Well, I put together a little opinion paper discussing a recent trend we've been seeing in 401(k) products over the last year or so, the so-called "Third Party Fiduciaries". The idea behind the paper was to share our views to our Advisor Partners and their clients to help them gain a better understanding of the limitations of arrangements that are being oversold to a degree. Unbeknownst to me, the paper was picked up by 401khelpcenter and put online today. So, since it is available publicly anyway, I figured I'd link it here for any to see. Happy reading.
http://www.unifiedtrust.com/Documents/Third_Party_Fiduciaries.pdf
Monday, January 21, 2013
Friday, January 18, 2013
Fixing the 401(k) Makes Sense - Let's look at it
Earlier in January, an article was published that caught my eye. The title alone, "Five Ways to Strengthen the 401(k)" was compelling enough for a Pension Geek like myself to read it. As I dove into the article, linked here --> http://www.investmentnews.com/article/20130106/REG/301069978, I started to analyze and think about the issues raised by the author. His perspective was to implement common-sense reforms that could make dramatic differences in generating better retirement readiness.
These are the 'Five Ways' as the author wrote them, and my comments in red.
1.) A Focus on Fees. New 401(k) fee disclosure rules are a good first step, but employers and participants need to focus on investment costs in plans, as investment costs represent 84% of a plan's fees. Unnecessarily high fees will eat away at the value of retirement savings over time. This is a true (albeit obvious) statement. I think more important for employer's to understand is the relationship between investment costs and subsidies delivered to service providers like record keepers, TPAs and custodians. It's great to compress investment expenses by selecting institutional class investments and the like. We are certainly advocates here, but a dialogue about the reaction of the vendors on billable costs needs to be assessed as well. If the service provider fees are unaffected by swapping expensive funds for inexpensive "equivalents", that makes a lot of sense to do. If it results in an increase of billable costs to the employer, it must be well vetted before implementing.
2.) Mandates for savings. The single most effective step that Congress could take to increase retirement savings is to set mandates requiring employers to offer some form of a retirement savings vehicle along with mandating an employer match and employee participation in the plan. By providing access to a savings vehicle, forcing contributions at some level and automatically enrolling participants on day one, mandates will jump-start retirement savings for millions of Americans. This is a great idea in theory, one that we've actually posited at our firm quite a bit. See this article that I co-authored a few years ago that identifies Savings Rate as the significantly most important factor in creating Retirement Success
linked here --> https://www.unifiedtrust.com/documents/PositiveOutcomesFactorsv43.pdf
Many states have considered mandating employer sponsored retirement plans at the state level. The furthest along on this is California. Mandating an employer match or mandating employee participation in the plan will prove more difficult. Many employers, if mandated to contribute to the plan, will do so by way of reducing current employee salaries accordingly. Ultimately, this will not necessarily help the employees and may, in fact, hurt them. Similarly, mandating employee contributions to the system has been done before, it's called Social Security. The difference offered here is that this forced contribution would be in a privatized 401(k) setting. Yes it will jump-start retirement saving, but may come at a current lifestyle price. This is a very slippery slope, and my sense is that if they go down the path of mandating contributions, it most likely won't be to the benefit of the private system, but rather it will likely be done in a public setting benefiting the govt.
3.) Defined investment options for workers. The 401(k) has opened the door to broad investment choice, but many workers feel confused rather than empowered by the options. One solution is to simplify the investment process by automatically enrolling participants in a professionally managed investment program providing most workers with an appropriate investment for their situation based on all investment assets, not just those in the retirement plan. For those wanting to go it alone, there would be an option to do so. Actually, I wholeheartedly agree with this point. In fact, this actually already exists.....allow us a little self-promotion. Our firm, Unified Trust Company has a system that works precisely as described. Here is a link that can introduce the concept that we call The UnifiedPlan --> https://www.unifiedtrust.com/up/index.cfm
4.) Restricting distributions. Under the rules, it is too easy for workers to take withdrawals from their 401(k)s, and as a result, too many participants treat their retirement savings like a checking account. Over time, and with the power of uninterrupted compounding, individual 401(k) accounts are likely to grow and be put to use as intended — to provide an income stream in retirement. Yes, right now within the rules a plan may allow for Loans or In-Service Withdrawals. I think that many of us practitioners would like to do away with loans altogether. I've heard them referred to as the bane of retirement plan record keeping. That said employers can eliminate them altogether from their respective plan now, if they choose to. Many do not because they fear that taking that extreme position will cause lower participation, and in some cases they are correct. I would submit that a good idea is to allow for either loans or an in-service distribution feature, but not both. Further, I'd suggest that employers explore restricting the loans in some way or otherwise set the loan policy so that taking one is undesirable. A few ideas:
These are the 'Five Ways' as the author wrote them, and my comments in red.
