Friday, December 14, 2012
Monday, December 10, 2012
Borzi’s view is that, “We are facing a crisis of confidence and people need help.” Those who “need help and want help need to understand that the people who hold themselves out as experts are accountable to them, and in fact, exercise the standard of care that consumers think they are getting and deserve to get.”
The only thing surprising about this, in this author's opinion, is that it didn't happen quicker. Many studies show that investors, in general, are incapable of distinguishing between broker-dealers and investment advisors and are confused (if they are even aware) about the differences between the legal standards that registered reps and investment advisor representatives are subject to. Nowhere is this more the case than in Retirement Plans which benefit all eligible employees, regardless of income or sophistication level.
Many financial advisors target upper middle class and wealthy individuals for their private practices. The majority of employees covered by retirement plans are not upper middle class or wealthy. As a result of this disconnect, it is often the case that covered employees have never had access to financial advice previous to what they receive from their Retirement Plan advisor. Therefore, the need for retirement plan advisors to be held accountable to the 'Exclusive Purpose' rule has never been greater. That rule requires that advisors exclusively act solely in the best interest of the participants.
It will be interesting to see how this all plays out. More to come in the months ahead.
Thursday, November 8, 2012
Friday, November 2, 2012
See this website that was set-up for just that purpose. There's a fun 'Youtube' video that you can link to from this website and places on twitter and facebook that you can link to as well.
Friday, October 19, 2012
Internal Revenue Service cost-of-living adjustments applicable to dollar limitations for retirement plans.
Wednesday, October 10, 2012
The gist of the article is this. Many of the industry service providers weren't explicitedly clear in the way they disclosed their fees on the mandated 408(b)-2 disclosures despite that the rules have been very clear that they are to be written in "Plain English". What a Shock!!!
The article points towards Wall Street for burying the Plan Sponsors under a mountain of fine print, which is more of the same from what they've always done as the provider referenced in the article estutely points out. However, to be fair, this wasn't really Wall Street as a whole. There's probably less than 100 major retirement plan service providers out there and most are insurance companies, mutual fund companies or independent recordkeepers. Let's keep the blame pointed squarely where it belongs.
To expect an industry comprised of asset gatherers to be forthright in telling their clients they've been overcharging them for years unapologetically would be counterproductive to their goal, gathering assets. It is very unsurprising to this author, that vendors are doing as little as possible to make fee clarity just that, clear.
Kudos for WSJ for writing what a lot of us have been thinking.
Wednesday, August 22, 2012
How does a plan sponsor protect itself when considering (or being sold) an opaque investment structure such as a Fixed Account or GIC?
A stable value fund's stability cannot simply be assumed. Plan trustees, and their financial advisers, have a fiduciary responsibility to conduct thorough due diligence when evaluating a plan's stable value option. This is easier said than done. Proper due diligence isn't simply a matter of reviewing underlying holdings, manager pedigree, or declared interest rates. It is far more complex. Is the provider who is guaranteeing the stable value option financially strong? Are rates consistent? Are costs/fees reasonable? Are contract limitations onerous?
- Insurer Quality - Annually, TIC conducts a review of the fund. Part of the review is a detailed investigation of the Insurer. Of particular focus, is the claim's paying ability, which backs the guaranteed rate that makes up the difference between Market and Guaranteed Values. We also monitor the "spread" between the Market Value and Book Value on a weekly basis, and customarily review their capacity to take on added risk, defined as more assets in our fund or funds they are insuring.
- Holdings - Annually, the Investment Committee interviews each Portfolio Manager about their holdings. During this interview process they are reviewing factors such as what the holdings are, the credit quality and duration against their benchmarks.
- Structure - Structure of this asset class is very important. We prefer the structure of a Common Collective Trust. They are required to be audited annually at the request of the Office of the Controller of Currency of the U.S. Treasury. The holdings are examined separately by an outside independent auditor. As a prudent measure, the committee opted for a Separate Account structure that allows us to isolate the assets from the creditors of the Insurer. Thus, our clients are protected against instability and the fund is potentially portable between insurers, under a "worst case" scenario.
