Trends for 2014, and beyond!

The year is coming to a close and, frankly, while excited for what lies ahead, I'm saddened to see the end of 2013.  2013 proved to be another great year both on a personal and professional level and while I reflect back on all of the success we've been having, I remind myself to be mindful of what lies ahead, 2014! 

As we transition past the legislative issues that have been bogging down the industry (MEP's, Fee Disclosure, fiduciary definition, etc.), the industry finally starts to put service improvement at the forefront.  In this article, published in Employee Benefit News, author Robert Lawton highlights five trends that he seems coming for 2014 and beyond and, candidly, I agree with him!

1.) Simple, simpler, and simply simplify!! - Plans, that is.
2.) More Target Date fund and/or managed account usage for participants.
3.) Focus on outcomes
4.) Retirement Readiness - Seems like tied to #3 to me.
5.) Shift from cost reduction and into monitoring

Below is a link to the complete article.  I hope Mr. Lawton has a perfect Crystal Ball.

http://ebn.benefitnews.com/blog/ebviews/top-5-401k-plan-trends-2014-2738237-1.html

Demand is Rising for 401(k) Advisors

Every once and a while someone asks me my thoughts about the retirement plan industry.  Occasionally, they choose to print some of those thoughts.  Below is an article from Benefits Pro featuring myself and a few others discussing the demand for specialization from the investment advisory community.  Happy reading.

http://www.benefitspro.com/2013/11/06/demand-rising-for-401k-advisors?eNL=527bea40150ba0744c000091&utm_source=RetirementAdvisorPro&utm_medium=eNL&utm_campaign=BenefitsPro_eNLs&_LID=143409125

Excessive Fee Case: Mass Mutual is on the Defense.

This is a great case, thanks to FRA Plan Tools for the link below describing the circumstances of the suit.

http://blog.fraplantools.com/new-excessive-fee-case-filed-by-massmutual-employees/

The complaint from the plaintiffs allege a variety of improper or missing fiduciary process' costing the plan and its participants millions of dollars over the years.

I echo the conclusions drawn by FRA re posted below. 

So what does this mean for plans that use MassMutual as a provider or advisors who recommend MassMutual services and products? It means that you should use this as an opportunity to review your plan’s relationship with MassMutual. This is only a complaint and no one can predict with any certainty how it will turn out. But that being said, if any of the specific allegations found in the complaint could apply to your plan, you have now been put on notice to investigate. This can include asking for more information, re-reviewing your 408(b)(2) disclosures and agreements, or benchmarking your plan’s fees. These tasks should obviously focus on analyzing any investments in your plan and ensuring that any fees paid are reasonable and necessary.

The Fiduciary Definition Fight continues

The U.S. House of Representatives approved legislation Tuesday evening, October 29th that would delay – or possibly kill – the Department of Labor’s regulatory initiative to expand the definition of a fiduciary to encompass retirement plan advisors. The bill passed by a 254-166 margin, including 30 Democrats.

The measure, introduced last summer by Rep. Ann Wagner, R-Mo., would prohibit the DOL from proposing its regulation until 60 days after the Securities and Exchange Commission has finalized a similar rule in the works to raise standards for advisors who provide retail investment advice.
On Monday, the Obama administration threatened to veto the legislation, saying that it undermines the DOL’s efforts to protect workers and retirees from conflicted investment advice.

Supporters of Wagner’s bill say the SEC must go first to ensure coordination between the agencies and avoid duplicative costly fiduciary requirements that would ultimately limit investment advice for smaller investors. Opponents say that the bill would effectively kill the DOL rule if the SEC declines to propose its own regulation.

For those who are not paying close attention to this issue, the DOL has been empowered to rule make on changes to the fiduciary definition but isn't necessarily coordinating with the Securities and Exchange Commission (SEC).  This is one of the issues causing the vote to delay, the desire to have the SEC opine before the DOL makes the rule.  The other issue is the applicability of this new rule making to Qualified Plans but also to IRAs. 

