Monday, November 16, 2015

Generation Lost: Millenials and how to best serve them regarding Retirement

 A colleague of mine, Lee Topley, forwarded this to me with some interesting thoughts.  I felt it good a good idea to share those here.  Full Disclosure: this post references a service my firm, Unified Trust provides called The UnifiedPlan (UP), a managed account service engineered specifically for 401(k) plans.

A client of ours recently inquired with us about how to communicate to Millennials.  See this linked white paper that was done by BNY Mellon on this group.  Generation Lost: Millennials and Finance Several of their key findings are below, and some thoughts on how we can impact 3 of the 4 summary findings.


  1. Millennials have little understanding of just how big a task they face in providing for their retirement.  This lack of knowledge is not due to a lack of interest.  Rather they feel they have not been told the reality of their situation.  The UP tells them exactly where they are (they don’t have to ask, we automatically give it to them)…they are in the Green (on track) or in the Red (underfunded)…and how much they have to save to become green if they are red.  Plus, the UP provides all types of flexibility to customize their solution if they want to re-model different scenarios.
  2. Most Millennials want financial services providers to be brutally honest with them about the bleak future they will face if they do nothing to build an adequate retirement income.  They want financial service providers to use more shocking messaging and to speak to them in language they understand.  The above response…Red versus Green is pretty frank on a participant's statement.  In addition if we use pointed communications focusing on the impact of greater savings, this would be the direct style that millennials are looking for. 
  3. Social Finance has a very strong appeal to Millennials, yet they do not feel that adequate impact oriented investment are accessible.  This is the one area that we aren't totally in sync on.  I wonder about this part of their concern.  Socially Responsible funds could be added, but due to prudence, would not be part of the glide paths.  So we could help here, but will this really help them achieve an adequate benefit at retirement or just make them feel better about how their money is invested?  This is the one finding that I think the UP doesn’t automatically cover. 
  4. Millennials feel today’s financial services products are not tailored to their needs.  They want new products to dovetail with the paths their lives are likely to take, not those of their parents.  Later in this paper the findings relate to the ability to access the money for buying a house, an illness, etc., so they may not be completely understanding the tax deferred aspect of their 401(k) money.  However, the plan can be set-up so they have access if the sponsor chooses to do so.

 Shortly after the summary on page 1 it states:

“These findings paint a picture of a generation that is ignorant of financial matters because it is being ignored. It is a generation that wants financial services providers to tell the truth”  A named Plan Fiduciary is bound by law to tell the truth and to always have their best interest as the #1 goal.

I found this dialogue interesting, and maybe gives the reader a little look under the hood at what professional fiduciaries are thinking about when discussing internally how to best serve clients.  

- Jason Grantz

Friday, November 13, 2015

Mailbag; What about Hedge Fund companies using their own hedge funds in their own 401(k) Plan?

Occasionally, we will receive a reader question that requires a little digging into.  When we get one like this, we feel like we should put it up for all to see.

Question from Steve: We have a client who is the CFO of a Hedge Fund company.  100% of their employer match is being automatically put into their own hedge fund.  We believe that this presents a real fiduciary risk for our client, but I was hoping you could site a lawsuit or DOL guidance?

Our Response:  Steve, there are several situations that I think apply to this directly, and specifically with regard to hedge funds.  The first issue is a recent case, Sulyma vs. Intel; reference article here Former Employee Sues Intel Over Hedge Fund.  This lawsuit is ongoing and only alleges imprudent investing in hedge funds meaning that it does not allege a conflict of interest which would be a violation of duty of loyalty to the participants (ERISA §404(a)).  I believe your group would have both the imprudent investing problem as well as a conflict of interest; a possible Self-Dealing violation of ERISA §406(b). So they would be potentially violating two sections of ERISA §404(a) and have a non-exempt Prohibited Transaction under §406(b)(2).

