Two of the major trends within the retirement plan industry are the promotion of fiduciary services and liability immunization for the Plan Sponsor or other fiduciaries. You’ve likely heard us say that ERISA specifically permits the delegation of responsibilities and the allocation of fiduciary duties to third parties. Of course, the natural side effect of this delegation is a reduction in exposure to fiduciary risk. We discussed this very topic in a June 2009 email entitled, “Fiduciary Delegation – Myth or Reality.” (available here)
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.
Wednesday, February 29, 2012
Tuesday, February 28, 2012
It's not what you make, it's what you keep
Yesterday, Employee Benefit News (EBN) had a very interesting article that discusses savings and spending patterns that occur post-retirement. You can find the article here.
http://ebn.benefitnews.com/news/ebri-health-fidelity-retirement-income-2722370-1.html?CMP=OTC-RSS
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.
http://ebn.benefitnews.com/news/ebri-health-fidelity-retirement-income-2722370-1.html?CMP=OTC-RSS
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
Final 408(b)(2) Regulations - Final is Final....about time!
Well, today is the day that the Interim tag was taken off the 408(b)(2) regulations and they have become final. In my first perusal of the rules, the biggest change seems to be the timing. The Interim rule was to be effective April 1, 2012 and that has been pushed back to July 1, 2012. The 404(a)(5) disclosures, i.e. participant fee disclosures, was also tied to this effective date so those are also pushed to July 1, 2012. Everyone gets a little more breathing room.
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.
Full Rule
http://www.ofr.gov/(X(1)S(q03r5lzzov2yvhmrvo4qlk5m))/OFRUpload/OFRData/2012-02262_PI.pdf
DOL Fact Sheet
http://www.dol.gov/ebsa/pdf/fs408b2finalreg.pdf
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.
Full Rule
http://www.ofr.gov/(X(1)S(q03r5lzzov2yvhmrvo4qlk5m))/OFRUpload/OFRData/2012-02262_PI.pdf
DOL Fact Sheet
http://www.dol.gov/ebsa/pdf/fs408b2finalreg.pdf
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