The underlying reasoning is that the current definition of fiduciary under ERISA is written too vaguely.  It is widely assumed that the new rules will pointedly define who is a fiduciary and who is not and potentially pull in a lot of non-fiduciary financial consultants into fiduciary status.  Versions of this potential new rule would also potentially create a 'non-uniform' uniform fiduciary standard. Scenarios could present themselves where financial consultants would be permitted to say that they are fiduciaries while also having the ability to have conflicts of interest with the client.  This would be the opposite of what the uniform fiduciary standard is intended for. 

Ultimately the fight will continue, it is possible that Wagner's bill will not get through the Senate or will be vetoed by the President.  More to come on this issue.

COLA 2014 - IRS Announces Pension Limits w. some changes

The Internal Revenue Service announced the 2014 Cost of Living Adjustments affecting dollar limitations for pension plans.  

The main changes are as follows:

• 415 Limit is increased from $51,000 to $52,000
• Annual Considered Compensation is increased from $255,000 to $260,000
• The Taxable Wage Base for Social Security is increased from $113,700 to $117,000 (yes, that's right, high earners are paying more into Social Security) 

There are other changes as well, but these are the main ones impacting 401(k) plans for 2014.  For a complete list including changes to IRA limits, DB limits and others, you can find them here -->

 http://www.irs.gov/Retirement-Plans/COLA-Increases-for-Dollar-Limitations-on-Benefits-and-Contributions

 
 
 
 

When building a 401(k) balance, what's most important?

Several years ago, I co-authored a paper linked here entitled Retirement Success: A Surprising look into the factors that Drive Positive Outcomes -->

https://www.unifiedtrust.com/documents/PositiveOutcomesFactorsv43.pdf

When we authored that paper, we were attempting to quantify and set priorities towards all of the factors contributing to a participant's income replacement.  Intuitively, we knew Savings Rate would be the most important, but didn't know to what degree and how that would compare to investment quality, asset allocation and risk.  The paper did confirm that Savings Rate is worth roughly 75% of someone's ability to retire.

Recently, an article was forwarded to me authored by John Rekenthaler entitled 'What Matters Most'.  It can be found on morningstar.com linked here -->

http://news.morningstar.com/articlenet/article.aspx?id=610828

The thought is similar to our paper from several years ago in that it looks specifically at a sample participant and attempts to define what would matter the most to her in order to allow her to retire given her specific set of circumstances.  The list below are the factors considered:

What would help her the most?

1)      Early start: Find a time machine, go back four years, and start her plan at age 38

2)      Higher salary: Get an immediate 25% raise, to $50,000 in annual salary

3)      Salary growth: Increase her salary by 4% annually rather than 3%

4)      Contribution rate: Invest 8% annually instead of 6%

5)      Company match: Receive a 75% company match instead of 50%

6)      Cheaper plan: Switch to Vanguard and pay 0.22% in fund fees rather than 0.72%

7)      Better funds: Own funds that gain 8% per year before expenses*

8)      Retire later: Wait two more years and retire at age 69, not 67

The interesting take on this to me was the reference to which of these factors are within her control and which were not.  The author identifies that three of the items above are in her control; Choosing when to start investing, choosing her contribution rate and choosing when to retire (or the length of her contribution period). The article goes on to demonstrate how most of the other items are mainly out of her control, and confirms the conclusion that we came to earlier which is that it is ALL ABOUT SAVING!!!  

It's a well done article and worth the read.  To the person who emailed it to me, thanks!

Five Steps to Mitigate Fiduciary Risk - or at least minimize it

 Every now and then we see an article of information that isn't saying anything new, but reminds us of some of the basics, i.e. the fundamentals of fiduciary best practices.  Below is an article that does just that, written in an easy to understand way, this article gives employers 5 steps to help mitigate a lot of fiduciary risk.  Thanks to the original publisher, REA & Associates Enewsletter originally authored by Paul McEwan, CPA, AIFA and linked here;

http://www.reacpa.com/five-steps-to-mitigate-your-401k-fiduciary-risk

Five Steps to Mitigate Your 401k Fiduciary Risk

There is so much noise in the marketplace regarding the fiduciary responsibility of plan sponsors it's no wonder people are confused. The confusion starts with who is a fiduciary so it's important to note that fiduciary status is based on the functions performed for the plan, not a person's title.