ERISA § 404(a)(1) to act solely in the interest of the participants and beneficiaries of the plans they serve and “(A) for the exclusive purpose of: (i) providing benefits to participants and their beneficiaries; and (ii) defraying reasonable expenses of administering the plan” and (B) to discharge their duties “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.”

In the Intel lawsuit it almost implies that a plan can never invest outside of the current norm (Modern Portfolio Theory, “normal” asset classes, etc.).  So the question is: “How does innovation occur in the prudent world of ERISA plans?”  This is something the industry will have to address at some point.

I also wanted to dig into whether or not there would/could be a Prohibited Transaction Exemption (PTE) for this.  For example, there are PTEs for mutual fund companies selecting their own funds for their employees 401(k) Plan.  Actually American Express tried to cite this PTE when they were sued a few years ago by their employees and when ruled they didn't meet the PTE, Amex settled the case for $15m.  Not to be too technical here but I don't think many of the PT exemptions (listed below) are going to be available to this group.  As mentioned, there is, in fact, a DOL opinion that deals with mutual funds, but, because the hedge fund is specifically not a registered investment company under the Investment Company Act of 1940, I believe they have much less room to act.

The potential conflicts of interest that could arise are numerous.  Here’s just a few.  Are they receiving any fees? Are the plan assets giving them some kind of economy of scale? Are the plan assets used as seed money for a new fund?  Here is full piece on the matter published by Groom Law Group, but the excerpt I clipped out below is what’s applicable.  See the yellow highlighted area.

Investing Plan Assets in Proprietary Mutual Funds. To the extent that a plan fiduciary also serves as investment adviser to a registered, open-end investment company, the fiduciary’s investment of plan assets in the mutual fund may involve one or more fiduciary conflicts. PTE 77-4 (for client plans) and PTE 77-3 (for the fiduciary’s own, in-house, plans) provide relief for such investments provided that certain conditions are satisfied, including disclosure and consent, and taking steps to avoid double fees. Similar relief is granted under PTE 79-13 for in-house plans of closed-end investment companies (but not for client plans, which effectively prevents most registered hedge fund managers from relying on these exemptions). PTE 84-24 also exempts, among other things, a plan’s investment in a mutual fund where the fund’s adviser or principal underwriter is also a directed trustee, prototype plan sponsor, or other service provider with respect to a plan (but not a discretionary investment manager or trustee, nor the plan sponsor), where an
affiliate of the fund’s adviser or principal underwriter will receive a sales commission with respect to the transaction. For this purpose, sales commissions generally include 12b-1 distribution fees. The PTE does not explicitly authorize the receipt of fund-level advisory and other fees (in contrast to PTEs 77-3 and 77-4), though it appears to do so implicitly. (Note that PTE 84-24 is not limited to the marketing of proprietary funds, though it is often used for that purpose.)

Steve, thank you for the excellent question and the chance to flex our research muscles.

- Jason Grantz

Tuesday, November 3, 2015

Retirement Income Options - In Plan vs. Out of Plan, Revisited

 In a recent post on, author Nevin Adams posited five reasons why Retirement Plan Sponsors aren't offering retirement income options inside the plan.  Link to article here:

5 Reasons Why More Plans Don't Offer Retirement Income Options

The reasons offered are:

1. There is no legal requirement to provide a lifetime income option.
2. The safe harbor for selecting an annuity provider doesn’t feel very “safe.”
3. Operational and cost concerns linger.
4. Participants don’t take advantage of the option when offered.
5. Participants aren’t asking for it. 

I think that this is an interesting take.  If no one is asking for it, it isn't required and when offered isn't used, that's a pretty good way of saying that there isn't any demand.  So if no demand, logically why would one supply.  But I think there's a bigger issue which is in Item #3.

