Monday, April 11, 2016

The Real Threat - State Run Plans

Now that the OMB has released the final version of the DOL's Conflict of Interest rule, it is a perfect time to look at the other major event looming on the horizon in the 401(k) world.  Arguably, as far as threats to industry are concerned, this one is the bigger threat. This is the issue of State offered and State-Run retirement plans.

In Brief:
Right now approximately ½ of the states are considering some type of public sector retirement offering.  In general the types the states are considering fall into one of three categories:

     1.)    Mandatory Plan using a State-Run Automatic Contribution IRA
a.       Typically for Employers over a certain size not currently offering a 401(k), Pension, Simple IRA, SEP or other type of plan, minimum # of employees will vary from state to state
b.      This grants them safe harbor from being covered under ERISA per the DOL
c.       Generally what the “blue” states are considering

     2.)    Voluntary Marketplace Model – For companies with less than 100 employees
a.       IRA Type products, includes the OBAMA MIRA program
b.      Both Blue and Red states considering this

     3.)    Voluntary State Run plan – Akin to the state entering as a competitor to the private sector
a.       Mainly the “red” states that are thinking about these

DOL/FED Stance:  In December, 2015, the DOL provided an opinion letter regarding state offered plans.
1.)    That the states could be granted Safe Harbor from ERISA if the state program was 
     a.) Mandatory and 
     b.) Auto-IRA based

2.)   It allows for creation of State-Run OPEN MEPs – No states have yet to pursue this b/c this would NOT be exempt from ERISA.  This potentially gives an unfair advantage to a state offering since Open-MEPs are not yet available within the private sector

3.)    Now the DOL is done with the Fiduciary Rule – State Run plan rules/regs. is the main priority.  The DOL will be trying to get rules to OMB by July to get them through under Obama’s term

State by State: California, Maryland and Connecticut are closest to passing something in 2016
Website: houses all of the state-by-state details.  Here is a summary.

California - Mandatory State-run auto IRA program. – Looks likely for 2016, applies to companies with 5 employees or more not yet offering a retirement plan
Connecticut – Their study was completed in 2014, looks likely to pass in 2016.  There is a potential hold back to passage which is that in 2017 CT will be having major budget cutbacks, and this new bill will cost CT $10m to implement.  There may not be $$ for this at this time.
Some wrinkles here.  
1.)    There was some interest within the state to add certain coverage requirements, specifically that if you were a CT resident who was employed but wasn’t offered a workplace retirement plan and your employer has 5 or more employees, that the employer would be required to offer you the state option.  The wrinkle was that this would be for ALL employees, so for example, a CT based employee of a company out of Kentucky that didn’t offer a workplace retirement plan.  That KY employer would now be required to offer the CT based employee the state auto-IRA plan.  This would also go for CT employees that were excluded for some reason, such as part-time employees.  This was wrinkle was removed.
2.)    50% of Accumulated funds will be mandatorily converted into a lifetime annuity at retirement.  This is still in play.
Georgia – Just at the beginning.  Have commissioned a cost/benefit study
Hawaii – Just at the beginning.  Have commissioned a cost/benefit study
Illinois -  Illinois is the first state to actually enact a state run retirement program.  It is a state run auto-IRA required (mandatory) for employers of 25 or more employees not offering a workplace plan. 
-          The mandate won’t kick in until the program becomes operational.  They have not yet issued RFP’s for recordkeeping.
Indiana – This is a VOLUNTARY state-run program.  Because it is voluntary, it is subject to ERISA.  This is basically Indiana entering as a competitor in the space. 
Maryland- very close to becoming law.  Mandatory State Run Auto IRA for employers with 10 or more ees.  One twist here is a $300 filing fee being waived as an incentive for employers.  This has unanimous support in Maryland
New Jersey – NJ is adopting the Voluntary Marketplace model.  It is early stages, so details are fuzzy right now.  They aim to have it up and running by 2018.  This is b/c it is a partisan issue, Christie is out in 2018, and wants this in effect in case Democrats take over as governor.  Auto-IRA was originally presented, but got vetoed by Christie.
Oregon – One of most liberal states in U.S.  In 2015 passed their law.  It will be a mandatory Auto-IRA program, NO minimum employee threshold.  Board is working through schematics on it now.
Utah – Voluntary State-run Auto IRA program.  Thus, it is subject to ERISA>
Washington – Similar to NJ, opting for Voluntary Marketplace model.  They have just issued an RFP for a website and for product specs.