- Fees - Most fixed accounts/GIC's are opaque when it comes to fees. Typically, they are embedded in the difference between the fund's gross yield (what the provider earns), and the fund's net yield (what the client receives). These funds often quote an expense ratio of 0%, and the yield is expressed as a percentage as well. Given the Collective Trust structure, we can identify precisely how much cost is associated with each manager and the fund as a whole. This amount is then expressed the same way as a mutual fund cost would be shown.
Monday, August 20, 2012
So how do we shorten that time at the end of our lives that we need to finance?
One very morbid way would be to die younger....but let's say that this won't be a voluntary option for most of us. Living longer seems to be the goal for most of us and the actuarial life expectancy tables all confirm that we, in the U.S., are in fact living longer. At present, the average American (male or female) will live well into their 80's or 90's. Most retirement calculators are static in the retirement age at around 65 or 66.
The other way would be to retire later. Aha! This is the answer to the question. I didn't save enough when I was young so I can't afford to retire at 65, let's find a point in time where I can afford it if I save like crazy from now on. This delaying of retirement can be powerful in helping the math work out. However, there are assumptions being made here, namely that an employer will actually KEEP you in your mid-late 60's, when they can hire someone younger, cheaper and with perhaps more and better skills.
Recently, I read this article in Kiplinger's, Rethinking Retirement by Eleanor Laise where she addresses this problem specifically.
What if 'Working Longer' isn't an option? She references a recent Employee Benefit Research Institute (EBRI) study where more than 1 out of 4 workers now plan to retire when they reach 70, up from 16% from five years ago. Unfortunately, this plan to work longer may not work out. In the same survey, of the retirees surveyed, 50% of them stated that they retired younger than they expected and 92% of those cited a negative circumstance for the reason why. I.E. it may not be a choice for us to work longer. Some examples of negative circumstances are company downsizing or poor health/disability.
So, here's the message....it's the same one that we always say and this just illustrates it yet again. The only sure thing to fight against our own elderly poverty is to save. Very simple, just save and make the lifestyle adjustment necessary to accommodate a policy of savings. Thank you Eleanor for a good article highlighting a true societal problem.
Tuesday, July 24, 2012
The post discusses the merits of (and how to do it) one fiduciary, such as the plan sponsor, delegating away fiduciary responsibility to another fiduciary, such as a discretionary trustee. It also specifically points to the parts of the ERISA that relates to appointment and delegation. In our minds when we wrote that we were thinking specifically of how a plan sponsor might shield itself from fiduciary responsibility surrounding selection and monitoring of investments and the risks associated. Part and parcel to delegation is 'Prudent Selection and Monitoring'. The idea was that in order to accomplish some risk mitigation, the plan sponsor would need to make sure the appointed fiduciary was prudently appointed and somehow monitored going forward. What we didn't deal with in the post, but held true then and still holds true now was that ALL parties associated with the plan, fiduciary or not, must be prudently appointed and monitored. This Duty to Monitor is part of basic fiduciary responsibility.
Flash forward to 2012. Very recently, Plan Sponsor Magazine published an article specifically dealing with a plan sponsor, Clark Graphics, failing to properly monitor its' functional Administrator (ERISA 3(16)) or their hired service provider, the Third Party Administrator (TPA). You can find the article here;
The U.S. Department of Labor (DOL) suit alleged insufficient oversight and mishandling of plan assets resulting in multiple violations of the Employee Retirement Income Security Act. Specifically, the suit alleged that the owners, failed in their fiduciary responsibilities as plan trustees by neglecting to monitor the actions of the plans’ administrator. The results were that the owner's of the company are being asked to restore the funds to the two plans in question amounting to approx. $500k and that the administrator in question is required to restore the same sum offset by the amount paid by the owners. One way or the other, the plan participants will be made whole from the administrative mistakes. Both the owner and the service provider are no longer allowed to serve as fiduciaries or service providers to any other plans.
“Employers that sponsor retirement plans have a fiduciary duty to monitor plan assets and ensure they are handled appropriately and protected,” said Assistant Secretary of Labor for Employee Benefits Security Phyllis C. Borzi. “Contracting with an outside firm to manage those assets does not absolve them of their legal responsibilities.”
