What's the State of State Retirement Initiatives?

Earlier this spring on June 17th, Maine's House of Representatives and Senate approved legislation that would create a Payroll Deduct IRA plan for Maine-based workers whose companies did not otherwise offer a retirement plan.  Maine is only the latest state to enact such legislation, but almost certainly not the last. Initially, Maine's program will work similarly to other programs of this type in that it will be required to be adopted by any employer with 25 or more eligible employees starting April 1, 2023.  An interesting twist in the Maine program is that it is intended to also go to smaller employers once it is off the ground with 15-24 employee companies mandated in October, 2023 and then 5-14 employee companies that following April.  Of course, these smaller groups can participate ahead of the mandate if they choose.   

This is the most aggressive one's of these state programs that I've seen and is part of a broader overall idea that I agree with, which is that coverage is the primary retirement issue in the U.S. today.  The states and the federal government agree, with many states having enacted state mandates or in the process of doing so.   See this piece put out by Georgetown University with the latest information for each state.   

Georgetown's State Program Brief

The federal government is said to be similarly considering a uniform version of these types of programs (which would be very helpful so we don't all have to learn 50 different sets of rules) as well.  But even in lieu of that, with upwards of 50% of U.S. workers not having access to a workplace retirement plan, the need is there to expand opportunity.  With the recent creation of Pooled Employer Plans and many now up and running, the coverage gap is starting to get smaller and that's a good thing for everyone.  Once we get coverage and equity gaps narrowed or eliminated, new innovation in Retirement Income solutions, more sophisticated investment structures and better technology can start to evolve and make a dent in elderly poverty rates.

In short, I think that these types of state-run programs and new types of retirement plan offerings add complexity to the industries offerings, but more importantly address a real need and a problem that needs to be solved.  The challenge will be to the private sector in stepping up and ensuring that the public options don't become the standard.

- Jason Grantz, QPA, QKC, QKA, AIFA

 

Let's just say it, TPAs Do it Better! Right?

HOT TAKE: I prefer to work with Third Party Administrators (TPAs) over writing business bundled.  Whew, there I said it, out loud in a public manner.  

BTW, not a very hot take for those who've worked with me as a huge majority of the business I've worked on in my career I've chosen to partner with TPAs, even at the expense of revenue to my firm and commission in my pocket.  Wanna know why?  If not, stop reading.  

Before moving on, let's first learn about what TPAs are and do and what bundled vs. unbundled is in the context of retirement plans.  Retirement plans (401(k), ERISA 403(b), Pension, etc.) generally have two different broad components; the investments and services surrounding tracking of these and keeping records and the administrative area which centers around legal requirements, operating of the plan and compliance with the law, regulations and the governing plan documents.  It is this second area that is the domain of the TPA.

When it comes to those administrative services, the vast majority of plans use a TPA since without one, the option is self administration.  Unless your business is actually a TPA firm or otherwise in the field, self administering a plan is generally a poor idea.  That said, when the TPA service a plan uses is directly provided by (embedded in) the recordkeeper of the plan, the firm providing the participant daily accounting, web experience, statements and call center, that's referred to as 'Bundled'.  When the compliance services are provided by a separate company, the arrangement is unbundled.   

In my experience, the perceived advantages of bundling are generally associated with making it easier for clients and with costs.  Specifically, less vendors to interface with, and less confusion on where to go for answers or service needs.  However, this is often more perception than reality.  The bundled providers often structure service teams to be separate from the compliance teams and so, while it is one company, it's multiple departments within and so the 'number of cooks in the kitchen' is ultimately the same.

Similarly, the perception that costs can be reduced by bundling may or may not be true, it depends.  Regardless, compliance services need to be provided and the workload for the individuals providing that service is identical and thus the resources needed are identical.  The trick here is to understand how the bundled provider is collecting their fees.  It is possible, likely, that they will illustrate lower fees for compliance to the client, but higher fees in other areas making apples to apples comparisons difficult.  In my experience, true TPA costs are usually only different by minimal amounts (think hundreds, not thousands) and could go either way.  