1.) A Focus on Fees. New 401(k) fee disclosure rules are a good first step, but employers and participants need to focus on investment costs in plans, as investment costs represent 84% of a plan's fees. Unnecessarily high fees will eat away at the value of retirement savings over time. This is a true (albeit obvious) statement. I think more important for employer's to understand is the relationship between investment costs and subsidies delivered to service providers like record keepers, TPAs and custodians. It's great to compress investment expenses by selecting institutional class investments and the like. We are certainly advocates here, but a dialogue about the reaction of the vendors on billable costs needs to be assessed as well. If the service provider fees are unaffected by swapping expensive funds for inexpensive "equivalents", that makes a lot of sense to do. If it results in an increase of billable costs to the employer, it must be well vetted before implementing.
2.) Mandates for savings. The single most effective step that Congress could take to increase retirement savings is to set mandates requiring employers to offer some form of a retirement savings vehicle along with mandating an employer match and employee participation in the plan. By providing access to a savings vehicle, forcing contributions at some level and automatically enrolling participants on day one, mandates will jump-start retirement savings for millions of Americans. This is a great idea in theory, one that we've actually posited at our firm quite a bit. See this article that I co-authored a few years ago that identifies Savings Rate as the significantly most important factor in creating Retirement Success
linked here --> https://www.unifiedtrust.com/documents/PositiveOutcomesFactorsv43.pdf
Many states have considered mandating employer sponsored retirement plans at the state level. The furthest along on this is California. Mandating an employer match or mandating employee participation in the plan will prove more difficult. Many employers, if mandated to contribute to the plan, will do so by way of reducing current employee salaries accordingly. Ultimately, this will not necessarily help the employees and may, in fact, hurt them. Similarly, mandating employee contributions to the system has been done before, it's called Social Security. The difference offered here is that this forced contribution would be in a privatized 401(k) setting. Yes it will jump-start retirement saving, but may come at a current lifestyle price. This is a very slippery slope, and my sense is that if they go down the path of mandating contributions, it most likely won't be to the benefit of the private system, but rather it will likely be done in a public setting benefiting the govt.
3.) Defined investment options for workers. The 401(k) has opened the door to broad investment choice, but many workers feel confused rather than empowered by the options. One solution is to simplify the investment process by automatically enrolling participants in a professionally managed investment program providing most workers with an appropriate investment for their situation based on all investment assets, not just those in the retirement plan. For those wanting to go it alone, there would be an option to do so. Actually, I wholeheartedly agree with this point. In fact, this actually already exists.....allow us a little self-promotion. Our firm, Unified Trust Company has a system that works precisely as described. Here is a link that can introduce the concept that we call The UnifiedPlan --> https://www.unifiedtrust.com/up/index.cfm
4.) Restricting distributions. Under the rules, it is too easy for workers to take withdrawals from their 401(k)s, and as a result, too many participants treat their retirement savings like a checking account. Over time, and with the power of uninterrupted compounding, individual 401(k) accounts are likely to grow and be put to use as intended — to provide an income stream in retirement. Yes, right now within the rules a plan may allow for Loans or In-Service Withdrawals. I think that many of us practitioners would like to do away with loans altogether. I've heard them referred to as the bane of retirement plan record keeping. That said employers can eliminate them altogether from their respective plan now, if they choose to. Many do not because they fear that taking that extreme position will cause lower participation, and in some cases they are correct. I would submit that a good idea is to allow for either loans or an in-service distribution feature, but not both. Further, I'd suggest that employers explore restricting the loans in some way or otherwise set the loan policy so that taking one is undesirable. A few ideas:
- Maximum of one loan outstanding at a time
- Condition the loan as a Hardship loan, only approve if a verified hardship exists
- Set the interest rate to the loan as something high, for example Prime plus 2 or even higher
5.) Meeting the need for reliable retirement income. With people living longer, retirement dollars need to last longer. Throughout the 401(k) industry, there are continuing efforts to merge the best features of traditional defined-benefit and defined-contribution plans to create an investment option that guarantees income for life. More needs to be done in this area to meet growing needs for reliable retirement income. Although this seems to be a new trend in the industry, solutions are emerging that could make a lifetime of difference for retirees and their families. See my response to item #3. It's already here, folks just need to find it.