We can't think of a better case to illustrate the importance of monitoring service providers. That said, this case begs the question;
Are the business owner's or an appointed internal committee of business managers the appropriate people to serve as the plan trustee or as fiduciaries responsible for service provider oversight?
This author would argue that the answer to that question, most of the time, is no, but that these are the individuals often in charge of doing just that. In our experience, the expert level of care required is mainly not available within the staff of most employers. The requisite skills, interest or ERISA education is, simply put, not present. In our opinion, the party in the best position to provide prudent monitoring of service providers is the Retirement Plan Consultant or Plan Advisor. If you are a Retirement Plan Professional reading this post, we think it would be a great idea to list this amongst your services offered.
Wednesday, June 20, 2012
It took a few weeks, but the industry made enough noise about FAQ 30 from the DOL's May 7th release of FAQ's pertaining to Fee Disclosure. This author posted on June 6th that our interpretation of this FAQ is that it made it effectively impractical for Self Directed Brokerage Accounts to exist in plans of any real size. Phyllis C. Borzi, assistant secretary of labor for DOL's Employee Benefits Security Administration (EBSA), said June 18 at the SPARK National Conference that a second set of FAQ's will be forthcoming after July 1st some time.
At the same conference, she did discuss FAQ 30 and basically stated that the industry was overreacting to it and that the spirt of it is that plan fiduciaries must have policies in place to monitor investments and ensure prudence. See below for an article that discusses the dialogue.
Our interpretation of the FAQ remains the same. Ms. Borzi's comments simply reiterate what we feel which is that Self Directed Accounts can still be used in plans, but from a practical perspective can become a very difficult investment choice because of the need to monitor the underlying holdings. When these brokerage accounts are not in a vendor window, but rather are scattered among various/many brokers it can be a near impossible task for any plan with a substantial number of brokerage accounts.
Friday, June 8, 2012
Among the more interesting of these FAQ's are Questions 29 and 30 which deal with Brokerage Windows and Self Directed Brokerage Accounts (SDA) in plans. Specifically, in relationship to Participant-Level Fee Disclosure what is asked is whether Brokerage Windows and Accounts are covered under the regulation. The short answer to this is yes, they are covered under this regulation.
However, in my best layman's terminology, what it says is that the SDA window must properly provide disclosure of all potential fees that may exist in that investment structure, but NOT the underlying investments held inside the account. I.E. The SDA is not considered a Designated Investment Alternative (DIA)
Ex.) If there is an Administrative Fee - like $1000/year or if there are transaction fees, those must be made available for the participants, but if the participant invests in a mutual fund inside the window, that mutual fund doesn't necessarily need to separately comply with the disclosure rules.
Seemingly, this could create a loophole of sorts. Like having a plan exclusively investing in SDAs and then investing in securities within those windows without any fee disclosure compliance for those securities.....not so fast!!!
In Q30 of this bulletin, what it says is that if a "significant number of participants and beneficiaries" invest in the same underlying security within the brokerage window, that this security would be considered a DIA and be subjected to the 404a-5 Fee Disclosure rules. So this begs the question, what is the definition of "significant number"? Later on this bulletin they reference 5 participants or at least 1% of the participants (for plans w. more than 500 participants) as that number.
Based on this stipulation, it led me to consider the following questions.
Q1.) If the uptake at the participant level for the brokerage window is 4 participants or fewer, are we to assume that the DIA questions in the SDA would be a moot point b/c of the reference to five participants or more?
A1.) More or less, yes, although not necessarily moot. A Plan Sponsor will still need to monitor this and ensure that it is less than five and that in general Prohited Transactions are still being prevented.
Q2.) If the answer to the first question is yes, only worry at five or more, what type of SDA examination procedures needs to be put in place to ascertain whether commonality of holdings exceeds the 5 participant or more threshold? If it does, how does a Plan Sponsor gain proper 404a-5 coverage if that holding is an individual security?