Your plan's fiduciaries will ordinarily include the trustee, investment advisers, all individuals exercising discretion in the administration of the plan, all members of a plan's administrative committee (if you have one) and those who select committee officials. When determining if an individual or an entity is a fiduciary, you need to look at whether or not they are exercising discretion or control over your plan.

Implementing the following best practices will help you mitigate fiduciary risk:
1.     Adhere to a well-defined, deliberative, documented process.

• Include a well-drafted investment policy statement (IPS) that describes the investment selection and monitoring criteria.
• Review annually the performance of the plan's fund line-up to determine if it meets IPS criteria.
• Identify all of your plan's service providers; know and understand their services and fees; monitor performance; and determine if fees are reasonable through objective plan benchmarking.

2.     Identify conflicts of interest. While they are not illegal, they will result in higher plan fees and reduced investment performance over time if not monitored. Any relationship that prevents the plan from being operated in the exclusive best interest of plan participants increases fiduciary risk.

• Beware of financial arrangements between service providers (for example, payments from mutual fund managers to the plan record keeper, TPA or investment advisor) as they are the biggest source of conflicts. Also be aware of personal relationships between plan fiduciaries and plan service providers.
• Use investment advisors in a fiduciary capacity and make sure they document that status in writing. If your advisors don't serve in a fiduciary capacity, be certain they are compensated on a level fee arrangement and know who pays them.
• Seek an independent review of your plan's service providers and investment platform every three to five years. Use an outside consultant, regardless of how much you trust your advisor.

3.     Take full advantage of fiduciary safe harbors provided for in the law.

• Comply with ERISA 404(c) if you allow participants to make investment decisions. There are three compliance areas: 1) investment menu requirements; 2) plan design and administrative requirements; and 3) information and disclosure requirements.
• Implement a Qualified Default Investment Arrangement (QDIA), especially if your plan has automatic enrollment provisions. This is an approved investment selection for participants not making an affirmative investment election. You should also consider moving all participant balances into the QDIA and then allow participants to make affirmative elections. Be sure to comply with all QDIA requirements.  

4.     Establish a fiduciary file that contains documentation of your plan oversight activities listed above, such as:

• All legal documents, including the IPS
• A copy of all service provider contracts and required disclosures
• All investment monitoring reports and prospectuses
• Minutes of all plan committee meetings
• All due diligence performed when selecting service providers
• Annual Form 5500 and audited plan financial statements, if required
• Annual plan activity summaries from service providers   

5.     Purchase fiduciary insurance. This is not an ERISA fidelity bond which is actually required coverage for all employees handling plan assets. Whereas a fidelity bond reimburses the plan for any losses resulting from dishonest acts by employees of the plan sponsor, fiduciary insurance protects the personal assets of all plan fiduciaries due to allegations of breach of fiduciary duties or failure to act prudently in the best interest of participants.

As a plan sponsor, you have the ultimate responsibility for monitoring the performance of the plan service providers your plan hires. You cannot assign or delegate away fiduciary responsibilities to another person or organization; however, you can share fiduciary status with others that may be more knowledgeable about retirement plan operations. If you don't follow the basic standards of conduct described above, you may be personally liable to restore any losses to the plan or to restore any profits made through improper use of the plan's assets resulting from their actions.

Limiting your fiduciary risk as it relates to your retirement plans is only five steps away. Follow them to protect yourself and you plan participants.