Even with the Safe Harbor of offering an annuity option in a plan, many (most?) in-plan solutions are quite expensive.  Since we are in an era of fee compression, or as I call it the race to zero.  Putting an expensive option into a plan seems like a bad idea, especially when income solutions are readily available post retirement outside of the plan.  The other issue has to do with portability concerns which there are various different types that come into play making these types of investments dangerous to put into plans.

Dr. Greg Kasten and I tackled this issue in a Journal of Compensation and Benefits piece back in 2013 titled 'Retirement Income - In-Plan vs. Out-of-Plan Solutions, Which is Better?'.  At the conclusion of our piece, it was determined that until this marketplace matures and all practical, fiduciary and operational issues are resolved (not to mention cost), the right format to utilize retirement income products is outside of the plan sponsored retirement plan.

- Jason Grantz

Monday, October 19, 2015

New COLA for 2016 - Err, there is NO COLA since there was no increase in the index

The IRS has now announced the qualified plan limitations for 2016. These limitations are determined based on annual increases in the cost of living index. Because there was no increase in the index, plan limits will remain the same as in 2015.

Staying the same in 2016 (not all, but main limits of interest):
  • The maximum annual benefit payable from a defined benefit plan remains at $210,000.
  • The 401(k) deferral limit will remain at $18,000.
  • The catch-up contribution for participants who have attained age 50 will remain at $6,000.
  • The compensation-based definition of highly compensated employee (HCE) will remain at $120,000.  Thus, an employee who earns more than $120,000 in 2015 will be deemed an HCE in 2016.
  • The maximum amount of compensation taken into account for plan purposes will remain at $265,000.
  • The maximum amount that can be contributed by and for a participant to a defined contribution plan (i.e. profit sharing or 401(k) plan) remains at $53,000 (this amount does not include catch-up contributions).
In addition, the Social Security taxable wage base will remain at $118,500.

- Jason

Wednesday, August 19, 2015

The Directed Trustee Loophole

“On the one hand, fund companies are hired by plan sponsors – and required by law – to create menus that serve the interests of plan participants. On the other hand, they also have an incentive to include their own proprietary funds on the menu, even when more suit­able options are available from other fund families.”     From Are 401(k) Investment Menus Set Solely for Plan Participants, by Poole, Sialm, and Stefanescu, Center for Retirement Research at Boston College

The following is a link to the above cited brief that is based on a forthcoming study in the Journal of Finance:   The brief highlights something that I think we have all understood to be true (?) but is either overlooked or has just been accepted.  

The study shows mutual fund companies – and I would also argue insurance companies - have an undue influence on the use of their proprietary funds.

“Where mutual fund companies serve as plan trustees – indicating their involvement in the management of the plan – additions and deletions from the menu of investment options often favor the company’s family of funds. More significantly, this bias is especially pronounced in favor of affiliated funds that delivered sub-par returns over the preceding three years.”

Interestingly all of the mutual fund companies would be serving as a directed trustee and would claim (particularly in court) to have no fiduciary responsibility - that the plan sponsor is “making all decisions.”

So how is a Directed Trustee, as a limited purpose fiduciary with a duty of loyalty to the participant and their beneficiaries, allowed to unduly influence investment selection in a way that would put their interests ahead of the participant? Tough question, but I’ll give it a shot.  “Conflicted” is in the eyes of the beholder.  In other words, a directed trustee has free reign, for the most part, to be compensated via revenue sharing payments (ABN AMRO Letter) and/or offer proprietary funds in the investment menu because (although a fiduciary) the directed trustee has no discretion over plan assets.  Thus, the argument is made that, while there may very well be a conflict of interest, it wasn’t the directed trustee’s decision to select XYZ investment manager, it was the plan sponsor’s— therefore, no conflict with ERISA fiduciary standards on the part of the directed trustee.  The following language from the DOL Advisory Opinion 97-15a [Frost Model] spells it out:

