is an issue. My feeling is that many if not most of the advice programs out there are good, very good or great. So why aren't the participants using these services? I have my thoughts.

Firstly, from a behavioral perspective, it has been my experience that many participants would be better described as speculators rather than investors. The key differnce is in expectations. Investors have an expected return on investment (ROI).

Ex.) I invest $10,000 in a 4% bond, I have an expected outcome of 4% interest for the term of the bond and a return of my $10,000 when the bond matures.

Most participants in 401(k) plans do not have an expectation of ROI, rather what they have is hope. I think, in part, this stems from the experience level of most participants as it pertains to investing. The great majority of investment professionals set minimum requirements on who they will look to as potential clients, such as net worth, or minimum investment amounts, e.g. $250,000. Many 401(k) participants would never qualify to work with investment professionals and are ill-equipped to understand the basics of investing, what the experience will be like, what market volatility is and how that will translate to emotional bias' and poor decision-making. Subsequently, the first and perhaps only investing experience they have is with their 401(k) plan and the only reason they get this access is from the aggregation of the asset of the plan.

Next, behaviorally, we've observed that for most participants that savings is a low priority. Most have a set-it forget-it mentality when it comes to decisions they make. For example, they decide to join the plan at a deferral rate of 4%, when we look back at them 3-4 years from now, they are still deferring just 4%. Asset Allocation is a best guess. The simple act of rebalancing, which is additive, doesn't happen in the aggregate. These and other issues lead to the poor income replacement statistics that we've all been seeing.

So, again, how do we take a valuable service like participant advice and get the uptake on it to be higher than the 25% figure in the article?

1.) Remove the price barriers. Not saying that advice should be free, far from it, what I am saying is that if the participant feels they will pay more for advice, they are likely to not take it. Instead, have the fee for advice be a plan-level fee. I.E. 25 basis points to the Plan Sponsor. If the Plan Sponsor chooses to pass along fees to the plan, then everyone pays for it. It becomes a fee neutral decision for the participant to use it or not.

2.) Make advice the default. Like other automatic provisions, usage goes up SUBSTANTIALLY if you make it a plan default. Our experience is that when we make advice programs a plan default we see a usage rate north of 85%.....that's right, 85% or 60% HIGHER than what the Wall Street Journal article says is the industry norm right now.

3.) Change the conversation at the participant level. Give them information in a way that they truly can understand. Most participants are return-centric, not benefit-centric. They look at what the investments did last quarter. In general, as mentioned, most are ill equipped to do anything with performance information, positive or negative. However, if we communicate to them at what age they will be able to afford to retire, give them the REAL number on what that is for a variety of ages, 66, 67, 68, etc. then they will truly know if they are on target to retire with enough income or not. If they are on a shortfall, we can communicate to them the earliest age that they can afford to retire or show them the impact of saving more.....what a novel concept, use the 401(k) Savings Plan as just that, a SAVINGS PLAN!

4.) Use the advantages offered in the Pension Protection Act of 2006. Automate savings, automate escalation, default people to Qualified Default Investment Alternatives, and automate rebalancing.

Those are real, practical solutions that can be implemented easily for many plans and will change the dialogue with Plan Sponsors and participants from investments and fees to something that really matters more which is income replacement rates.

Thursday, October 20, 2011

New Retirement Plan Limits for 2012 (COLA)

Not my usual kind of post, but this blog should be a source for all relevant Qualified Plan news and the IRS changing the Annual Limits for plans is pretty important information. Below is all of the changes, and there were some changes.

Internal Revenue Service cost-of-living adjustments applicable to dollar limitations for retirement plans.

401(k), 403(b) & 457 Elective Deferral Limit increases from $16,500 in 2011 to $17,000 in 2012

Catch-Up Contribution Amount stays unchanged at $5,500

415 Defined Contribution Annual Additions Limit increases from $49,000 to $50,000

Compensation Considered increases from $245,000 to $250,000

Income Subject to Social Security Tax (Taxable Wage Base) increases from $106,800 to $110,000

There are others that are important for use with Non-Discrimination and Top-Heavy tests, but the above are the relevant ones to Plan Sponsors and participants.

Monday, September 19, 2011

DOL to Reconsider Fiduciary Rules

The Department of Labor announced that it would be re-proposing its rule on the definition of fiduciary due to requests from the public via Congress that the agency provide more input on the rule.