A2.) Theoretically, procedures could be established to monitor these accounts looking for and observing any commonality of holdings. However, from a practical perspective who is really going to do this? Certainly not most Plan Sponsors, and it seems a daunting task for any administrative professional to do it either. It would seem especially difficult in scenarios where the participants aren't in a window, but rather are using their own brokers at different broker dealers.
DOES THIS MEAN THAT SDAs ARE EFFECTIVELY......DEAD MAN WALKING?? Time will tell, but our interpretation is that yes, for any plan of size with many SDAs, they are no longer practical to have.
Q3.) If the Plan Sponsor does have that policy in palce to properly monitor these (LOL), what happens when the security is an individual stock or bond (ex., Facebook Stock). How does the stock provide a 404a-5 disclosure?
A3.) Not likely to happen or be done correctly.
Q4.) If this 5 or more rule is a rule, what can a firm do to put a policy in place to keep it at five or less without bumping against Non-Discrim. Issues?
A4.) There really is no way to put a restrictive policy in place without potentially running into Benefits, Rights, Features issues, i.e. Discrimination.
So that was a long way to go for this author to conclude the following opinion. The new Participant Fee Disclosure rules, Rule 404a-5, has effectively mitigated the usefulness of the Brokerage Window in ERISA plans.
Personally, that makes me happy on some level. Now we'll see if this is what actually happens over time.
Tuesday, May 29, 2012
I'm going to refer to this letter as the Toth Letter - as he is the party it is addressed to. The questions posed in the request by Mr. Toth were as to whether the 'Advantage 401(k)' operated by 401(k) Advantage LLC and TAG Resources would be viewed by the DOL as a single "employee pension benefit plan" even though it was to provide services to multiple otherwise unrelated employers.
Please peruse the letter for the details, but the result of this letter is that this plan (and assumingly others like it) would not be considered a single plan, but rather a group of individual plans. It also reaffirms the notion that adopting employers of MEP programs are still considered to be fiduciaries under the meaning of ERISA. From this author's point of view, this is not surprising news, but rather reaffirming of what we've been saying all along.
Nonetheless, it does give a viable source opinion to refute any assertion that Open-End MEP programs are a "magic bullet" for employers.
Monday, April 2, 2012
Recently, I personally attended the annual 401(k) Sales Summit put on by the American Society of Pension Profesionals & Actuaries (ASPPA). At the opening of Day 2 of the conference, I attended a session which was a one on one interview of Michael Davis of the Department of Labor by Brian Graff of ASPPA. There were several topics discussed, upcoming fee disclosure rules, the proposed expanded definition of a fiduciary, and yes, MEPs. Mr. Davis, was one of the better DOL speakers I've heard present and I felt he was very clear in that he felt that the current rules governing Qualified Retirement Plans (the ERISA) do not support the concept of an "Open MEP", meaning MEPs for employers that are unrelated and subjected to a collective bargaining agreement. He mentioned this three separate times, so it was very clear. This took place on March 19, 2012.
Interestingly, this news was met with shock/surprise (perhaps anger?) by many of the members of the audience, whom are other pension practitioners like myself. It SHOULDN'T have come to a surprise to anyone as these remarks are consistent with what has been coming out of EBSA for the last year or so, and even again just two weeks prior on March 7, 2012 at Phyllis Borzi's (Assistant Secretary of Labor) testimony to the Special Committee on Aging of the U.S. Senate. Press Release Here --> http://www.dol.gov/ebsa/newsroom/ty030712.html.
In this testimony, Ms. Borzi specifically stated that the idea of "Open MEPs" is not an established concept under ERISA and went on to express concerns about aggressive marketing and promotion of Open MEPs stating that:
- Adopting Employers are fully releived of fiduciary obligations for administering and monitoring investments and of administrative reporting duties.
- That by pooling plans together can reduce administrative burdens and costs.