“…it is generally the view of the Department that if a trustee acts pursuant to a direction (i.e. is directed) in accordance with section 403(a)(1) or 404(c) of ERISA and does not exercise any authority or control (i.e. discretion) to cause a plan to invest in a mutual fund, the mere receipt by the trustee of a fee or other compensation from the mutual fund in connection with such investment would not in and of itself violate section 406(b)(3).  Note: Emphasis added along with parenthesis

Unified Trust is a Discretionary Plan Trustee – not a Directed Trustee.  Under 403(a), the discretionary plan trustee “shall have exclusive authority and discretion to manage and control the assets of the plan “with a duty of loyalty” and no conflicts of interest.  Subsequent language allows an “escape clause” for the trustee. This language says that to the extent the trustee is directed by the plan sponsor or other named fiduciary they are not responsible for the management of plan assets. This is where the term “directed trustee” comes from. This loophole has been widely used by most vendors giving the appearance of a loyal fiduciary with no conflicts.

If a plan sponsor was truly aware of the difference, which do you think they would choose?
-    A Discretionary Plan Trustee who has a duty of loyalty and no conflicts of interests…like Unified Trust?  


-      A limited purpose Directed Trustee?

Wednesday, August 5, 2015

What's a Plan to Do?

“Some sponsors are just starting to think about outcomes, since in the past they thought they needed a retirement plan because that’s part of what it takes to attract employees.  But they had never thought about, ‘Is the plan supposed to do something? And if it is supposed to do something, what is it supposed to do,” said Dr. Gregory Kasten founder and CEO of Unified Trust.

Dr. Kasten was among a few select experts in the field interviewed for the article Retirement Ready-or Not, recently published by  The article stressed the critical role an advisor plays in helping plan sponsors answer the question, ‘what is a retirement plan supposed to do”? While that question seems simplistic in nature, surprisingly very few sponsors ever think about the true purpose or goal of their retirement plan as it relates to their employees success. Many in the industry measure success in terms of tracking participation and deferral rates, monitoring investment performance, and benchmarking fees all of which are important, but none of which independently provide a complete guide as to whether or not participants are succeeding. At Unified Trust, we believe that success is an employee being able to adequately replace their paycheck when they retire.

We also believe that success doesn’t happen by chance. That’s why Unified Trust developed the ‘benefit policy statement’ which is considered a sister document to the ‘investment policy statement.’  “If you want to manage outcomes, you are going to have to measure outcomes – and go a step further and define the outcomes you want,” said Kasten.

In these times of fee compression where it’s ever so critical to show added value, by helping a plan sponsor deliver improved outcomes for their participants, advisors can differentiate themselves in the marketplace.  As we move into the future, how successful—or unsuccessful— a retirement plan is in delivering retirement security may become a factor in determining whether or not a plan sponsor and other plan fiduciaries are meeting their fiduciary responsibilities.  Having a plan that doesn’t measure up to changing industry standards could leave the fiduciaries open to potential litigation.


- Jason

Thursday, June 18, 2015

Tibble v. Edison Ruling - Some potential impact to Advisors

 What Tibble v Edison International Ruling Means to Advisors

In the above linked article recently published on LifeHealthPro, the author discusses the Supreme Court’s recent decision on Tibble v. Edison International which centered on whether Edison International’s financial advisors and investment committee had breached their fiduciary duties by choosing retail share classes instead of institutional shares of specific mutual funds. It mainly focused on whether the ability to claim such a breach exceeded the six-year statue of repose mandated by the Employee Retirement Income Security Act (ERISA).

In mid-May, the high court handed down its unanimous opinion in Tibble v. Edison and said that “a fiduciary normally has a continuing duty of some kind to monitor investments and remove imprudent ones.”  This was expected and probably brought a widespread “no kidding” response from fiduciaries who have done just that from the get-go.

The Court vacated and remanded the lower court’s ruling; they went on to note in their opinion that the previous court’s ruling had “erred by applying a 6-year statutory bar based solely on the initial selection of the three funds without considering the contours of the alleged breach of fiduciary duty.”