Bottom line: when it comes to costs, bundling actually makes it more challenging for fiduciaries to properly evaluate service providers and fairness of fees.  What if the bundled provider is good at compliance but poor at recordkeeping OR providing investments.  The client is stuck in an all-in-one set-up, and few vendors are great at everything they do.  In that situation, a client has two choices, endure the poor service OR completely replace the entirety of the service which can be a real project for them as an employer.

What are the advantages of an independent TPA?

Perceived advantages are;

• Local TPAs can conduct in person meetings - Sometimes this is true, but with the proliferation of 'Zooming', this perceived advantage may be less important.
  
• Likely to receive more comprehensive boutique-style service, but also improved technical proficiency and competence - In the small plan market, this has absolutely been my experience.  This is a matter of volume of similar, smaller clients with more sensitivity to ERISA Non-Discrimination rules OR with desires for custom employer contribution formulas.  
• Often TPAs are more willing to work on pricing with retirement plan advisors who drive higher volume - Of course, this also ratches up the service expectations potentially to include 7-day/week access or faster turnarounds
• By decoupling the TPA from the recordkeeping/custody, they become easier to hold accountable as they can be replaced without a major project (usually).  - From a fiduciary prudence perspective, the more services are decoupled, the easier they become to evaluate for necessity, fee reasonableness and service.  
• Typically, the person at the TPA who is administering the plan is also the person managing the relationship.  This usually means a better communication arrangement as administrators need to have both relationship skills as well as technical chops. - My experience is that sometimes this is true at the TPA, sometimes not, but is is VERY uncommon for the bundled administrator to also have top notch communication skills. 
• The major advantage comes from flexibility of plan design.  Simply put, TPAs can use varying documents, be nimble enough to amend plans on the fly and are the opposite of 'conveyor belt' style.  - I've always deferred to the TPA when New Comparability, Cash Balance or other custom formulas are required.  But I've also found that TPAs are often in the best position to opine around quality of local payroll or other benefit providers.  
  

There are other reasons (I don't know if you picked up on the word relationship earlier in this post, eh hem, but that's the whole deal for me), but for me, the independent TPA simply allows more flexibility, often better process' and higher quality compliance services than is typically found at a bundled provider.  Of course, as with any decision a Plan Sponsor makes surrounding plan services, they should evaluate who does their TPA work with due care and prudence.  This means evaluate not only who their recordkeeper and investment provider is, but also what structure is right for them and understand how fees are gathered and what the fees are for.  

As always, would love to here from the retirement plan community their thoughts on this topic.  Thanks for reading!

- Jason Grantz, QPA, QKC, QKA, AIFA

 

Where has the all the content gone?

I'd like to apologize for the lack of consistent content on this blog to those who read it often.  It's been an extremely busy time for me professionally, but the blog post ideas haven't gone away, they've just been getting posted elsewhere!  About 18 months ago or so, my firm, Unified Trust launched a blog and I've been one of the authors populating the content.  Below you can find a link to the blog and a link specifically to the content authored by myself.  Thanks for being patient.  I will try to post here more frequently.

http://blog.unifiedtrust.com/index.php/author/jason-grantzunifiedtrust-com/

http://blog.unifiedtrust.com/

Best - Jason Grantz

Is the Time at Hand for 'Open Meps' - repost from Unified Trust Blog

Time and timing are funny things.  A good idea may be a good idea, but the timing of that idea can be everything.  Back in 2010 and 2011, it seemed like I couldn’t have a conversation with an advisor or go to an industry conference without hearing about so-called ‘Open Multiple Employer Plans’ or ‘Open MEPs’.  At first, they almost sounded fake to me, as we in the industry have a tendency to create marketing or sales terms.  Of course, I was aware of MEPs, but only in the context of what we’re now calling ‘closed’ or ‘traditional’ MEPs.  The concept behind a MEP was always that the related business’ sharing some kind of a nexus or commonality could essentially join into the same retirement plan.  By banding together, economies of scale had the potential to provide better investments, lower fees and less fiduciary risk-all good benefits.  The nexus was important as it kept this exclusive to related or very similar entities.