Populism Sans Facts - Reposting

Ray Harmon of ASPPA does a nice job of taking it to President Obama for his offhanded, negative slanting remarks about the Retirement system.  Good job Ray - Well worth the read.

http://www.napa-net.org/news/technical-competence/populism-sans-facts/?id=6661&tkn=940127217506af86e247cd&mqsc=E3583188&utm_source=WhatCountsEmail&utm_medium=NAPA_List+Napa-Net%20Daily&utm_campaign=NAPA%20Net%20Daily

Fee Disclosure: Enforcement Coming, no surprise

Fee Disclosure has been discussed ad nauseum on this blog in past entries.  Here we are on the approximate one-year anniversary of 408(b)-2 and an article comes out discussing how the DOL intends to make a concerted effort to enforce excessive fee cases, using the disclosures as the primary supporting documentation.  See below for the full article.


http://www.napa-net.org/news/managing-a-practice/regulatory-compliance/philadelphia-region-of-the-ebsa-to-focus-on-fees-in-401k-plan-audits/?id=4553&tkn=375651996506af1d83e2f5&mqsc=E3576487&utm_source=WhatCountsEmail&utm_medium=NAPA_List+Napa-Net%20Daily&utm_campaign=NAPA%20Net%20Daily

And they were kind enough to supply a link to the list of items required in the event of a DOL audit.

http://www.asppa.org/document-vault/pdfs/GAC/2013/dolreq.aspx

My thoughts are that the full impact of the fee disclosure rules from last year have yet to be felt, perhaps this is a sign of that impact en route.

Just who's Revenue Sharing is this Anyway? Good question Fred.....

This is a straight re-post from Napa-Net.  Original author, Fred Reish, link to follow.

http://www.napa-net.org/news/managing-a-practice/regulatory-compliance/whose-revenue-sharing-is-it-anyway/?id=6661&tkn=940127217506af86e247cd&mqsc=E3570246&utm_source=WhatCountsEmail&utm_medium=NAPA_List+Napa-Net%20Daily&utm_campaign=NAPA%20Net%20Daily

Is revenue sharing a plan asset? This issue and others were addressed in a July 3 DOL opinion letter (Advisory Opinion 2013-03A) addressed to the Groom Law Group concerning a plan administered by Principal.

In the situation addressed in the letter, Principal receives payments in the form of 12b-1 fees and other revenue sharing to offset expenses and deposit excess monies in a general account. Unless there is a specific agreement to the contrary, Principal is not required to hold each plan’s excess revenue sharing in a separate account. The DOL said that the revenue sharing received by Principal is a plan asset, but not before it is received.

Since Principal is using the revenue sharing to pay for the cost of the plan, some of which is paid to itself and from funds it manages, it is incumbent upon the plan fiduciary to ensure that the services and costs are necessary and reasonable. In particular, the letter stated:

It is the view of the Department that the responsible plan fiduciaries must obtain sufficient information regarding all fees and other compensation that Principal receives with respect to the plan’s investments to make an informed decision as to whether Principal’s compensation for services is no more than reasonable. … Prudence requires that a plan fiduciary, prior to entering into such an arrangement, will understand the formula, methodology and assumptions used by Principal in arriving at the amounts to be returned to the plan or used to pay plan service providers following disclosure by Principal of all relevant information pertaining to the proposed arrangement.

While this question is not addressed, if revenue sharing is considered a plan asset just like the investments themselves, doesn’t the revenue sharing really belong to the participants? If so, it raises the question of why one participant should have to pay more than another with the same account balance to offset the cost of administration of the plan just because the funds they invest in have higher revenue sharing. Would that pass the “reasonable” test?

Good questions.....ultimately the bigger question that I have is whether any of these standard industry practices would meet a true interpretation of the Exclusive Purpose rule......perhaps that's a matter of opinion, but my sense is that the participants are the last things on the mind of the big insurance companies and big mutual fund houses......

Tax Reform, Hatch and Starter 401(k)'s

On a morning where I read one of the scariest ideas I've seen come from Congress in my adult life, the so-called "Blank Slate" idea on Tax Reform from Senator's Baucus and Hatch which more/less calls for a complete "Do Over" on U.S. taxes, I also saw the separate ideas put forth by Senator Hatch in his introduction of the SAFE Retirement Act of 2013.  

Some thoughts on each of these.