The author posits the idea that some industry insiders are worrying that this may be the beginning of the Supreme Court’s interest in delving deeper into the fiduciary duties of those managing employee retirement plans and that the Court left just enough vagueness in its opinion to make advisors wonder what will be considered “reasonable” for due diligence and monitoring.

I was interviewed and quoted a few times in the article, specifically regarding the veracity of the decision and the likely consequence of minimizing the protection of the six-year statute of repose.

Another commenter suggested that this decision won't have much impact on keeping fees reasonable or a fiduciary duty to monitor since these ideas have already been in play for quite some time, but that it may cause some firms to take the idea of reviewing the plan's Investment Policy Statement (IPS) to ensure compliance with it.
At my firm, Unified Trust, we act as the plan trustee and in that role we are responsible for executing the plan's IPS, selecting and monitoring the investments and generally employing a prudent process that is thorough, regular and well documented.  One result from this ruling that I see happening more is a greater conscious effort from Retirement Plan Committees and their advisors in documenting their decision-making or outsourcing to firm's that will.

- Jason Grantz

Wednesday, June 17, 2015

Fiduciary Fight Continues - Could Congress cut off funding?

Earlier today, a House bill plans to stop the Department of Labor’s fiduciary proposal by cutting off funding to implement the measure.

The measure was included by the House Appropriations Committee in the draft fiscal year 2016 Labor, Health and Human Services (LHHS) funding bill, slated to be considered in subcommittee on June 17. The legislation includes funding for programs within the Department of Labor, the Department of Health and Human Services, the Department of Education, and other related agencies.

In a summary of the bill, the provision dealing with the fiduciary proposal is included under a section titled “Reducing Harmful Red Tape.” The language itself says simply, “None of the funds made available by this Act may be used to finalize, implement, administer, or enforce the proposed Definition of the Term ‘‘Fiduciary’’; Conflict of Interest Rule—Retirement Investment Advice regulation published by the Department of Labor in the Federal Register on April 20, 2015 (80 Fed. Reg. 21928 11 et seq.).”

In another article, published on Investment News Weekly, it is pointed out that if this particular bill doesn't make it through the Senate, this same rider could get attached to another bill.  If it were attached to a bill that would be considered too important for the President to veto, it is possible that the DOL Fiduciary rule proposal could be de-funded. 

The article attached here: DOL Fiduciary Rule in Crosshairs of New Spending Bill?

We've written on this blog about the DOL Fiduciary Proposal, and have summarized it with updates linked here.  Summary of DOL Fiduciary Proposal

Earlier this spring, U.S. House Representative Republican Ann Wagner announced publicly a three-pronged approach to try and kill these rules.  The first strategy involves getting a bill through requiring the SEC to take lead in the rule making to establish a new fiduciary standard. 

Failing that, the second strategy is to employ the private sector to attempt to delay the rules for as long as possible in hopes that it pushes into and beyond the presidential election and the incoming president stops it.  This second strategy is well known and the DOL is aggressively moving to have these rules finalized and in place by the second quarter of 2016.

Her third strategy is the appropriations approach outlined earlier in this post.  Needless to say, there is considerable opposition in both the public and private sector to these rules moving forward.  More updates will come as this unfolds.

- Jason Grantz

Tuesday, June 2, 2015

Mailbag: Q&A with The 401(k) Study Group

The 401(k) Study Group has created a new segment with their Blogtalk radio podcast called 'Mailbag' which is an 'Ask the Expert' style radio interview.  I was fortunate enough to be tapped by Chuck Hammond to be their first "Expert" tapped to answer questions.  Below is the link.  Enjoy!

Ask the Expert' with Chuck Hammond

- Jason

Monday, April 27, 2015

The DOL's Conflict of Interest Rules - Summarized and lots of links!