There had been  a lot of noise in the market that Open MEPs, where this commonality didn’t exist, were also okay.  This struck me as odd.  Did the rules change when I wasn’t paying attention? I don’t think so.  I’ve come to the conclusion that what did change was that the market decided that the existing rules weren’t clear enough. There was a disconnect between what was written into ERISA on MEPs and what was absent in the Internal Revenue Code about MEPs.  Because of this lack of continuity, some aggressive players in the market went ahead with the Open MEP idea, taking the position that if it isn’t explicitly prohibited, it was therefore permitted.  I remained skeptical and even wrote about it on my personal blog (MEP’s EBSA Speaks and More Opinions).  Then in May of 2012, the Department of Labor issued the TOTH Letter, DOL Advisory Opinion 2012-04A.  With this stroke of the pen (or keyboard), all of the noise in the market quieted down.

Flash forward four years and this concept is again at the forefront of the conversation.  In fact, a version of Open MEPs, now being called Pooled Employer Plans (PEPs) is close to becoming a legal structure.  Prior to the election, I was interviewed on this subject (Multiple Employer Plans Have a Bright Future) and discussed whether or not this idea would have its day.  The creation of these new PEP plans is part of a bill that was marked up by the Senate Finance Committee in September called The Retirement Enhancement Savings Act of 2016.  This bill supports the notion of an Open MEP, now being called a PEP, effectively removing the nexus requirement if certain conditions are met.  Timing is everything and now the question really is, when will this bill get passed?  It has made it through Senate Finance unanimously (a very rare occurrence) and has bipartisan support.  At this point, it seems that the only decisions left to be made are regarding  what broader piece of legislation will this Act be attached to and which president will get the credit for it, Obama or Trump.

Professionally, I find this exciting.  As readers know, Unified Trust Company is a professional ‘named fiduciary’ in our role as Discretionary Corporate Trustee over retirement plans.  Within these new PEP requirements are the appointments of a “pooled plan provider”, a ‘named fiduciary’ to act as the plan administrator and one or more named trustees who “must be  a bank or other financial institution” that would be responsible for contributions and assets.  Unified Trust would be a great fit potentially for some of these roles.  Whether these come to fruition sometime soon or not, the future is looking very bright.

- Jason Grantz

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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Scary Times (not an October pun)

First, I'd like to apologize to those who regularly read this blog for delays between my last and this blog post.  It's been an extremely busy summer and often the first thing that gets pushed to the side when time is short are passion projects.  That said, while this is not a political blog and I'm not a political person, no post in mid-October of this particular election year couldn't ignore the scariness of our current presidential race and the potential ramifications.  

Earlier today, I read a blog post from 401(k)specialist.com, linked here called How a Hillary Win Means Government Run 401ks.  That's a pretty scary title!!  I'm not giving a presidential opinion, but rather opining on the....aghast.....thought of the government taking over and running (er...eliminating) the 401(k).  The ramifications of this are scary as well, complete elimination of an entire industry that's been helping people for over 30 years and despite what they tell you, an even WORSE result.  Despite the negative noise around the private sector system, the 401(k) helps more people financially then ANY other program out there with the exception of Social Security, and everyone acknowledges that Social Security falls far short for most and when supplemented with 401(k) can give people a financial chance.

In the article, it describes how Hillary Clinton is considering Tony James for Secretary of the Treasury.  Tony James is a co-promoter of Guaranteed Retirement Accounts, an idea that's been put forth by Teresa Ghilarducci, the professor of economic policy analysis at the New School for Social Research and a well known enemy of the 401(k) and the 401(k) industry.  She often makes glib disparaging commentary about the 401(k) referring to it as an 'immature child' and the like. 

Her  idea is to mandate a 3% of compensation contribution into a new retirement system run by the government.  This would be in addition to what folks already put into Social Security.  This "new" idea has been around since Carter was president!!!!  If anyone thought that 3% was enough to make retirement inadequacy a thing of the past, they would have passed it through already!!!  We're talking almost 40 years and 6 Presidents!  Don't get me wrong, I think we can all acknowledge that their are problems, coverage is certainly an issue and costs, while already compressing, still have room to go down.  But, most professionals in this space will tell you that a minimum of 10% of compensation is what people need to be saving to ensure financial security in retirement.  That's the FLOOR, so 3%.....REALLY???!!! 

