What do election results mean for your 401(k)?

As yet another sign of the apocolypse (thanks Superstorm Sandy), Yours Truly was interviewed by Benefits Pro on my thoughts regarding the election and the future of Retirement Plans.  Below is a link to the article.  Enjoy!

http://www.benefitspro.com/2012/11/07/what-do-election-results-mean-for-your-401k

Save My 401(k)

In 2013, tax reform will be on the table in Congress.  Everything will be on the table, and one area that is getting serious consideration is cutting the benefits afforded by 401(k) Plans.  This is a very serious threat to the primary way Americans save for Retirement.  I encourage any regular readers or those of you who occasionally stumble upon this blog to contact your congress person and encourage them to "Stay Away from Your 401(k)".

See this website that was set-up for just that purpose.  There's a fun 'Youtube' video that you can link to from this website and places on twitter and facebook that you can link to as well.

www.savemy401k.com

Occasionally we post facts COLA - The 2013 Retirement Plan Limits

Below are some of the changes, the one's that are most useful for participants to know.

Internal Revenue Service cost-of-living adjustments applicable to dollar limitations for retirement plans.

* 401(k), 403(b) & 457 Elective Deferral Limit increases from $17,000 in 2012 to $17,500 in 2013

* Catch-Up Contribution Amount stays unchanged at $5,500

* 415 Defined Contribution Annual Additions Limit increases from $50,000 to $51,000

* Compensation Considered increases from $250,000 to $255,000

* Income Subject to Social Security Tax (Taxable Wage Base) increases from $110,100 to $113,700

There are others that are important for use with Non-Discrimination and Top-Heavy tests, but the above are the relevant ones to Plan Sponsors and participants.

"Plain English" in 408(b)-2 disclosures, hah, I've got a bridge I can sell you too!!!!

Every once in a while, someone else does my job for me.  In this case, I'll give the credit to the Wall Street Journal for saying in writing what many of us have been saying in person for quite some time now.  The attached article highlights a problem with the recent 408(b)-2 disclosures mandated to be distributed to Plan Sponsors (employers) earlier this year. 

http://professional.wsj.com/article/SB10000872396390444024204578044422783570446.html?mod=djemITP_h&mg=reno64-wsj

The gist of the article is this.  Many of the industry service providers weren't explicitedly clear in the way they disclosed their fees on the mandated 408(b)-2 disclosures despite that the rules have been very clear that they are to be written in "Plain English".  What a Shock!!! 

The article points towards Wall Street for burying the Plan Sponsors under a mountain of fine print, which is more of the same from what they've always done as the provider referenced in the article estutely points out.  However, to be fair, this wasn't really Wall Street as a whole.  There's probably less than 100 major retirement plan service providers out there and most are insurance companies, mutual fund companies or independent recordkeepers.  Let's keep the blame pointed squarely where it belongs. 

To expect an industry comprised of asset gatherers to be forthright in telling their clients they've been overcharging them for years unapologetically would be counterproductive to their goal, gathering assets.  It is very unsurprising to this author, that vendors are doing as little as possible to make fee clarity just that, clear. 

Kudos for WSJ for writing what a lot of us have been thinking.

How Stable is your Stable Value Fund?

Several weeks ago, it was in the news that a major financial institution was allegedly the subject of a Department of Labor (DOL) Investigation surrounding its' Stable Value offering and the potential inappropriate nature of the holdings of that fund.  Linked below.

 http://www.investmentnews.com/article/20120729/REG/307299981

While the news article alleged the investigation, it specified that the fund in question had between 4% and 13% of its underlying holdings in private-mortgage debt that was rated and also underwritten by that same firm.  To those operating in a fiduciary environment, this shouts conflict of interest (i.e. prohibited transaction) and is a potential violation of ERISA.  If the DOL were to find that the firm violated ERISA with respect to the investments within the fund it could have a domino effect.  The plan sponsors who welcomed this fund into their 401(k) plans, and the advisers who recommended it, could be liable for improper due diligence and a breach of their fiduciary duty.

