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