They have stated that two separate Opinions will be forthcoming dealing with the concept of the Open MEP. We are on record (see blog posts from July 2011 and again in August 2011) stating that we believe that any person/entity that may excercise discretion or control over plan assets (whether specifically named in the plan document or not) is a fiduciary as defined under ERISA Section 3(21) and that includes employers who adopt into an MEP. If the rules change, we may also change our opinion. Until then, the message remains, BE CAUTIOUS. Investigate these structures thoroughly including gaining a strong understanding of the relationship between those providing services to the plan (and charging fees) and those in a fiduciary position. We believe that many of the ones we've looked at appear to be in violation of the ERISA Prohibited Transaction rules.
Wednesday, February 29, 2012
As the marketplace evolves and new ideas are born, they are molded into various product offerings, and all too often “oversold." A great example of this is the (now old fashioned) fiduciary warranty. We are now seeing these evolutionary processes at work with the advent of ERISA §3(38) Investment Managers as a service built into certain products. When faced with the choice, conventional wisdom suggests that is better to utilize these services in hopes of better plan management and lessened fiduciary risk. The issue we see is that services of this nature are marketed and sold identically as comprehensive shields from liability for the plan sponsor, which they simply are not.
Earlier this week, Forbes.com published an article (available here) featuring a hypothetical deposition between an attorney and a Business Owner/Board of Directors. The article helps illustrate the notion that businesses typically do not consider their retirement plans to be a primary function of their business. As a result, retirement plans are rarely given the requisite attention from business owners/board members needed to fulfill their fiduciary responsibilities. A common assumption is that those under the employ of the owner will operate the plan and maintain responsibility over its compliance. Unfortunately, this can be detrimental to the success of the plan and problematic for plan fiduciaries that are personally liable for the plan’s operation.
We observe that being a fiduciary, and meeting the Prudent Fiduciary Standard of Care, is very complicated, even for those with experience in the field. It would be a monumental undertaking for any business owner or board to develop a technical expertise with qualified plans, which is something they are expected to have simply by choosing to sponsor a plan.
Tuesday, February 28, 2012
The study in the article was conducted by EBRI, the Employee Benefit Research Institute. I found a few takeaways very interesting. Specifically, that retired American households tend to spend approx. 80% of their Pre-retirement income, that there is a curve to spending with the earlier years representing a period of higher spending which reduces as people age and that the two biggest costs post-retirement were on housing and healthcare. Noteworthy, healthcare costs rise from as low as 9% to as high as 18% as the person ages.
What I found interesting as well, were some factors that contributed to these statistics. As an example, a retiree doesn't pay FICA taxes, a retiree doesn't contribute to a 401(k) Plan, a retiree drives less and buys less clothing, frankly because they don't work.
Finally, since health deteriorates as one ages, discretionary spending on entertainment, for example, declines as well.
All of the above confirms what the industry is already working towards which is 'The Number' for each person. We, generally, feel that this number is somewhere around 70% income replacement, adjusted for inflation to be funded by social security, 401(k) savings and outside savings. In general, we advocate retiring later as for each year of work, a person gains one more year of savings and one less year of post-retirement financing and one more year of earnings on what they've already saved.
The bottom line from all of the above is, it isn't how much one earns that is of primary importance, but rather that what one earns needs to be larger than what one spends. This is true during our working years and true post-retirement as well.
Thursday, February 2, 2012
Other major changes I've observed is the exclusion of certain 403(b) Annuity Contracts and custodial accounts, an expansion of the information required to be disclosed and updates to how disclosure of changes are to be made.
Attached is the actual regulation and the DOL's fact sheet on the guidance.