Anticipated changes include but are not limited to:

-Clarifying that fiduciary advice is limited to individualized advice directed to specific parties
-Addressing concerns about application of the rules to routine appraisals
-Clarifying limits of the rule's application to arm's length commercial transactions, such as swap transactions.
-Addressing the impact of the new regulation on current fee practices of advisors and brokers, and looking at exemptions permitting brokers to receive mutual fund, stock, and insurance commissions.

The full article, available through, can be seen here.

Thursday, September 15, 2011

How often is prudent to conduct a vendor search?

As a general rule for Plan Sponsors, it is always good to have a market evaluation that is current on hand. This way, you will always be aware of what the marketplace is offering and have a good idea as to whether your plan is current and still in the best interest of the participants. The question is, how current does this need to be and at what point do new services outweigh the financial and time costs of making plan changes.

Historically, this was always a matter of opinion. When asked, I've usually answered every three to five years should be sufficient to gauge what is new in the market and determine if a change is warranted and disclaimed that by saying that more frequent is also fine. However, it appears that this thought needs to be amended somewhat.

It now appears that if a Plan Sponsor wants to be prudent and avoid a litigation risk in the unlikely event of a law suit, that they should adopt a policy of conducting a market study AT LEAST every three years.

In the preamble to its 2010 service provider fee disclosure rules, the Department of Labor (DOL) assumes/suggests plan sponsors conduct an RFP about every three years. While, in general, preambles are not laws, the 2011 Seventh Circuit Court of Appeals decision in George v. Kraft Foods is reinforcing concerns that this is the new normal for a prudent plan fiduciary.

Kraft's 401(k) plan participants sued for breach of fiduciary duty alleging Kraft should have done an RFP every three years and this failure resulted in payment of excessive investment fees to the plan's service provider. A lower court accepted Kraft's defense that it relied on expert outside consultants to ensure fees were competitive when extending that service provider's contract multiple times and granted summary judgment in Kraft's favor. On appeal, the Seventh Circuit rejected that as an absolute defense and sent the case back for a trial, which could end up costing more than settling.

This decision on appeal has lead some to assert that the rule should be vendor search every three years. However, this is not a mandate at this time. Certainly, as an employee of a service provider, I can tell you that it is not in my firm's best interest to have our clients search the market every three years for a possible vendor change. However, as a fiduciary, we would say that adopting a policy of market evaluation periodically is a very good idea. By formalizing a policy and setting a timeframe, whether 3 years or some other, and then following it, a Plan Sponsor would be engaging in a Prudent Process to verify that what they are offering is still prudent to offer.

This would also reenforce the idea that service providers should earn their fees, not just at the time they win a client, but on a continuous basis. This will enforce better competition and ultimately better service for Plan Sponsors and participants.

Tuesday, August 23, 2011

MEPs, Mediocre Employer Protection....Just Kidding, continued

As a follow-up to an earlier post from July 6th regarding Multiple Employer Plans, this author recently discovered (thanks Alan) an article that discusses the matter in much greater detail, linked here


This article, published on, titled 'Trouble Ahead for Multiple-Employer Retirement Plans?" is very thorough in its description of MEPs, concerns of the DOL and what the perceived and actual benefits to employers are for participating in them.

This author beleives that meaningful gains can be had in both the area of fiduciary relief and in economies of scale, but that it requires properly vetted and structured MEP programs. Given the amount of recent attention given to these programs, and a trend towards "open" MEPs, or MEPs of unrelated employers, the DOL was promted to make its voice heard on the matter.

Based on the DOLs comments, and our own interpretations of the statutes, we still believe that MEP programs can work well, but from a prudence perspective, we believe they are better structured as "closed" MEPs, meaning that the employer is CLEARLY related. An example of this can be a corporate entity and a group of franchises of the corporate entity.

Final thoughts (for now):

When, as a Plan Sponsor, evaluating whether to adopt a MEP or, as an advisor, whether to advise a client on the merits of a MEP program, I think a detailed evaluation of the structure should be documented and stored in employer minutes, thus, aiding in satisfying the fiduciary requirement of prudent selection. Even though the decision to join a MEP is typically stated as a settlor function, meaning business decision, the control of assets that typically follows puts that decison maker into fiduciary status.

