Move to Block State Run Plans - I can hear the cheers from Industry already!

Greetings all and Happy New Year!  Is Feb. 16th too late in the year to still say that?  Well, since this is my first posting in a few months, I feel good about saying it to any of you who feel good about reading my blog! 

It's been a tumultuous time for everyone over the last few months.  Not to rehash daily news, but the election results and subsequent policy making that's transpired since the new regime has taken office have put the 401(k) world into a confusing state where no one really knows what will or what will not actually transpire regulation-wise.  I've intentionally stayed silent publicly about the whole Department of Labor (DOL) Fiduciary Rule mess because it seems like every day the narrative changes.  That will continue to be my position until we have clarity.

Speaking of the DOL, the latest is that Mr. Puzder is out and a new favorite for the position has emerged, Alex Acosta.  Mr. Acosta is a dean at the Law School of Florida International University and has some public policy experience as an assistant attorney general for the Civil Rights Division under President George W. Bush, is a former U.S. attorney for the Southern District of Florida and previously served on the National Labor Relations Board.  Time will tell where he stands with respect to the 'Conflict of Interest' rule and when/if some version of fiduciary regulations will actually transpire.

In the meantime, something that I was very happy to see just transpired with the other giant threat to the private sector retirement system.  Just yesterday, the House of Representatives (highly Republican tilted) passed TWO separate resolutions that would effectively "roll back" the regulatory Safe Harbor that was put into effect for states in the creation of public sector "mandatory" retirement plans.  You can read about the resolutions here, House Passes Resolutions to Block State-Run Plans.

Not surprisingly, these two resolutions passed with consistent voting along party lines.  The usual suspects of the anti-private sector-401k  movement, Pelosi, Neal and Ghilarducci all had much to say about these resolutions.  My favorite of all of the quotes was from Ms. Ghilarducci (who still thinks that a mandatory 3% contribution to a govt. plan is the answer.....saying this since Carter was president) is this one, “This would be a painful step backwards for the millions who are shut out from the dwindling number of employer-sponsored plans,”

I love that quote.  It just shows how out of touch this person is.  Employer's have free will to create or not create plans and employees have free will to choose to work for or not work for employers who don't offer a workplace retirement plan.  If this system is free and open to all in this regard, how are they being shut out?  Whereas, the safe harbor for state-run plans effectively a.) gives the states a competitive advantage as a sponsor over what can be gotten in the private sector as private sector plans are subject to ERISA and state plans are exempt and b.) create confusion and a prime opportunity for local governmental corruption (I know.....this never happens....).

The other part about that quote I like is just a fundamental disconnect on basic facts.  She says "dwindling number of employer-sponsored plans".  That is plainly incorrect.  The number of employer sponsored plans in the U.S. increases daily, weekly, monthly and annually and has done so for three decades.  What's dwindling are the number of traditional Defined Benefit Pension plans.....which by the way have been replaced by and large by Defined Contribution Plans because DB Plans are financially unsustainable for most employers, including.....eh hem.....by almost ALL of the states, cities and municipalities who have them!!!!

Hope this gets done and we get rid of this lopsided opportunity for the states.  Sorry for the rant (not sorry). 

- Jason Grantz, QPA, AIFA

Will he or won't he....put the Kibosh on the DOL Fiduciary Rule - Trump I mean

Of all of the words in the English language that I never thought would appear on my blog, the name; Donald Trump would be at the top of that list.  Yet, here it is!!!   The following is a post where I will discuss my initial thoughts of a republican congress and a Donald Trump presidency as related to the retirement plan industry and retirement policy.  This falls into two categories.  First, will this now party-aligned legislative body pass retirement legislation (almost certainly, yes) AND will this new regime seek to unwind any of the previous regime's legislation and regulation.....again, almost certainly yes. 

Regarding the first part, tax reform is almost a veritable certainty to occur in the first couple of years of the Trump presidency.  With that will occur other tax policy initiatives and some of the one's related to retirement and pension reform have been kicking around for a while.  Will it be the most recent one, The Retirement Enhancement and Savings Act of 2016  or something similar?  My guess is yes.  This calls for a re-imagining of the rules around Multiple Employer Plans (MEPs) into something new called Pooled Employer Plans or PEPs.  This concept is similar to what the industry has been tauting for years as Open MEPs.  Here is a link to the full mark-up from the Senate Finance Committee. RESA 2016 Full Description.

Regarding the new Department of Labor (DOL) Fiduciary Rules.  I've seen/read a lot in the last few days about how this regime is going to squash these rules since they aren't friendly to the financial services industry which is largely aligned with the republican side of the debate.  However, killing a regulation once it's enacted is very difficult to do, it's not like the DOL (assuming new leadership) could just pull it, nor could they subject it to changes without a review and comment period.  This would take us well beyond the upcoming implementation date of April 10. 