Again, more detail within the website link ( about what every state is doing.  I think this is important b/c, as an industry we potentially will have a new public option competitor in every state, but every  state may be different.  Interesting times. 

- Jason Grantz

Friday, April 8, 2016

The DOL Conflict of Interest Rule is finally here! Some implications....

Implications of the Fiduciary Rule 

After months of anticipation and years of debate, the Department of Labor (DOL) “Conflict of Interest Rule” has finally been released.  During the proposal process, the DOL fielded over 400,000 comments, some of which were in opposition to the rule while others were seeking clarification to specific areas within the rule.  The one thing there is little debate about is the intent of the rule.  There may be arguments around the government’s role in this process, or the nuances of what constitutes investment advice, but how do you argue that a rule requiring the industry to act in the best interest of their clients is a bad thing?

It will likely take weeks, if not months, to fully dissect and understand the scope of the new fiduciary rule and how the landscape will change as it is phased into implementation.  Here are a few of my initial interpretations and what I think the potential implications are.

Potential Impact on Financial Advisors
The registered investment advisors (RIAs) that have already been acting in a fiduciary capacity just saw their marketplace get considerably more crowded.  With the vast majority of advisors now being considered fiduciaries, RIAs will be forced to adjust their value proposition to distinguish themselves amongst their competitors.  My opinion is that the most impactful point of differentiation will be to not only improve outcomes for participants but to quantify those outcomes for the plan sponsors and retirement plan committees.

Some broker-dealer registered reps may need to utilize the ‘education carve-out’ to limit or avoid fiduciary status.  However, the carve-out is going to be narrower than it previously was (per DOL Interpretive Bulletin 96-1) and the education provided under this approach will be limited and may be considered unsatisfactory to many plans.  Registered reps who wish to stay in the retirement plan industry using the education carve-out may ultimately need to rely on a very strong fiduciary partner to do so (a view shared by notable fiduciary expert Fred Reish in a recent blog post as an evolving “common solution” for 401k-focused registered reps in the wake of the new fiduciary rule).

Potential Impact on Advisory Fees
In recent years, fees have been compressing as a result of the DOL’s fee disclosure initiatives and the increasingly competitive nature of the marketplace—something that is expected to accelerate under the new fiduciary definition rule.  It’s also highly likely we’ll see increased litigation over the matter.  

However, we don’t believe that there will be a bright-line test on fee reasonableness.  It’s not necessarily about the fee but rather what is being done to earn the fee.  For that reason we believe that an advisor’s business model will need to include greater fee transparency, a prudent documentation and monitoring process, and the ability to quantify participant level outcomes.  Advisors that can accomplish this will be in a better position to justify their fees and differentiate their services in a fiduciary environment where everyone is essentially viewed as an equal.

Potential Impact on Compliance
Compliance complexity and oversight will greatly increase.  For example, testimony to the DOL indicated in the first year the rule goes into effect financial institutions will have to produce more than 86 million written disclosures and notices.  This does not come without a cost.  Who will pay for this?

Potential Impact on Vendors
Many major vendors will be exempt from the fiduciary rule or attempt to structure relationships to avoid fiduciary status under the rule.  This means litigation that develops may be between the plan sponsor and the advisor since the vendors may not be a fiduciary—that is unless you are working with a vendor that is willing to accept fiduciary status such as my firm, Unified Trust who not only is willing to accept fiduciary status, we sign on as discretionary trustee, and thus a named plan fiduciary, in the plan document for every plan on our platform.

The DOL Conflict of Interest Rule will no doubt have a sizable impact on the industry.  The extent of that impact will unfold over the coming months and years.  We do firmly believe that it will increase the need to have a fiduciary process that is not only accurate but also automated and algorithm-based.  In other words, it won’t be enough to say you’re a fiduciary, rather you will need to show prudent fiduciary processes are in place and in the best interest of the investor. 

- Jason Grantz, QPA, AIFA