In the previously linked article, the author raises the concern of a TPA sponsoring a MEP program which would be then offered out to its clients. This is a perfect example of an issue that would be discovered if the MEP program is vetted structurally. Under this scenario, the TPA, as an employer would be the primary adopter (or MEP Sponsor) and therefore clearly a fiduciary to the plan. Any financial benefit that TPA would then receive from the MEP, for example fees they charge to administer it for any/all future adopting employers, could then be (and likely would be) interpreted as self dealing. This is a clear violation of the Prohibited Transaction rules of ERISA, but one that the TPA likely isn't even aware they are violating. This is just an example, but their are many other equally risky scenarios that can play out. Caution is advised before proceeding into these types of arrangements without an expert level of understanding. In other words, if there was every a place to consult rather than sell to a client, this is it.

Wednesday, August 17, 2011

Quantifying the Drivers of Retirement Success

The collective retirement industry spends an extortionate amount of its resources on marketing efforts to promote the quality and superiority of its various investment managers. In fact, most industry professionals would agree that “absolute return”, “alpha”, and “compound interest” are the concepts that really stimulate plan sponsors and participants to act. On a path laden with headwinds and hazards for most participants, absolute returns and manager outperformance are perceived to assemble a path with less resistance. Meanwhile, focusing on—and chasing—these elusive concepts typically does little to materially improve a client’s retirement outlook relative to other important factors.

In a recent article written by Jason Grantz and David Blanchett (available here), the driving factors of a successful retirement outcome were explored and quantified on a relative basis. The authors analyzed four factors that contribute to positive (or negative) retirement outcomes: asset quality, actuarial assessment & intervention, asset allocation, and savings rate. In somewhat of a surprising revelation, the study concluded that asset quality, defined as selecting an asset sufficient to consistently outperform its peers, was the least important driver of success. It accounted for just 4% of the relative importance the factors promoting success.

This analysis tells us that focusing on picking the next great mutual fund is not the activity that’s going to maximize the probability of retirement success for a retirement plan or its participants. We all know that savings is important, but historically it has been difficult to relay the relative importance of savings in quantitative terms, which is now possible. The analysis conducted for this paper suggests that savings rate is clearly the primary driver of retirement success by a wide margin.

Although improving savings rates can be difficult, spending additional time having meetings with participants, sending targeted mailers or implementing “smart” plan defaults like automatic enrollment and automated progressive savings are some relatively easy things to implement in order to improve deferral rates in retirement plans.

Thursday, July 14, 2011

DOL Officially extends fee disclosure....again....

In a notice on its website, the U.S. Department of Labor announced the extension of the applicability date of the fiduciary-level fee disclosure regulation issued under ERISA section 408(b)(2) until April 1, 2012. The Department had previously proposed to extend the applicability date only until January 1, 2012.

The DOL also announced an amendment to the applicability date of the participant-level fee disclosure regulation. Initial participant-level disclosures must now be made no later than 60 days after the first day of the plan year beginning after November 1, 2011; or if later, 60 days after the effective date of the fiduciary-level fee disclosure regulation.

Previously, the Department had proposed a 120-day transition period to provide the initial participant disclosures. The final rule is available here.

and a fact sheet for it here.

This delay doesn't change our views on the matter. Ultimately consumers should know what they pay for all goods and services and Plan Sponsors who are engaged in a trust arrangement, which all Qualified Plans are, further have an obligation to determine the reasonableness of a contract or arrangement.

In the absense of knowing all compensation arrangements, how can one determine that an arrangement is reasonable? The delays, nonetheless, are frustrating, another small win for the lobbyists.

Wednesday, July 6, 2011

MEP's - Mediocre Employer Protection.....Just Kidding

Actually, the purpose of this post is in response to those seeking some "opinions" on whether MEP's, Multiple Employer Plans, are a good idea or not. The pros/cons are out there, on the pro's side is potential economies of scale and, theoretically, increased fiduciary protection. It has been this author's contention that the MEP is not a silver bullet (as has been sold by various MEP sales people), but isn't a bad idea necessarily. There is a place for all creative designs in the marketplace.