DOL Fact Sheet
Tuesday, January 17, 2012
For those of us practicing in the ERISA Qualified Plan arena, this story or one like it is very familiar. We all competed against this type of scenario and we all know that it isn't legal. I've often cited that this is a Prohited Transaction (PT) and violates several different ones. Well, thanks to a linked in post that led me to this blog post from the Business of Benefits (nice one Mr. Toth) we can all now specifically cite the US Criminal code when this scenario presents itself. http://www.businessofbenefits.com/2010/06/articles/complex-prohibited-transaction/erisa-plans-ultimateand-criminalprohibited-transaction-rule-of-18-usc-1954/
To summarize the post, this behavior violates ERISA's Prohibited Transaction rules, but it also violates the US Criminal Code, specifically, 18 USC §1954. It specifically is an Anti-Kickback rule and is broad in nature although it does specify ERISA plans that
(1) an administrator, officer, trustee, custodian, counsel, agent, or employee of any employee welfare benefit plan or employee pension benefit plan; or
(2) an officer, counsel, agent, or employee of an employer or an employer any of whose employees are covered by such plan; or
(3) an officer, counsel, agent, or employee of an employee organization any of whose members are covered by such plan; or
(4) a person who, or an officer, counsel, agent, or employee of an organization which provides benefit plan services to such plan
receives or agrees to receive or solicits any fee, kickback, commission, gift, loan, money, or thing of value because of or with intent to be influenced with respect to, any of the actions, decisions, or other duties relating to any question or matter concerning such plan or any person who directly or indirectly gives or offers, or promises to give or offer, any fee, kickback, commission, gift, loan, money, or thing of value prohibited by this section, shall be fined under this title or imprisoned not more than three years, or both.
Many scenarios could fall under this, but specifically, the act of Tying a company loan to the 401(k) Plan would fall under this. So, sometimes we need to look past ERISA to the Criminal Code itself to find something specific. I wonder if the banks have contemplated that this, technically, should be disclosed as compensation under 408(b)-2.......
Thanks Linked-In and thanks Mr. Toth for the good intelligence.
Friday, January 13, 2012
This is despite that fact that with approx. 3 months to go they still have not issued the final guidance needed for the variety of different service providers to all comply.
In this author's experience, this is typical. The Fee Disclosure rules, both 408(b)(2) and 404(a)(5) have been around for several years now and it would seem to me that all of the relevant issues have been discussed and vetted ad nauseum, so one would think that final guidance would have been here long before now. But, that is the problem with the regulating bodies. They claim to be sympathetic to industry concerns, but alas not so concerned that they would give industry enough time to implement changes to be in compliance.
Ethically/Morally, we've always been in favor of Fee Disclosure (see former blog posts on the subject) but we remain skeptical that the newly "informed" consumer, i.e. the Plan Sponsor and Participants will either be better off with this new information or outraged by it. Frankly, we believe it very possible that harm will be caused in the form of fewer participants saving money and more plans becoming out of compliance.
In fact, we think it is likely that a whole bunch of Plans that were previously in compliance with ERISA (teh heh....) will now be out of compliance and in many cases be engaging in Prohibited Transactions unknowingly. What remains to be seen is whether or not any of this will actually be enforced. In the meantime, as Samuel Jackson once said in the movie Jurassic Park.... "Hold onto your Butts!"
Friday, January 6, 2012
Note, that while the article is, in my opinion, well written, factual and fairly thorough, I was disappointed, nonetheless, to read that he was referring to Discretionary Trustees in the broader sense. He makes the valid point that all trustees appointed by the Plan Sponsor are Discretionary Trustees unless specifically appointed as a Directed Trustee. That includes individuals, such as business owners or boards or officers appointed in this role. The only place he even mentions that you can appoint a Discretionary CORPORATE Trustee is as an aside where he states how uncommon this appointment is. He doesn't go into the merits of Prudent Fiduciary Appointment, or even compare contrast the differences between the two types of Corporate Trustees. You can incidentally find that on this blog.
Disappointment aside, he does make a few very good points.
1.) All trustees are Discretionary unless specifically identified as Directed in the Plan Document at which point the responsibilities of trustee fall back to the Named Fiduciary, typically the Plan Sponsor. The good example of US Airways and their relationship to Fidelity Trust Company is provided.
2.) Directed Trustees provide a very limited array of services, typically asset custody, following direction and ensuring transaction accuracy. They are a highly limited fiduciary, and most (that I've seen) disavow fiduciary status in the contracts.
3.) No one can ensure blanket relief from fiduciary liability. There are only degrees of limited relief. Unfortunately, he doesn't point out that the highest degree is to prudently appoint a Discretionary Corporate Trustee.
So, long story short (too late, I know), Scott Simon wrote a decent article making the point that the devil is in the details, and that Plan Sponsors should be wary of unscrupulous sales pitches about fiduciary relief.