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

Retirement Income Options - In Plan vs. Out of Plan, Revisited

 In a recent post on NAPA.net, 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

   

What's a Plan to Do?

“Some sponsors are just starting to think about outcomes, since in the past they thought they needed a retirement plan because that’s part of what it takes to attract employees.  But they had never thought about, ‘Is the plan supposed to do something? And if it is supposed to do something, what is it supposed to do,” said Dr. Gregory Kasten founder and CEO of Unified Trust.

Dr. Kasten was among a few select experts in the field interviewed for the article Retirement Ready-or Not, recently published by NAPA.net.  The article stressed the critical role an advisor plays in helping plan sponsors answer the question, ‘what is a retirement plan supposed to do”? While that question seems simplistic in nature, surprisingly very few sponsors ever think about the true purpose or goal of their retirement plan as it relates to their employees success. Many in the industry measure success in terms of tracking participation and deferral rates, monitoring investment performance, and benchmarking fees all of which are important, but none of which independently provide a complete guide as to whether or not participants are succeeding. At Unified Trust, we believe that success is an employee being able to adequately replace their paycheck when they retire.

We also believe that success doesn’t happen by chance. That’s why Unified Trust developed the ‘benefit policy statement’ which is considered a sister document to the ‘investment policy statement.’  “If you want to manage outcomes, you are going to have to measure outcomes – and go a step further and define the outcomes you want,” said Kasten.

In these times of fee compression where it’s ever so critical to show added value, by helping a plan sponsor deliver improved outcomes for their participants, advisors can differentiate themselves in the marketplace.  As we move into the future, how successful—or unsuccessful— a retirement plan is in delivering retirement security may become a factor in determining whether or not a plan sponsor and other plan fiduciaries are meeting their fiduciary responsibilities.  Having a plan that doesn’t measure up to changing industry standards could leave the fiduciaries open to potential litigation.

 
- Jason

Tibble v. Edison Ruling - Some potential impact to Advisors

 What Tibble v Edison International Ruling Means to Advisors

In the above linked article recently published on LifeHealthPro, the author discusses the Supreme Court’s recent decision on Tibble v. Edison International which centered on whether Edison International’s financial advisors and investment committee had breached their fiduciary duties by choosing retail share classes instead of institutional shares of specific mutual funds. It mainly focused on whether the ability to claim such a breach exceeded the six-year statue of repose mandated by the Employee Retirement Income Security Act (ERISA).

In mid-May, the high court handed down its unanimous opinion in Tibble v. Edison and said that “a fiduciary normally has a continuing duty of some kind to monitor investments and remove imprudent ones.”  This was expected and probably brought a widespread “no kidding” response from fiduciaries who have done just that from the get-go.

The Court vacated and remanded the lower court’s ruling; they went on to note in their opinion that the previous court’s ruling had “erred by applying a 6-year statutory bar based solely on the initial selection of the three funds without considering the contours of the alleged breach of fiduciary duty.”

The author posits the idea that some industry insiders are worrying that this may be the beginning of the Supreme Court’s interest in delving deeper into the fiduciary duties of those managing employee retirement plans and that the Court left just enough vagueness in its opinion to make advisors wonder what will be considered “reasonable” for due diligence and monitoring.

I was interviewed and quoted a few times in the article, specifically regarding the veracity of the decision and the likely consequence of minimizing the protection of the six-year statute of repose.

Another commenter suggested that this decision won't have much impact on keeping fees reasonable or a fiduciary duty to monitor since these ideas have already been in play for quite some time, but that it may cause some firms to take the idea of reviewing the plan's Investment Policy Statement (IPS) to ensure compliance with it.

 

At my firm, Unified Trust, we act as the plan trustee and in that role we are responsible for executing the plan's IPS, selecting and monitoring the investments and generally employing a prudent process that is thorough, regular and well documented.  One result from this ruling that I see happening more is a greater conscious effort from Retirement Plan Committees and their advisors in documenting their decision-making or outsourcing to firm's that will.

- Jason Grantz

Fiduciary Fight Continues - Could Congress cut off funding?

Earlier today, a House bill plans to stop the Department of Labor’s fiduciary proposal by cutting off funding to implement the measure.

The measure was included by the House Appropriations Committee in the draft fiscal year 2016 Labor, Health and Human Services (LHHS) funding bill, slated to be considered in subcommittee on June 17. The legislation includes funding for programs within the Department of Labor, the Department of Health and Human Services, the Department of Education, and other related agencies.