The Blank Slate -  linked here
http://www.finance.senate.gov/imo/media/doc/06272013%20Call%20for%20Input%20on%20Tax%20Reform1.pdf

The general idea is that the U.S. Tax code is broken, it is riddled with exclusions, deductions and credits and caters to special interests.  It needs to be fixed, and needs to be simplified and clear out all of the unproductive provisions.  They say that their goal is to: (1) help grow the economy (applause!), (2) make the tax code fairer (whatever that means.....), or (why not AND?!) (3) effectively promote other important policy objectives.

They put out a bunch of noise about percentages, blah blah blah.   Here's what frightens me.

Blank Slate means the elimination of ALL special provisions, exclusions, deductions and credits and then add back in only the one that meets one of the above 3 goals.  This do over approach will almost certainly hurt lots of individual tax payers and because of #3, will almost certainly allow for all of the Special Interests to get back what they want in the name of "promoting other important policy objectives", Who's policy are they talking about?  I'm guessing that it is isn't mine.......Oh yeah, since this is a 401(k) blog, 401(k) Elective Deferrals are 'exclusions, deductions and credits', thus would be eliminated and may or may not be added back......

As I started to consider taking all of my money out of the bank and stuffing it in my mattress, I saw this other idea come across my desk, and it is a peach.  Truly, a lot of good ideas in this one and it came from, wait for it......Senator Hatch, one of the co-authors of the aforementioned Blank Slate!!! 

SAFE RETIREMENT ACT OF 2013- His introduction linked here.

 http://www.hatch.senate.gov/public/_cache/files/7644a3b9-be99-4e6f-bb2f-4f691bf50640/Hatch%20Floor%20Statement%20SAFE%20Retirement%20Act.pdf

The provisions of this submitted legislation would have mainly positive benefits to the Retirement Plan industry, would allow for greater coverage and greater savings levels.  In general, I'm in favor of these provisions listed below:

The bill would:
• create a new safe harbor deferral-only “Starter 401(k)” plan with automatic enrollment and an $8,000 deferral limit (plus a catch-up for those age 50 and over) for employers that do not have another retirement plan

• allow employers to adopt a qualified retirement plan on or before the due date, with extensions, of the employer’s tax return

• allow employers to replace SIMPLE retirement accounts with a safe harbor 401(k) plan during the year

• remove the arbitrary 10% auto-escalation limit on elective deferrals under the existing automatic enrollment safe harbor

• permit required interim amendments to qualified retirement plans to be made in conjunction with the plans’ restatement cycle

• allow plan sponsors to make electronic delivery of retirement plan documents the default option

• direct the DOL to modify its new participant disclosure regulation so that an investment that uses a mix of asset classes can be benchmarked against a blend of broad-based securities market indices

• allow individuals to roll over insurance contracts into individual retirement accounts

• allow required minimum required distributions to be rolled over into Roth IRAs

The legislation would also restore jurisdiction over the fiduciary rules in the tax code to the Treasury Department, and would require Treasury officials to consult with the SEC in prescribing rules relating to the professional standard of care owed by brokers and investment advisors to IRA investors — thus adding yet another element to the debate over a new, broader fiduciary standard.

The Tax Man is a kid in a candy store - 401(k) Savings threats

On this blog we've tried to inform the readership about the very immediate threats to the United States' primary savings vehicle, the 401(k) Plan.  See previous postings on the 'Save My 401(k)' campaign. 

Recently Fox News had a brief piece produced on The Willis Report, linked below.

http://www.youtube.com/watch?feature=player_embedded&v=hPDjLIzcD2U

In the report you can hear Judy Miller of ASPPA and Jonathan Hoenig of Capitalist Pig Asset Management discuss one of the proposed Tax Reform's attacking 401(k) plans, the $3m lifetime benefit cap.  I think they do a good job of highlighting that by capping savings for the wealthy, that there will be a trickle down negative impact on the working middle class as well.  Bottom line, ANY program engineered to dis-incentivize savings stated differently is to incentivize dependency on government. 

We don't take political stances here on this blog, but any program engineered to create dependency on ANY other institution feels wrong, and is very dangerous.  The private sector can, and has, successfully engineered a savings system that works very well.  If anything, politician's should be looking for ways to increase incentives to save. 