We believe that with a contained, related group of employers and the proper service providers in place, that a MEP structure can work quite well. Think about that small group of franchise owners who are related, but don't have a good employee benefit while the main franchise has a very strong one. Assuming the vendors can work with the group to allow it to be feasible from a cost perspective, this group could benefit quite well from a MEP structure.

That said, although an Employer who adopts a MEP plan for their employees is giving up 'Named Fiduciary' status, meaning they will no longer be the named Plan Sponsor or the Named Administrator or Named Trustee, we believe they will still be a fiduciary under ERISA and will have some remaining obligations. Specificully, under the definition of a fiduciary, ERISA §3(21) has 3 parts. Two of those parts deal with the ability to or the actual excercising of discretion over plan assets. It is under this formal definition that an employer who adopts a MEP is still a fiduciary. Ultimately, at their discretion they are opting into and may opt out of the MEP and this is an excercise of control over plan assets. Therefore, they are still a fiduciary and still have quite a bit of residual responsibilities and risk.

Recently, a series of opinions and subsequent postings have appeared that provide the user with some cautionary advice on MEP programs. See these two links, one from ASPPA and one from The Law Offices of Ilene H. Ferenczy, LLC.

Interestingly, these are more from the administrative point of view, but also site DOL opinions and a recent discussion held between members of the DOL and IRS with members of the Govt. Action Committee (GAC) of ASPPA. The result is a stated opinion that many of the so-called MEP programs out there wouldn't qualify as MEPs at all because many of the employers are unrelated and therefore fail to meet the qualification. Under those scenarios, if discovered, those plans would be required to file their own 5500's, test separately, have their own fiduciaries, etc. This is VERY different than the way that these increasingly popular "open-end" MEPs are being sold in the marketplace. I think this is a good case of 'Buyer Beware'. The employers are buying a Panacea or Cure-All for their responsibilities, but in reality they aren't gaining much, if anything.

As always, we welcome any differing view points or clarifications. Please, nothing commercial or it will not be posted.

Friday, June 3, 2011

Surprise! Another Delay - Fee Disclosure Revisited....again...

Over the last year or so, we’ve been keeping tabs on the rules surrounding fee disclosure in all of its forms current and newly proposed. Specifically, the new proposals are the final 408(b)(2) disclosures and the Participant fee disclosure rules under ERISA §404(a)(5). The 408(b)(2) rules have been delayed twice and are currently due to come into effect on January 1st, 2012. In a filing just published at the Federal Register, the U.S. Department of Labor has officially proposed the previously discussed extension for those 408(b)(2) regulations. The Federal Register filing formally effectuates that intent.

The new announcement in this filing is that the DOL stated it would propose an amendment to the participant level fee disclosure regulation which would provide a 120-day transition period (instead of 60 days) to provide the initial participant disclosures. However, it does not appear there will be any extension provided for quarterly expense disclosures. According to the DOL release , a calendar year plan would have to furnish the initial participant disclosures no later than April 30, 2012. The quarterly expense disclosures required by paragraphs (c)(2)(ii) and (c)(3)(ii) of the regulation (e.g., quarterly statement of fees/expenses actually deducted) would have to be furnished no later than May 15, 2012.

In essence, this gives the service providers an extra quarter to get into compliance. Not a big deal, but worth noting as in previous posts we referenced Q4, 2011 and now it will be Q1, 2012.

Thursday, May 19, 2011

Strong Words from EBSA Regarding 408(b)(2) Compliance

Fil Williams of the DOL's EBSA recently stated at the Mid-Atlantic Benefit Conference on May 5, 2011: “…for those employers to whom the new Section 408(b)(2) rules do apply, responsible plan fiduciaries ultimately will be obligated to terminate contracts or arrangements with service providers that do not comply.”

Even though the DOL has aready postponed the final 408(b)(2) regulations once, they are scheduled to become effective January 1, 2012. This along with the new participant disclosure regulation (effective in November 2011) will make for a busy Thanksgiving, end of year, for retirement plan services providers.

An associate of ours at Unified Trust, Pete Swisher, recently published a column in the ASPPA Summit Newsletter addressing the regulations and six ways to prepare your practice by November. It is available by clicking here.

Tuesday, May 17, 2011

ERISA Trumps everything…..