So if they were to do this, it would have to be done with an overriding interim regulation or some longer term solution where it gets scrapped as an add-on to a future piece of legislation or just simply delaying implementation of it past April 10th as something to deal with later on.  One thing I find  interesting, is that Trump himself has never spoken about it publicly and his website is silent on the matter altogether.  So whether it is a high priority of the new administration or not remains to be seen, but even if it is a high priority, my expectation is that April will come and go and this new DOL rule will be enforceable at that time BY the private sector. 

For how long after.......time will tell.

- Jason Grantz, QPA, AIFA

 

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The Fiduciary Rule: Intentions vs. Results

I was recently contacted by Christopher Carosa of FiduicaryNews.com who was looking for insights on the recently released Department of Labor (DOL) Conflict of Interest Regulations.  I found it particularly interesting that his questions regarding the rule weren’t so much mechanical in nature, meaning how it will work, but rather whether or not the rule will have the desired impact.  More specifically, he wanted to know whether it would actually prevent conflicts of interest or allow conflicts of interest to  persist. 

To see the full  dialogue as well as thoughts from other industry professionals, click here:  http://www.fiduciarynews.com/2016/05/dol-fiduciary-rules-conflict-of-interest-split-personality/

Outside of the article, Chris was also interested in how retirement savers can be more aware of potential conflicts of interest.  I identified three questions they could ask their current or potential service provider to hopefully help ensure that conflicts of interest are being properly disclosed or mitigated entirely.

1. Do you (advisor or service provider) charge fees in a level manner neutral of any investment advice or recommendations you might make?
2. Do you have any formal or informal arrangements with any investment product or product manufacturer that would create a bias in the advice you give me?
3. Will you provide a simple summary that clearly defines all fees, services and investment recommendations in a format that is easily comprehendible?

A recommended best practice would be to have the service provider respond to these questions in writing so that it’s fully documented and the service provider can be held accountable.   My firm, Unified Trust has always operated as a fiduciary and taken a no conflict-of-interest approach.  Our strong fiduciary governance process focuses on improving the results and outcomes for our participant clients. 

However, the reality is that we are very different in the industry, and there are service providers in the industry who will continue to do business in a conflicted manner.  They will need to be prepared to be up front about any potentially inappropriate conflicts-of-interest that they might have.

It may be wishful thinking, but wouldn’t it be great if the industry took a different approach to the one taken when the fee disclosure rules came out?  Instead of being opaque and doing the minimum to comply, this time make clarity a priority, be direct with clients and do more than the minimum.

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: http://cri.georgetown.edu/ 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 (http://cri.georgetown.edu/) 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

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

DOL Fiduciary Rule Set To Shake Up Retirement Marketplace

Myself along with a few others were interviewed last week by LifeHealthPro.com author, Lynn Brackpool Giles.  The topic of discussion on the table was the forthcoming Department of Labor's (DOL) Conflict of Interest Rule aka 'The Uniform Fiduciary Standard'.  Some of the main concerns expressed in the article by the author and those interviewed surrounded the onerous nature of complying with the new rules, the potential aggregate costs associated with advisor compliance and the potential impact, re: shake-up of the retirement plan landscape.  The article is linked here.
 
DOL Fiduciary Rule Set To Shake Up Retirement Marketplace



In addition to the thoughts that I expressed within the article, I thought I’d share some of what didn’t make it in.  Specifically, my opinion is that over time the industry and the advisors will absorb this highly onerous set of rules and a new “business as usual” will result.  We will see new retirement plan business models created. 

One such model that I’ve already started to see take hold is that of the ‘Retirement Plan Specialist’ partnering with unaffiliated non-specialist advisors, almost like an advisor “wholesaling” to another advisor.  These new independent specialists will be those that can run effective conflict-of-interest-free retirement plan practices at a profit without the need to work with individuals beyond the plan relationship.  If they partner with referring or non-affiliated wealth management advisors, a true symbiosis can occur and stay within the boundaries of the new rules.
 
Under this new model, the specialists will need to be scalable and efficient in their business practices, and their plans will need to be designed to be altruistic in nature favoring improving outcomes as the primary goal of the plans. There is nowhere better than Unified Trust in the industry at improving outcomes and we, as Discretionary Corporate Trustee and Named Plan Fiduciary are taking a large amount of the fiscal, investment and monetary burden off the shoulders of the plan sponsor and advisor.  In conclusion, our services enable the advisor to be highly scalable, allows the advisor and employer to demonstrate that their plan is actually driving better retirement readiness and as an added benefit, significantly reduces financial and fiduciary risk for all involved. 

 


-Jason Grantz