Check the video, become aware, act!

The "Real" Role of a 401(k) Plan Advisor - Good Thoughts Ary

Once in a while someone writes something and gets it right. .  Attached is a good read for Retirement Plan Advisors of all levels, beginner through expert.   Main theme is that overall comprehensive service and maximizing protection is where the value to the employer is, it's not all about picking funds, or really even a little.

See the article linked here.

http://www.jdsupra.com/legalnews/the-real-role-of-a-401k-plan-financi-67827/

Nice work Ary!

Save My 401(k) - Part 3, Lots of Negativity out there

If you haven't had a chance to see the recent PBC special, ‘Frontline, The Retirement Gamble’, it is worth watching.  It's a little scary in its depiction of the retirement industry.  It’s gotten a lot of industry attention.  I suggest you take a look, if you get a moment.  Linked here. 

 

http://www.pbs.org/wgbh/pages/frontline/retirement-gamble/

 
 

After watching it, please think about this excerpt from Phyllis Borzi, assistant secretary of labor in charge of EBSA (DOL enforcement).  Look at the choice of words she uses highlighted below in yellow.  Not new rhetoric, but definitely louder now than ever.  You can sign up for the DOL newsletter at DOL.GOV.

 

Take Three:

Fresh From 'Frontline,' Borzi on Retirement

Phyllis C. Borzi is the assistant secretary of labor in charge of the Employee Benefits Security Administration, which helps protect the retirement security of millions of America's workers. This week, she appeared in the PBS Frontline documentary, "The Retirement Gamble." We asked her three questions about retirement security in America today.

Frontline says that there's a retirement crisis. Is this true? I think the Frontline episode was right to point out that there are significant challenges that workers face in saving for retirement. We used to have a system of predominantly traditional pension plans, which are professionally managed and invested, and funded by employers. Now it is a defined contribution system, which requires workers to take on more responsibility not only to make sure that they save enough, but also to invest the right way. Part of our job at EBSA is to make sure workers are getting the information that they need, such as information on the fees that they are paying, so that those challenges aren't insurmountable.

What can the average person do to help ensure a secure retirement? There are a lot of steps you can take. First, make sure you are saving now, no matter where you are in your career, and maximize your employer match if you have one. Also, pay attention to the fees you're being charged and make sure you read all of the communications that you receive from your plan. If you have an investment adviser, make sure you're asking them questions to ensure that the person is a "fiduciary," that is, somebody legally required to put your financial interests ahead of their own. We've developed a fact sheet to help you do just that.

Can you tell us more about what the Department of Labor is doing to help? One of the challenges that Frontline identified was that investment advisers and brokers may be encouraging you to invest in products that financially benefit them — and may not be the best option for you. We don't think they should be able to do that, so we're working on a proposed rule to address these conflicts of interest and make sure that when you get advice, it's in your best interest, not your adviser's.

• Read the Fiduciary Fact Sheet
• Read the EBSA Newsletter

Added to original Post - Great synopsis on the one-hour show written by Nevin Adams. Linked below.
http://www.napa-net.org/news/managing-a-practice/industry-trends-and-research/gamble-gambit/?id=6661&tkn=940127217506af86e247cd&mqsc=E3514172&utm_source=WhatCountsEmail&utm_medium=NAPA_List+Napa-Net%20Daily&utm_campaign=NAPA%20Net%20Daily
 

Save My 401(k) - Part 2, Retirement Plan Limits under Attack!!!

This is a continuation of some thoughts from last fall where there were proposals kicking around Washington D.C. surrounding Tax Reform and specific threats to the Retirement Plan system.  Back then we thought we might see the dreadful 20/20 rule where individuals would be capped on the amount of contribution benefit to the greater of $20,000 or 20% of compensation per year.  That proposal would have hurt savings across the board.  Because of that ASPPA created a grass roots campaign called Save My 401(k) which many of us practitioners gladly got behind.  Here's the website for information on how to support it.

www.savemy401k.com

Flash forward 6 months and Obama's new budget proposal does come with a bunch of cuts directly impacting the Retirement Plan System.  The biggest one is the lifetime cap of $3m.  That seems like a lot of money to the average Joe.  Here are some thoughts:

1.) The number is actually determined as an annual living benefit of $205k/year.  They use that to back into this arbitrary $3m number.  That calculation is levered by prevailing interest rates which are at an all time low.  Therefore, when (not if) interest rates go up, that $3m number will go down and will go down sharply!