In the latest edition of Investment News Weekly, they published an article called ‘401(k) rights trumped by ERISA', linked here

This was an unusual article to see published in a general information publication like Investment News, unusual in that it deals with a highly specific legal ruling dealing with Participant, Spousal and Named Beneficiary rights in a death situation.

The gist of the article is that the participant named his three children as beneficiaries to his 401(k) Plan in the event of his death. He did so properly using a beneficiary form and did so after the passing of his first wife, so spousal consent was unnecessary at the time the form was completed. Flash forward some time later and he remarries, doesn’t update the form, and six weeks later passes away. The new wife (now a widow) is now in a legal battle as to who has rights to the 401(k) assets. The children say they do as they were named on the form, the spouse says she does because she never waived her rights to the assets. The court sided with the spouse and based on the facts/circumstances listed in the article seems to be the appropriate decision.

The important takeaway here is that ERISA (which is our rule book) trumps everything! It may have been the deceased participant’s wishes to award the assets to his children, but it doesn’t matter. The rules state that a spousal waiver must occur otherwise the wishes of the participant are irrelevant. It doesn’t stipulate in this rule as to whether or not the participant was, in fact, married when he/she filled out the form!

Often I’m asked by financial advisors where/how they can add value and earn their fee. This question is often posed in the context that my firm acts as a Discretionary Trustee and we make 100% of the Investment Decisions for plans which is often an area that financial advisors provide service.

This is a great example of how an advisor can add value to a plan. It isn't sexy, but it is very effective. If the advisor stays front and center with the participants of the plans that they are serving and understands the rules of the game, than they can ensure current and complete forms, that intentions are being followed and situations like the one above, however uncommon, don’t occur. This article can be a great sample of a scenario that can be presented to Plan Sponsors as to where/how advisors value is earned and there are a million other small ways like this that are part of the service.

By the way, aiding in this manner is not a fiduciary act, so for those Registered Reps out there who aren’t permitted to act as fiduciaries, there is still a way to build a value proposition and not provide fiduciary services directly yourselves.

Monday, May 9, 2011

Coming Soon.....Participant Fee Disclosure!!!! Get your helmets on....

What exactly is it that get’s Retirement Plan Professionals, advisors and service providers alike, so worried about when it comes to Fee Disclosure? That’s a bit rhetorical, as I suspect the answer is mostly obvious for those who read this blog. In the last year or two, the anxiety level regarding fee disclosure has been quite apparent. As a clarifying point for those who are unaware, there are TWO sets of fee disclosure rules. The implementation date of one of these, commonly referred to as the 408(b)(2) fee disclosure rules, has been postponed to 01/01/12 (at the time of this writing), and perhaps will be again. The other set of rules are the new rules under ERISA §404(a)(5), commonly referred to as ‘Participant Disclosure’. These rules are going to be effective for the 4th Qtr. of 2011, right around the corner. Surprisingly and confusing to me, even though these are the more difficult set of rules, these seem to be the one’s that fewer practitioners are worried about.

The 408(b)(2) rules are getting a lot more industry attention, perhaps this is due to how much the industry has historically done to disguise fees, that it is going to be incredibly difficult to accurately show clients how to follow the money trail. Perhaps it is because this is the rule that makes Broker/Dealers and Insurance Company’s a little squirmy due to that little requirement where the service providers have to declare if their acting as a fiduciary or not. Whatever the reason is, the practical reality is that some difficult discussions (and maybe decisions) will happen between service providers and clients. But this is a difficult business, and I believe that ultimately most of the good practitioners will get through it with most of their client relationships intact.

However, participant disclosure……that’s a whole other scenario, and it’s happening first!!!! This article, by David McCann from CFO Magazine does a good job of thousand footing the situation.

I, and most practitioners I know believe that the majority of participants have no idea what the retirement plan costs are and many think that they are getting a free benefit, that they pay nothing for their 401(k). This is a systemic issue. Most 401(k) mouse traps in the market, historically, have been designed to disguise fees from the participants. The group annuities (and Collective Funds) unitize the investments and thus are embedding fees into the unit prices. Many mutual fund platforms are often registered rep distributed, and their compensation is in the expense ratio, but also built into share prices, not to mention implicit revenue sharing arrangements. Even environments where the fees are deducted as line item expenses from participant accounts will often not be explicitly disclosed. For the participant to discover these charges, they will have to search for these deductions online in the form of a customized transaction report.