How does a plan sponsor protect itself when considering (or being sold) an opaque investment structure such as a Fixed Account or GIC?   
 
A stable value fund's stability cannot simply be assumed.  Plan trustees, and their financial advisers, have a fiduciary responsibility to conduct thorough due diligence when evaluating a plan's stable value option. This is easier said than done.  Proper due diligence isn't simply a matter of reviewing underlying holdings, manager pedigree, or declared interest rates. It is far more complex. Is the provider who is guaranteeing the stable value option financially strong? Are rates consistent? Are costs/fees reasonable? Are contract limitations onerous?

As a discretionary trustee for our clients, my firm's Trust Investment Committee (TIC) has implemented several decisions and due diligence process' to help ensure that the Stable Value investments offered to our clients are transparent regarding its holdings and its fees.  Some of the items we look at are:

• Insurer Quality - Annually, TIC conducts a review of the fund.  Part of the review is a detailed investigation of the Insurer.  Of particular focus, is the claim's paying ability, which backs the guaranteed rate that makes up the difference between Market and Guaranteed Values.  We also monitor the "spread" between the Market Value and Book Value on a weekly basis, and customarily review their capacity to take on added risk, defined as more assets in our fund or funds they are insuring.

 

• Holdings - Annually, the Investment Committee interviews each Portfolio Manager about their holdings.  During this interview process they are reviewing factors such as what the holdings are, the credit quality and duration against their benchmarks.

 

• Structure - Structure of this asset class is very important.  We prefer the structure of a Common Collective Trust.  They are required to be audited annually at the request of the Office of the Controller of Currency of the U.S. Treasury.  The holdings are examined separately by an outside independent auditor.  As a prudent measure, the committee opted for a Separate Account structure that allows us to isolate the assets from the creditors of the Insurer.  Thus, our clients are protected against instability and the fund is potentially portable between insurers, under a "worst case" scenario.

 

• Fees - Most fixed accounts/GIC's are opaque when it comes to fees.  Typically, they are embedded in the difference between the fund's gross yield (what the provider earns), and the fund's net yield (what the client receives).  These funds often quote an expense ratio of 0%, and the yield is expressed as a percentage as well.  Given the Collective Trust structure, we can identify precisely how much cost is associated with each manager and the fund as a whole.  This amount is then expressed the same way as a mutual fund cost would be shown.  

To answer the original question, one way that a Plan Sponsor can protect itself is to hire a professional fiduciary that has built a solid and prudent due diligence process that includes a thorough investigation of the Stable Value/Fixed Account offering.

The Secret to Retirement - Working Longer, or maybe not?

In the Retirement Plan industry there is a lot of discussion surrounding retirement income adequacy.  Everyone's trying to work out at what age we can all retire at and what if there's a savings shortfall (there is one in the aggregate!!!) for an individual person.  How do we adjust for it, etc.  The answer that lies in most of these retirement readiness planning services is to reduce that person's liability.  Plainly, this means to shorten the amount of time that a person needs to finance. 

So how do we shorten that time at the end of our lives that we need to finance? 

One very morbid way would be to die younger....but let's say that this won't be a voluntary option for most of us.  Living longer seems to be the goal for most of us and the actuarial life expectancy tables all confirm that we, in the U.S., are in fact living longer.  At present, the average American (male or female) will live well into their 80's or 90's.  Most retirement calculators are static in the retirement age at around 65 or 66. 

The other way would be to retire later.  Aha!  This is the answer to the question.  I didn't save enough when I was young so I can't afford to retire at 65, let's find a point in time where I can afford it if I save like crazy from now on.  This delaying of retirement can be powerful in helping the math work out.  However, there are assumptions being made here, namely that an employer will actually KEEP you in your mid-late 60's, when they can hire someone younger, cheaper and with perhaps more and better skills. 