It is alarming that this type of socialist reform is the main idea of the folks advising this future potential president.  However, if Hillary wins the presidency, there's no guarantee that she'll be re-elected and scrapping an entire retirement system in favor of this sort of reform is going to be highly resisted, four years won't be enough time, not to mention, Secretary's of Treasury don't make laws.  So, in my opinion, this won't be what actually occurs, but it is something that we should all be keeping an eye on as these types of ideas from powerful and influential people have a way of sticking around. 

- Jason Grantz

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

Fear is a Lousy Investment Strategy

Co-Authored by Jason Grantz and Joseph Reese

As the markets close on St. Patrick’s Day, we find the Dow Jones Industrial Average up for the first time in 2016 after the fifth straight day in positive territory (and tack on a 6^th straight day as of the March 18^th market close). This is on the heels of a U.S. stock market that saw its worst January since 2009. 

Fear is a lousy investment strategy. According to a review of their 2.5 million recordkeeping participants by Aon Hewitt (Volatility Drives Stock Market Fears in 401k plans), January volatility made participants feel like they needed to do something…anything. Trading activity was up substantially in January – to levels not seen since January of 2009. Participants were fleeing to ‘safer ground.’

Interestingly, Aon Hewitt saw Target Date Funds (TDFs) with the biggest outflow at 39%.  This flies in the face of the basic premise of TDFs – a fully diversified, single decision asset allocation. What’s particularly interesting is that we typically would assume that inertia and procrastination rule the day when it comes to participant action or more pointedly inaction. However, it seems that myopia and loss aversion, aka extreme fear, combined with misguided focus is what is causing participants to take action when they shouldn’t.  By misguided focus, what we mean is that these TDF oriented plans are still focusing the participant on investment performance and not on what really matters, which is whether or not those participants are on track.  This is an enormous flaw and is being reinforced in the majority of 401(k) programs today.  This is exactly what our managed account service, The UnifiedPlan fights against.

In the UnifiedPlan, the focus of the enrollment and of the subsequent statements is on whether or not the participants are on track, not on short term returns or investment performance.  When contrasting the recent participant behavior in Target Date Funds highlighted above, participants with the UnifiedPlan managed accounts during the month of January didn’t react to the volatility.  In fact, we saw just 0.25% opt out. That’s a huge disparity; 39% reactive in TDFs vs. 0.25% for UnifiedPlan managed account participants.  Why is that? We believe that because the solution is personalized to the participant and the goal is illustrated as a percentage of monthly income replacement, it de-emphasizes short term performance and subsequently there is less fear in a volatile market. 

According to data offered by Aon Hewitt, “participant trading activity in January 2016 reached a three-year high, and 82 cents of every dollar traded moved from equity instruments to fixed-income funds.”

Just out of curiosity, we wonder how many of the participants trading out of equities in January are still on the sidelines as the market recovers?  If history is any guide, we think it is most, if not all.

For another take on the same topic, check out Justin Morgan’s post on the Unified Trust Blog linked here Managed Accounts Manage Behavior Better.

- Jason Grantz and Joe Reese

"The Government Does Not Do It Better" - Brian Graff, and he's dead on right about that!

Over the last few weeks I've been doing a bit of thinking regarding the state of the retirement plan industry, where it is now, where it's heading.  A lot of the noise that's out there right now seems to be centered around retirement plan litigation, mainly the spate of recent excessive fee lawsuits that have settled and the many more recently filed.  Further still is more negative energy and interest surrounding the forthcoming finalized rules for the Conflict of Interest Rule (aka the new fiduciary definition).  While these topics are important and certainly bear observation and reaction as they play out, to me, the biggest threat on the horizon is a bit closer to home, at the state level.

While the industry is looking left at all this fee and fiduciary stuff, the DOL was on the right, quietly creating a major threat to the private sector by giving a significant advantage to publicly offered (by the state.....so far) employer facilitated retirement plans.  This isn't new stuff, it's been percolating through the system for quite some time.  It gained steam, however, over the summer.  In May, Senate Democrats put pressure on the Obama administration to clarify some legal issues surrounding state run retirement programs.  In particular was whether or not these new programs would be covered by or run afoul of ERISA.  In July, the president responded directing the DOL to facilitate the implementation of state laws protecting the states.  Finally, on November 16th, the DOL released comprehensive guidance creating a road map to the creation of state-run private sector retirement programs that would have different (frankly better) rules than that of the private sector.  Many states have already started down the path to creating these.