As a result, the new participant disclosure rules will 100% create a HUGE amount of phone calls, complaints to everyone and anyone associated with creating and managing their plan. Frankly, I think, it will cause a large quantity of plans, big and small, to search out new providers. For proactive practitioners, this is absolutely an opportunity. Advisors who aren’t in front of this are going to have to back pedal as the business owners and CFOs start getting questioned by staff. As Mr. McCann says in his article……..consider yourself warned!

Tuesday, April 12, 2011

Stirring the Pot - Washington D.C........ugh

In case you weren't paying attention to what's happening in Washington these days as pertains to the Pension industry, I thought I'd post some information from my sources and some thoughts on it.

1.)Chairman Ryan’s proposed Budget Resolution On April 5, 2011 Chairman Paul Ryan (R-WI) introduced his 2012 budget resolution. The House Budget Committee’s Fiscal Year 2012 Budget Resolution as drafted is controversial to say the least. The resolution would privatize Medicare, turn Medicaid into block grants to states, repeal the health reform bill passed by the last Congress and cut $6.2 trillion in government spending over 10 years.

The budget resolution was passed out of the House Budget Committee on a party line vote last Wednesday after a marathon markup, and is scheduled to hit the floor of the House on Thursday of this week. A budget resolution is not a bill and will never be law. It is designed to be an outline or roadmap of what priorities and policies the author(s) want to further. This resolution is void of details on tax reform, although Ryan’s more detailed ‘Path to Prosperity” plan that underlies his budget proposal fills in some details. Most importantly for Retirement Plan practitioners, Ryan’s plan would eliminate capital gains taxes, perhaps unintentionally encouraging employers to invest outside of a 401(k) plan rather than incur the limits, cost and heavy regulations attached to qualified plans.

2.)Tax Reform Bill Introduced On April 7th, Senators Wyden (D-OR), Coats (R-IN) & Begich (R-AK) introduced the first official senate tax reform bill of the 112th Congress. The bill is a re-make of last year’s bill by Wyden and Senator Judd Gregg (R-NH), who has since retired, and includes RSA’s (with the current $5,000 IRA limit on contributions) and a $2,000 per year LSA-type account, plus a modest reduction in tax rates. The bill, S.727, also proposes to eliminate a number of tax expenditures including exclusion of benefits under cafeteria plans, fringe benefits, meals and lodging but none directly related to the employer provided retirement plans. Senator Wyden is on the Senate Finance Committee, but the Republican cosponsors are not, and so it is not expected that the Finance Committee will take up this specific proposal.

3.)Tax Reform, Aging and Retirement Plans Both Senate Finance and the Senate Special Committee on Aging held hearings in the last month on issues related to tax reform and retirement plans. On March 30th the Senate Finance Committee held a hearing titled “How Do Complexity, Uncertainty, and other Factors Impact Responses to Tax Incentives.” The hearing took a long distance look at the complexity of the entire tax code, saving more detailed examination of specific issues, such as retirement savings for a later date. The Aging Committee looked at the potential danger of securities lending of retirement investments, their lack of any reporting or oversight requirements and the fact that participants are not informed of this practice in a hearing titled “Securities Lending in Retirement Plans.”

Upcoming hearings include an April 12th hearing in the Senate to discuss what foreign tax codes might offer as examples as America changes its own code. Two hearings are scheduled for April 13th: A Senate Finance hearing titled “Perspectives on Deficit Reduction” and a House Ways and Means Committee hearing on the tax codes’ impact on individuals and families titled “How the Tax Code’s Burdens on Individuals and Families Demonstrate the Need for Comprehensive Tax Reform.”


Some thoughts on the above govt. initiatives. Firstly, it is clear that this congress (like many before it) is highly focused on tax issues, balancing the budget and long term improvements in the tax system. Obviously, practicing retirement plan consultants, like myself, are intimately aware that Retirement Plans have a huge cost in current tax revenue for the U.S. Govt. In recent years, with a spotlight on the shortcomings of the system, Retirement Plans have become fertile ground for proposals to improve the system, some reasonable, some not-so-much (even a serious proposal to eliminate 401(k)s altogether). In this new batch of information, there are some potentially extreme and industry-damaging proposals including eliminating retirement plan deductions completely and/or limiting contributions to a $20k max from both employer and employee sources as well as the revitalized argument against Cross-testing (New Comparability) in Qualified Plans.