Last week, the Department of Labor (DOL) unveiled its long awaited Conflict of Interest rules (regulation, not law).  Here is a link to the DOL's fact sheet,  The regulation itself is hundreds of pages.

So, at first blush I think that the proposal is slightly less onerous than I thought it would be, but it does some things that are going to be a big deal.

1   1.)    It broadens the definition of who is and who is not a fiduciary and takes away the loophole on what is and isn’t advice.  Essentially, my read is that if you are a financial advisor/adviser, agent, registered rep, broker, Investment Consultant, etc. who recommends anything to a retirement plan, plan sponsor or participant, you will be considered a fiduciary, even if it is singular advice.  My take is that it will be virtually impossible to be a rep on a 401(k) plan and not be a fiduciary.
2.) IRAs are pulled in as part of the jurisdiction here.  That includes recommendations about IRA rollovers and in advising IRA holders on underlying investments, holding IRA advice givers accountable to similar standards more/less as they would be on ERISA plans.
      3.) There will be a Best Interest Contract Prohibited Transaction Exemption (BIC PTE) – This is going to get a TON of comments during the comment period as it seems pretty significant in the amount of required detail and submission including sending a copy to the DOL, thus requiring an investment consultant to be highly visible to the DOL for regulation purposes.  This is the way the DOL is saying an advice giver can be conflicted, I (along w. others in the industry I've spoken to) are highly skeptical of this process.
      4.) Enforcement of the new rules seems to be an issue since while the DOL has the power to write the rules, only the IRS has the power to enforce and, as of this writing, they aren’t staffed to enforce ERISA-like standards on IRAs.

For this proposal to become rule, these are the next steps:
  1. Comment Period – 75 days, ending on/about 07/6
  2. Public Hearing – within 30 days after Comment Period 
  3.  Preparation of Final Rule – This will take some time as DOL will need to absorb the public comments and make changes.  Then sent to the Office of Management and Budget (OMB) to review. 
  4. Effective Date – The rule becomes effective 60 days after publication in the Federal Register once back from OMB 
  5. Applicability Date – 8 months later
Assuming this goes through with no further opposition (Congressional, SEC, industry, etc.), the industry will need to be ready to function under these new rules sometime in late 2016, figure Q3.

My thoughts, I’m still of the opinion that this can get derailed.  I believe that even written as is, that if any delay in efficiency of the above process from here were to occur that causes it to push into Q4 of 2016 or later will effectively kill it, or will at least be likely to because of the Presidential election.  

It is common for incoming president's to halt any unfinished business from the previous administration, this is often what occurs even when the new President is in the same party as the previous president.  So, while the DOL did a good job in getting this out with enough time to actually get it through, they really did wait until the last minute.  They should have put this out last year. 

That said, the DOL and the industry knows about this timeline concern.  On April 21st, a letter (The letter) was sent to the DOL from an association of 20 industry trade groups  asking for the Comment Period to be extended from 75 to 120 days.  On April 23, Labor Secretary, Thomas Perez indicated that the DOL has no intentions of delaying this indicating that they want this 'fast-tracked' and not impacted by the next presidential election, 'DOL Not Budging'.  

Also, of interest, according to Bloomberg several democratic Senators have actually pushed back against the DOL's proposal despite presidential backing, see article Dems Pushback
citing significant problems with the bill potentially leading to reductions in consumer services.  Seemingly, the fight here is still ongoing and, more opposition is expected. 

UPDATE: As an update to this delay strategy, a group of democratic congressman, 18 of them, have also joined the voices asking for more time, attached here;  Democratic Reps Want Longer Comment Period.

UPDATE 2: More requests for delay, this time from three dozen republican senators, pressure is mounting!  The senate letter here; Senate Letter asking for delay

A number of groups have put out summaries of the regulations, estimates on impact and some general thoughts as to where the problems are initial visible.  I'm sure more will come on this issue.  Below for links to the summaries.

Happy Reading!

- Jason Grantz