These new rules have created a safe harbor for payroll deducted IRA programs run through the state without offering an equal safe harbor for the private sector.  It also allows for the states to proceed with creating an "Open MEP" type program while simultaneously not providing similar guidance for the private sector.  This will foster extreme competition to the private sector in the next few years from the states, and in my opinion, also opens the door for the federal government to follow suit with a national program similar to what was done with health care.  This is the real threat to the private sector retirement system, NOT the Conflict of Interest Rule which is mainly going to be an inconvenience that we'll all figure out how to work with. 

Brian Graff wrote a great piece on it in the latest Plan Consultant Magazine.  It's a MUST-READ for anyone in the industry.  It's linked here.

The Government Does Not Do It Better

- Jason Grantz

What’s in a name?

I received this great piece from a colleague of mine, Joe Reese, who kindly offered to post it on our blog.  Thanks Joe - Jason G.

Recently, we were competing for a law firm and were told by the Plan Sponsor that the insurance company service providers we were competing with “can assume being named the Plan Trustee.”  We are a discretionary plan trustee – it was clear the insurance company service providers were offering a directed trustee solution. While a discretionary trustee and a directed trustee are both trustees and both fiduciaries, they are not one in the same. 

After days of back and forth, reviewing documents, etc. the law firm requested 3rd party information highlighting the difference between a discretionary trustee and directed trustee. The following was our response.

First, some context…

ERISA Section 402(a) provides that a written plan document must include one or more ‘‘named fiduciaries’’ who control and manage the plan’s operation and ad-ministration. ERISA Section 403(a) states that plan assets generally are held in trust, managed by trustees either named in the trust instrument or appointed by the plan’s named fiduciary. Trustees typically have authority to manage and control plan assets unless the plan expressly provides that the trustees are subject to the direction of the named fiduciary or delegates such authority to an investment manager.

Then in the DOL’s own words…

DOL Field Assistance Bulletin 2004-3: Fiduciary Responsibilities of Directed Trustees

http://www.dol.gov/ebsa/regs/fab_2004-3.html

Here are a couple key parts of the above Field Assistance Bulletin:

• The duties of a directed trustee under section 403(a)(1) are therefore significantly narrower than the duties generally ascribed to a discretionary trustee under common law trust principles.
• The named fiduciary has primary responsibility for determining the prudence of a particular transaction, whether the transaction involves buying, selling or holding particular assets. Accordingly, as the courts and the Department have long recognized, the scope of a directed trustee’s responsibility is significantly limited. A directed trustee does not, in the view of the Department, have an independent obligation to determine the prudence of every transaction. The directed trustee does not have an obligation to duplicate or second-guess the work of the plan fiduciaries that have discretionary authority over the management of plan assets and does not have a direct obligation to determine the prudence of a transaction.  See In re WorldCom ERISA Litig., 263 F. Supp. 2d at 761;  Herman v. NationsBank Trust Co., 126 F.3d at 1361-62, 1371 (directed trustee does not have a direct obligation of prudence under ERISA section 404; its obligation is simply “to make sure” the “directions were proper, in accordance with the terms of the plan, and not contrary to ERISA”).

And finally, Case Law…

Federal courts have typically held that a retirement plan’s directed trustee can’t be held liable if it followed the investment directions of the plan’s named fiduciary. Below is a summary of cases dealing with directed trustee liability.

Renfro v. Unisys Corp., 671 F. 3d 314 - Court of Appeals, 3rd Circuit 2011

“Fidelity's limited role as a directed trustee, delineated in the trust agreement, does not encompass the activities alleged as a breach of fiduciary duty—the selection and maintenance of the mix and range of investment options included in the plan.”

“As we have explained, a directed trustee is essentially "immune from judicial inquiry" because it lacks discretion, taking instructions from the plan that it is required to follow.”  

Fidelity maintained that it was not a fiduciary with respect to the conduct constituting the alleged fiduciary breach. The trial court granted Fidelity's motion to dismiss, ruling that Fidelity and its related entities were not fiduciaries with respect to the challenged conduct because they did not exercise control over the selection and inclusion of investment options in the plan.

