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 cfo.com, 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.