2.) The impact on this cap will predominantly be felt by the people in charge of companies.  Those who decide on whether or not to have a plan to begin with.  If they hit the cap, a huge incentive for them goes away and voila, the plan goes away too.  That is felt by every day people, not just the wealthy!

3.) The rule does NOT impact Deferred Compensation plans, aka Executive Bonus Plans.  Why not?  Interesting question.  The big CEO's, President's of Industry, the President of the U.S. ALL have accounts greater than $3m that aren't impacted by the rule.....it is very curious.

Brian Graff, President of ASPPA does a really good job of pointing this out on CNBC.  Link to the video here.  Enjoy!

http://video.cnbc.com/gallery/?video=3000161050.

Let's Talk About Risk, Man.

Yesterday, I saw a good post from NAPA Net regarding the potential of triggering a Form 5500 type audit.  For those unaware, NAPA is the National Association of Plan Advisors.  I found particularly interesting the list of actual 5500 responses deemed likely to trigger an audit or investigation.  Specifically listed were: 

• line items that are left blank when the instructions require an answer
• inconsistencies in the data disclosed on the Form 5500 schedules
• a large drop in the number of participants from one year to the next
• a large dollar amount in the “Other” asset line on the Schedule H

*Other red flags include hard-to-value investments, non-marketable investments, and consistent late deposits of deferrals.  Included in this category would be Self Directed Brokerage Accounts and Employer Stock.

The reason that this post struck me as interesting has to do with a topic that we discuss often on this blog and when we're out consulting with clients.  Specifically, Risk Mitigation.  Regular readers of this blog know that my firm is a Discretionary Corporate Trustee and that one of the primary reasons we are hired, although not the exclusive one, is to provide relief from exposure to fiduciary liability risk. 

 

Risk mitigation is crucial to our story, but we are consciously aware that of the fact that while fiduciary based law suits are increasing, they are still relatively uncommon in the small plan marketplace where we find most of our clients. 

One area that I've been focusing on when meeting with clients is in risk categorization.  Generally, I view employer (plan sponsor) risk falling into three main areas of concern:

a.       High Risk/Low Probability – This is the risk of law suit.  It is unlikely to occur, but if it does, it will be unpleasant, expensive financially to defend and will have a reputation cost as well.

b.      Low Risk/High Probability – We've found that in 85% of the plans we take over, we catch some kind of administrative, fiduciary or document breach up front and correct them.  These types of issues are likely to pop up from time to time and are a quite common problem.  They are relatively inexpensive to correct but do cause aggravation to clients.   

c.       Medium Risk/Medium Probability – This is the audit risk.  In my opinion, I believe that this is ought to be the biggest area of concern for an employer.  The risk of audit is becoming greater and greater and in the political environment of today, with extreme governmental debt and tax reform coming, this is one area that the government can easily generate revenues in the form of excise taxes, penalties and fines.  It is this risk that is supported by NAPA's posting.

The lesson here for employers is to make sure that 5500's are completed with the same kind of care and attention to detail that a person would use when filling out their IRS 1040.  

The lesson for advisors is two-fold. 

1.) Providing a 5500 review to help clients avoid potential audit trigger's could/should be among your services.

2.) Try coaching clients to eliminate some of those difficult to value assets like employer stock or Self Directed Accounts because those plans are the low hanging fruit from an auditor's perspective.

Finally, some a little self serving here, it would be a good idea for employers to hire a professional fiduciary services provider, like a Discretionary Corporate Trustee.

 

 

Podcast - 401(k) Alphabet Soup, me and Chuck Hammond

New media for me, enjoy!

http://www.blogtalkradio.com/the401kstudygroup/2013/03/15/the-alphabet-soup-of-the-401k-industry

Retirement Income Solutions - In-Plan or Out-of-Plan?