This author is against anything that would reduce benefits to participants or damage an industry that is continuously working hard to improve the services delivered and has written to his local congressman expressing opinions as to the usefulness of plan design features such as New Comparability. Further, as an American, I believe that the marketplace dictates what services/costs are necessary and reasonable, and am generally against anything that repeals benefits that are clearly good for working Americans even if they are being used as efficiently as they could be.

Wednesday, April 6, 2011

The 3(38) IM & Discretionary Trustee Service Model

Over the last several years, there has been increasing awareness of the various fiduciary roles that retirement plan advisors and consultants play when serving their retirement plan clients. In previous posts, we have tackled the topics of Full-Scope §3(21) vs. Limited Scope §3(21) Advisors, as well as how fiduciary delegation and appointment functions. In this post, along with supporting documents, we are focusing on the two main discretionary fiduciary models: that of a Discretionary Trustee and that of an ERISA Section 3(38) Investment Manager.

Please peruse the following Journal of Pension Benefits article we co-authored which discusses the differences between the duties of a Discretionary Trustee and those of an ERISA §3(38) Investment Manager (IM), view article. We believe this is an important topic given Unified Trust’s position as a Discretionary Trustee and given that we have recently launched a new service model called Investment Manager, more information.

In the article we discuss a model for comprehensive Retirement Plan Fiduciary Governance we’ve called The Two Party System, illustrated here.

The idea is for the plan sponsor to hire two separately engaged, independent (of each other) fiduciaries. They may be a Discretionary Trustee and an IM or a Full/Limited Scope §3(21) Advisor. One of these parties does the work required to ensure proper fiduciary governance and the other oversees the first which allows proper adherence to the Duty to Monitor. In the absence of two, the party responsible for oversight is the Plan Sponsor and, in most cases, little if any fiduciary liability exposure is shed. The combination of a Discretionary Trustee and an IM or §3(21) Advisor together make for a potentially superior model to a Discretionary Trustee, §3(38) IM or §3(21) Advisor alone.

Thursday, March 24, 2011

Retirement Income - Insurance isn't the only Way

Over the last several years as the Retirement Plan marketplace has matured, service providers have built out an array of services engineered to help participants and plan sponsors in different ways. Plan design in a post Pension Protection Act environment has led to increasing use of techniques such as Automatic Enrollment or Progressive Savings Escalators. But only recently has the shift focused beyond the accumulation phase. As the Boomer generation gets closer and closer to retirement, IRA Specialty providers and Employee Education providers are popping up everywhere. With this comes a new focus on Income Replacement including defining Income Replacement adequacy, strategies that start in the accumulation phase and work throughout life and even Insurance Based Guaranteed Income Vehicles.

Our philosophy has always been to create a more pension-like experience for the participant where the accumulation phase is targeted toward a range of possible retirement ages and amounts and managing that experience to fruition taking the least amount of risk necessary to achieve the goal. We call this style Defined Goal Investment Management. Recently, we’ve observed that several firms out there are starting to come out with their own spin on the ‘Pension-Like’ retirement plan experience. This article from Investment News titled 'Firms are Omitting Annuities in New Retirement Income Products,, does a good job in weighing some of the pros and cons of insurance-based retirement income products and non-insurance based retirement income services.

In the end, we believe the appropriate philosophy is that if we default the participant into an environment that gives them an adequate income replacement than the uptake on that would be much higher than if they had to elect to do it themselves. This is in line with our overall core philosophy, default the participant into all of the decisions that lead to the best outcomes and leave them there unless they choose to opt out.

Thursday, February 17, 2011

The Passive vs. Active Debate

Earlier this month, the good folks at Knowledge Wharton published an article on their website entitled 'If Index Funds Perform Better, Why Are Actively Managed Funds More Popular?', linked here -->

While, we at this blog, don't have a strong opinion on the passive vs. active debate, the article does go through a somewhat balanced excercise of the pros and cons of each. That said, while it touches upon this a little in the beginning of the article, I don't think they are giving enough credit to one very important reason why Active management outsells passive to the degree it does.

