Tuesday, April 30, 2013

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.


Nice work Ary!

Friday, April 26, 2013

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. 
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.

Tuesday, April 16, 2013

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.


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!


Friday, April 5, 2013

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.