Very recently, we had a paper published in the Journal of Compensation and Benefits.  Dr. Greg Kasten is the primary author, and I had a small contribution to it.  You will find it linked here: 

https://www.unifiedtrust.com/documents/RetirementIncome-InPlan-vs-OutOfPlanSolutions.pdf

The paper deals with the recent trend of offering guaranteed income products, often in the form of a Guaranteed Income for Life Annuity, inside of 401(k) Plans.  The purpose of the article was to explore if real demand existed for such products and if so, were they better placed inside of a qualified retirement plan or outside of one?

Summary of findings:  Guaranteed Income for retirement, simply put, is a good idea.  However, the current availability of these products within the 401(k) space is poor.  The products are at an immature stage in their life cycle and are problematic for a variety of reasons.  Thus it would be advisable for a client to seek guaranteed income outside of their 401(k).  

Going a little deeper:

1.) Retirement Income Products are desired to provide a regular guaranteed stream of income.

2.) Many 401(k) service providers are putting these types of products into their 401(k) plan products.

3.) Question: Will employers and participants be better served with these products in a 401(k) Plan or outside of it, post retirement or in an IRA?

4.) Concerns for In-Plan Solutions:

a. Fiduciary Prudence – Is it a good idea for an employer to endorse an income product by putting in a plan as a Designated Investment Alternative?

  i.     Time and resources required to satisfy regulatory requirements for specialized products
  ii.    Lack of benchmarking and monitoring guidance for new products
  iii.   Risk of fiduciary liability for failing to meet participant expectations
        
b.      Product Feature Issues:
 i.      In order for the participant to receive the full value of the Income Product – They must be held  to term.  In many cases, early withdrawal or cancellation can be excessively wasteful.

 ii.      Diversification Issue – Currently, the insurance carrier who supplies the Income Product typically will only offer one Income product, their own.  They will not allow fair competition for the employee to select the one that’s best for them.  It is like offering a 401(k) plan with one balanced mutual fund and a money market fund and saying if they want access to the market, they can invest in the balanced fund.  What if the balanced fund isn't appropriate for that participant?
                     
 iii.     Portability – In order for employers to exercise their fiduciary duty, they must periodically check the marketplace to ensure that what they have is still in the best interest of the participants.  Over the lifetime of a plan, it is likely that a service provider change will occur, typically every 5-8 years on average.  At present, these Income Products are not portable.  This presents a practical issue for the employer.

 Do they make a provider change and force the participant to sell their Annuity early and take a large loss?  If yes, that’s a big fiduciary risk.

 If no, do they operate the plan with multiple service providers, requiring coordination between vendors, excess fees to administer, etc.?

 Do they not make a change to avoid options 1 and 2?  This is akin to being held hostage by a bad investment arrangement.

 iv.     Rollover ability – If participants change jobs, these products can’t be rolled to another employer’s plan, and perhaps not even into an IRA.  For people who change jobs periodically, this presents another practical issue.  What does the participant do in the event of a job change?

 v.     Fee transparency and reasonableness – Because these are individual annuities, the benefit of pricing power from asset aggregation is lost.  As a result, these annuities are often expensive and opaque in nature.  Further due to what is listed above, they would fail the DOL’s definition of a fair or reasonable contract or arrangement.  Specifically, the DOL views a reasonable contract or arrangement as one that is explicit in fees,
written and that can be terminated in a reasonable time frame without fee or penalty.  These currently do not meet that standard.

 vi.    Survivorship -  Most of the current versions of these Income for Life annuities are participant only, meaning that they don’t extend benefits to the surviving spouse in the event of death.  Compared to income products that exist in the open market, this is a very big disadvantage.

5.) Based on the above, the advice is that Income for Life products are a good idea, but are immature in their product life cycle.  Guaranteed Income can be found elsewhere, i.e outside the 401(k) plan, with more advantageous features and benefits.  Until the next generations of these are created, it would be inadvisable to put them into a 401(k) Plan.