In this author's opinion, the real reason is the distribution system. Having spent quite a few years employed to distribute actively managed mutual funds, I can tell you first hand that the distribution machine to sell active management is huge and filled with very effective sales professionals. Despite the quantitative data put forth in the article, active management will continue to outsell passive as long as they build in distribution fees (12b-1s) to pay the distributors.....registered reps.

Either way, I think the article is a good read. Thanks Wharton.

Tuesday, February 15, 2011

Final 408(b)(2) Regulations postponed......briefly

Just last week, February 11 to be exact, the Department of Labor announced that it intends to extend the applicability date for service-provider fee disclosure rules under section 408(b)(2) of ERISA. Disclosure requirements will now apply to contracts or arrangements in existence on or after January 1, 2012, rather than July 16, 2011.

At this point, nothing other than the effective date has changed. All covered service providers will still be required to provide extensive disclosures about their services and the compensation they expect to receive as well as identifying their fiduciary status.

This delay was made solely so that The Department of Labor can review the public comments that they requested previously in connection with the interim final rule, including comments on the types of service providers who should be covered and on whether the required disclosures should be presented in a standard format or not, and subsequently to allow time for implementation of any changes made based on those comments.

While this extension is sure to be welcomed by certain service providers, it isn't likely to provide any type of reprieve. For those hoping for the "good old days" to come back,.....well there's always hope.

Tuesday, January 18, 2011

IRS Raises Fees for Most Determination Letters

Fees.....where do we begin? Obviously, the burden of determining if fees are fair, reasonable and necessary is a daunting challenge even for professional fiduciaries. Very few practitioners enjoy going through a fee discussion with clients, the industry has been hiding fees and selling "free" plans for 35 years, necesitating the quite robust set of new rules forthcoming later this year. In many cases, it is hard to get clients to understand all of the moving parts and mechanics of Retirement Plan fees, even harder in some cases to get them to not pass them along to their participants. Of course, in difficult economic times like the present this task becomes even more unplesaant. With that stated, see the below list of IRS imposed fee increases, some of which are 250% increases.....gotta love the timing.

Effective Feb. 1, 2011, The Internal Revenue Service (IRS) has raised the fees for determination letters and advisory letters sought by qualified retirement plans.

These increases will be for almost every type of determination letter request, as follows:

(1) For a plan intending to satisfy a design-based or nondesign-based safe harbor, or a plan not seeking a determination letter with respect to any of the general tests, and the plan is not seeking a determination letter with respect to the average benefits test:

The single employer Form 5300 determination letter fee is increased from $1,000 to $2,500;
The single employer Form 5310 determination letter fee is increased from $1,000 to $2,000;
The multiple employer Form 5300 or Form 5310 determination letter fee is increased as follows:

  • 2 to 10 employers from $1,500 to $3,000
  • 11 to 99 employers from $1,500 to $3,000
  • 100 to 499 employers from $10,000 to $15,000
  • Over 499 employers from $10,000 to $15,000

Average Benefit Test Or General Tests

(2) For a plan seeking a determination letter with respect to the average benefit test and/or any of the general tests:

The single employer Form 5300 determination letter fee is increased from $1,800 to $4,500;
The single employer Form 5310 determination letter fee is increased from $1,800 to $4,000;
Adopters of a Master or Prototype Plan or a Volume Submitter Plan will pay a fee that is increased from $1,000 to $1,800;
The multiple employer Form 5300 or Form 5310 determination letter fee is increased as follows:

  • 2 to 10 employers from $2,300 to $5,000
  • 11 to 99 employers from $2,300 to $5,000
  • 100 to 499 employers from $15,000 to $25,000
  • Over 499 employers from $15,000 to $25,000

(3) For group trust submissions under Rev. Rul. 81-100, C.B. 1981-1, 326; Rev. Rul. 2004-67, C.B. 2004-2, 28, and Rev. Rul. 2011-1, I.R.B. 2011-2, the fee has been increased from $750 to $1,000. Form 5316 to be used for group trust submissions will be available soon, according to the IRS.

For the complete (260 pages) rule please view IRS Revenue Procedure 2011-8 ---> http://irs%20revenue%20procedure%202011-8%20---%3e%20http//