Tussey v. ABB, Inc., Case 2:06-CV-04305, 2010 Document 103

“By the plain language of the Trust Agreement, Fidelity Trust has no responsibility for reviewing the merits of fund choices made by the Pension Review Committee. 

Thus, Fidelity Trust had no responsibility to prevent the addition of the Fidelity Freedom Funds to the Plan’s investment line-up.  For these reasons, the Court finds that Fidelity Trust cannot be held liable for ABB’s breaches under ERISA Section 405(a)(2).” 

Fidelity’s reaction to the Tussey v. ABB court’s decision regarding Fidelity not being responsible as a directed trustee:  “We are pleased with the decision today by the court of appeals,” Vincent Loporchio, a Fidelity spokesman wrote in an email. “Fidelity’s actions were in all respects consistent with our fiduciary duties to our clients and all legal requirements. With this decision on appeal, Fidelity has prevailed on all claims asserted against it in court.” 

In re Cardinal Health Inc. ERISA Litigation, S.D. Ohio, No. C2-04-643, 3/31/06

The US District Court for the Southern District of Ohio dismissed a claim against Putnam Fiduciary Trust Co. as directed trustee of Cardinal Health employees' retirement plan in a case involving company stock investments.  The court found that Putnam was a directed trustee with limited fiduciary duties. The judge also refused to dismiss the employees' claim that some of the Cardinal Health defendants breached their ERISA fiduciary duties by failing to monitor those they had appointed to act as plan fiduciaries, and said Cardinal Health may be liable under the doctrine of respondeat superior for its board of directors' failure to monitor those they appointed to act as plan fiduciaries.

Donovan v. Cunningham14 (S.D. Texas 1982)

This early case briefly discussed the ‘‘limited role’’ of the directed trustee. The court noted that a directed trustee couldn’t be liable for breach of fiduciary duty where its activities ‘‘at all times remained within the limited role of a directed trustee.’’

Maniace v. Commerce Bank of Kansas City18 (8th Cir. 1994)

The Eighth Circuit ruled that a bank serving as directed trustee of an ESOP didn’t violate its fiduciary duties in allowing the plan to continue to hold large amounts of employer stock despite the stock’s declining value. The court found that, as a directed trustee, the bank wasn’t an ERISA fiduciary with respect to employer stock held by the ESOP because it lacked discretion over plan assets. According to the court, ‘‘the obligations of a directed trustee are something less than that owed by typical fiduciaries.’’

Grindstaff v. Green20 (6th Cir. 1998)

The Sixth Circuit ruled that a directed trustee isn’t a fiduciary to the extent it doesn’t control the management or disposition of plan assets. The court rejected ESOP participants’ claim that the ESOP’s directed trustee had a duty to investigate the merits of any directives given to it by the plan’s named fiduciary. The court noted that the trustee had no discretion pertaining to voting the ESOP stock and could only act at the direction of the named fiduciary.

In re McKesson HBOC Inc. ERISA Litigation21 (N.D. Cal. 2002)

A California federal district court dismissed ESOP participants’ claim that the plan’s directed trustee breached its ERISA fiduciary duties by allowing plan fiduciaries to continue to invest in employer stock when it allegedly knew that such an investment was imprudent. The court found that as a directed trustee, the trustee was obligated to follow the investment instructions given by the named fiduciaries and thus couldn’t be held liable for any losses that resulted from performance of its duty to follow those instructions. The court noted in a footnote, however, that if the participants could demonstrate that the trustee knew that the investment directives violated ERISA, then the trustee wouldn’t be relieved of ERISA liability by following such imprudent directives.

Lalonde v. Textron Inc.22 (D. R.I. 2003)

In this case, the district court dismissed ESOP participants’ claim that the plan’s directed trustee breached its fiduciary duties by not rejecting the named fiduciary’s directive to invest in the plan sponsor’s stock. The court found that the directed trustee had no discretionary authority, and hence no fiduciary status. The First Circuit subsequently upheld the district court’s decision after concluding that, even if it were to assume that the trustee wasn’t a true directed trustee, there was nothing in the participants’ complaint that would permit an inference that the trustee abused any discretion it might have had.

Yes, discretionary trustees and directed trustees are both fiduciaries, and trustees…but the role they play are not the same. A Plan Sponsor who confuses the two does so at his or her own peril.

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.

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