Recently, I read this article in Kiplinger's, Rethinking Retirement by Eleanor Laise where she addresses this problem specifically. 

http://www.kiplinger.com/columns/retirement/archives/dont-count-on-working-longer.html

What if 'Working Longer' isn't an option?  She references a recent Employee Benefit Research Institute (EBRI) study where more than 1 out of 4 workers now plan to retire when they reach 70, up from 16% from five years ago.  Unfortunately, this plan to work longer may not work out.  In the same survey, of the retirees surveyed, 50% of them stated that they retired younger than they expected and 92% of those cited a negative circumstance for the reason why.  I.E. it may not be a choice for us to work longer.  Some examples of negative circumstances are company downsizing or poor health/disability. 

So, here's the message....it's the same one that we always say and this just illustrates it yet again.  The only sure thing to fight against our own elderly poverty is to save.  Very simple, just save and make the lifestyle adjustment necessary to accommodate a policy of savings.  Thank you Eleanor for a good article highlighting a true societal problem.

The Duty to Monitor - Serious Business!

Way back in June of 2009 we wrote a post called 'Fiduciary Delegation - Myth or Reality', located here;


http://the401kplanblog.blogspot.com/2009_06_01_archive.html

The post discusses the merits of (and how to do it) one fiduciary, such as the plan sponsor, delegating away fiduciary responsibility to another fiduciary, such as a discretionary trustee.  It also specifically points to the parts of the ERISA that relates to appointment and delegation.  In our minds when we wrote that we were thinking specifically of how a plan sponsor might shield itself from fiduciary responsibility surrounding selection and monitoring of investments and the risks associated.  Part and parcel to delegation is 'Prudent Selection and Monitoring'.  The idea was that in order to accomplish some risk mitigation, the plan sponsor would need to make sure the appointed fiduciary was prudently appointed and somehow monitored going forward.  What we didn't deal with in the post, but held true then and still holds true now was that ALL parties associated with the plan, fiduciary or not, must be prudently appointed and monitored.  This Duty to Monitor is part of basic fiduciary responsibility.

Flash forward to 2012.  Very recently, Plan Sponsor Magazine published an article specifically dealing with a plan sponsor, Clark Graphics, failing to properly monitor its' functional Administrator (ERISA 3(16)) or their hired service provider, the Third Party Administrator (TPA).  You can find the article here;

http://www.plansponsor.com/Employer_to_Pay_500K_for_Failing_to_Monitor_TPA.aspx

The U.S. Department of Labor (DOL) suit alleged insufficient oversight and mishandling of plan assets resulting in multiple violations of the Employee Retirement Income Security Act. Specifically, the suit alleged that the owners, failed in their fiduciary responsibilities as plan trustees by neglecting to monitor the actions of the plans’ administrator.  The results were that the owner's of the company are being asked to restore the funds to the two plans in question amounting to approx. $500k and that the administrator in question is required to restore the same sum offset by the amount paid by the owners.  One way or the other, the plan participants will be made whole from the administrative mistakes.  Both the owner and the service provider are no longer allowed to serve as fiduciaries or service providers to any other plans.


“Employers that sponsor retirement plans have a fiduciary duty to monitor plan assets and ensure they are handled appropriately and protected,” said Assistant Secretary of Labor for Employee Benefits Security Phyllis C. Borzi. “Contracting with an outside firm to manage those assets does not absolve them of their legal responsibilities.”

We can't think of a better case to illustrate the importance of monitoring service providers.  That said, this case begs the question;

Are the business owner's or an appointed internal committee of business managers the appropriate people to serve as the plan trustee or as fiduciaries responsible for service provider oversight?  

This author would argue that the answer to that question, most of the time, is no, but that these are the individuals often in charge of doing just that.  In our experience, the expert level of care required is mainly not available within the staff of most employers.  The requisite skills, interest or ERISA education is, simply put, not present.  In our opinion, the party in the best position to provide prudent monitoring of service providers is the Retirement Plan Consultant or Plan Advisor.  If you are a Retirement Plan Professional reading this post, we think it would be a great idea to list this amongst your services offered.