Thanks to the author, Tom Gonnella, for putting out good food for thought.
Thanks for 2012 and The Big Five in 2013
To all the readers of this blog, I wanted to say thank you for your previous and continued interest. 2012 was a very important and, frankly, a big year for us. We've gotten more attention then ever and have more hits per day and then ever before. Looking forward to continuing the dialogue in 2013 and working with each of you to try and fine ways to better improve the delivery of good Retirement Plan Consulting. That said, here's what we have to look forward to in 2013 in the Retirement Plan Industry.
1. Threats to DC plan tax incentives coming from two continuing debates on Capitol Hill — over the nation’s debt limit and about tax reform. This is a very real potential threat that we've discussed previously leading to 'Save My 401k' campaign. I'm told that 55,000 citizens have submitted letters to their congress people to date and more are doing so every day. We are getting their attention.
2. Fee disclosure is not over. We expect DOL regulators to look at advisor fees again in 2013, focusing on critical questions about how fees are paid. This is going to be interesting. As it unfolds, I expect to see enforcement of last year's 408(b)-2 regulations and my opinion is that Plan Sponsors will be held accountable for compliance leading them to ask a lot of questions to their advisors about advisory fees. Could get uncomfortable for some.
3. The definition of a fiduciary and what the advisor’s role in that is. Expect to see a proposed rule from DOL in the second quarter of the year. This debate roles on. Some of us involved in the industry and with the National Association of Plan Advisors will likely have a chance to weigh in on this issue.
4. Lifetime benefits. We know that this issue is an area of great interest to the DOL. We’re moving toward a requirement in this area; probably by March we’ll see a proposed regulation on providing lifetime income estimates on participant statements. This is a great idea. However, there are a lot of great ideas that lead to extremely poor execution. A great example is the next item. The idea of a glide path where people start out more aggressively invested and get more conservative as they age is a great idea. The industry's deliverable on that, the Target Date Mutual Fund, was a poorly executed result (at least from the investors point of view....actually a great deal for those fund companies).
5. Reevaluation of target date funds — in particular, regarding their usage as QDIAs. I'm crossing my finger's that eyes will be open as to the major flaws that exist with the current availability and structure of these funds and hope that the QDIA definition will eliminate these as an option......
Keep your eyes open, as there will surely be more to come.
Best - Jason
1. Threats to DC plan tax incentives coming from two continuing debates on Capitol Hill — over the nation’s debt limit and about tax reform. This is a very real potential threat that we've discussed previously leading to 'Save My 401k' campaign. I'm told that 55,000 citizens have submitted letters to their congress people to date and more are doing so every day. We are getting their attention.
2. Fee disclosure is not over. We expect DOL regulators to look at advisor fees again in 2013, focusing on critical questions about how fees are paid. This is going to be interesting. As it unfolds, I expect to see enforcement of last year's 408(b)-2 regulations and my opinion is that Plan Sponsors will be held accountable for compliance leading them to ask a lot of questions to their advisors about advisory fees. Could get uncomfortable for some.
3. The definition of a fiduciary and what the advisor’s role in that is. Expect to see a proposed rule from DOL in the second quarter of the year. This debate roles on. Some of us involved in the industry and with the National Association of Plan Advisors will likely have a chance to weigh in on this issue.
4. Lifetime benefits. We know that this issue is an area of great interest to the DOL. We’re moving toward a requirement in this area; probably by March we’ll see a proposed regulation on providing lifetime income estimates on participant statements. This is a great idea. However, there are a lot of great ideas that lead to extremely poor execution. A great example is the next item. The idea of a glide path where people start out more aggressively invested and get more conservative as they age is a great idea. The industry's deliverable on that, the Target Date Mutual Fund, was a poorly executed result (at least from the investors point of view....actually a great deal for those fund companies).
5. Reevaluation of target date funds — in particular, regarding their usage as QDIAs. I'm crossing my finger's that eyes will be open as to the major flaws that exist with the current availability and structure of these funds and hope that the QDIA definition will eliminate these as an option......
Keep your eyes open, as there will surely be more to come.
Best - Jason
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