In a summary of the bill, the provision dealing with the fiduciary proposal is included under a section titled “Reducing Harmful Red Tape.” The language itself says simply, “None of the funds made available by this Act may be used to finalize, implement, administer, or enforce the proposed Definition of the Term ‘‘Fiduciary’’; Conflict of Interest Rule—Retirement Investment Advice regulation published by the Department of Labor in the Federal Register on April 20, 2015 (80 Fed. Reg. 21928 11 et seq.).”

In another article, published on Investment News Weekly, it is pointed out that if this particular bill doesn't make it through the Senate, this same rider could get attached to another bill.  If it were attached to a bill that would be considered too important for the President to veto, it is possible that the DOL Fiduciary rule proposal could be de-funded. 

The article attached here: DOL Fiduciary Rule in Crosshairs of New Spending Bill?

We've written on this blog about the DOL Fiduciary Proposal, and have summarized it with updates linked here.  Summary of DOL Fiduciary Proposal

Earlier this spring, U.S. House Representative Republican Ann Wagner announced publicly a three-pronged approach to try and kill these rules.  The first strategy involves getting a bill through requiring the SEC to take lead in the rule making to establish a new fiduciary standard. 

Failing that, the second strategy is to employ the private sector to attempt to delay the rules for as long as possible in hopes that it pushes into and beyond the presidential election and the incoming president stops it.  This second strategy is well known and the DOL is aggressively moving to have these rules finalized and in place by the second quarter of 2016.

Her third strategy is the appropriations approach outlined earlier in this post.  Needless to say, there is considerable opposition in both the public and private sector to these rules moving forward.  More updates will come as this unfolds.

- Jason Grantz
 

Mailbag: Q&A with The 401(k) Study Group

The 401(k) Study Group has created a new segment with their Blogtalk radio podcast called 'Mailbag' which is an 'Ask the Expert' style radio interview.  I was fortunate enough to be tapped by Chuck Hammond to be their first "Expert" tapped to answer questions.  Below is the link.  Enjoy!

Ask the Expert' with Chuck Hammond

- Jason

The DOL's Conflict of Interest Rules - Summarized and lots of links!

Last week, the Department of Labor (DOL) unveiled its long awaited Conflict of Interest rules (regulation, not law).  Here is a link to the DOL's fact sheet,  http://www.dol.gov/protectyoursavings/FactSheetCOI.pdf.  The regulation itself is hundreds of pages.

So, at first blush I think that the proposal is slightly less onerous than I thought it would be, but it does some things that are going to be a big deal.

1   1.)    It broadens the definition of who is and who is not a fiduciary and takes away the loophole on what is and isn’t advice.  Essentially, my read is that if you are a financial advisor/adviser, agent, registered rep, broker, Investment Consultant, etc. who recommends anything to a retirement plan, plan sponsor or participant, you will be considered a fiduciary, even if it is singular advice.  My take is that it will be virtually impossible to be a rep on a 401(k) plan and not be a fiduciary.

 

2.) IRAs are pulled in as part of the jurisdiction here.  That includes recommendations about IRA rollovers and in advising IRA holders on underlying investments, holding IRA advice givers accountable to similar standards more/less as they would be on ERISA plans.
 

      3.) There will be a Best Interest Contract Prohibited Transaction Exemption (BIC PTE) – This is going to get a TON of comments during the comment period as it seems pretty significant in the amount of required detail and submission including sending a copy to the DOL, thus requiring an investment consultant to be highly visible to the DOL for regulation purposes.  This is the way the DOL is saying an advice giver can be conflicted, I (along w. others in the industry I've spoken to) are highly skeptical of this process.

      

      4.) Enforcement of the new rules seems to be an issue since while the DOL has the power to write the rules, only the IRS has the power to enforce and, as of this writing, they aren’t staffed to enforce ERISA-like standards on IRAs.

For this proposal to become rule, these are the next steps:

1. Comment Period – 75 days, ending on/about 07/6
2. Public Hearing – within 30 days after Comment Period 
3.  Preparation of Final Rule – This will take some time as DOL will need to absorb the public comments and make changes.  Then sent to the Office of Management and Budget (OMB) to review. 
4. Effective Date – The rule becomes effective 60 days after publication in the Federal Register once back from OMB 
5. Applicability Date – 8 months later

Assuming this goes through with no further opposition (Congressional, SEC, industry, etc.), the industry will need to be ready to function under these new rules sometime in late 2016, figure Q3.

My thoughts, I’m still of the opinion that this can get derailed.  I believe that even written as is, that if any delay in efficiency of the above process from here were to occur that causes it to push into Q4 of 2016 or later will effectively kill it, or will at least be likely to because of the Presidential election.  

It is common for incoming president's to halt any unfinished business from the previous administration, this is often what occurs even when the new President is in the same party as the previous president.  So, while the DOL did a good job in getting this out with enough time to actually get it through, they really did wait until the last minute.  They should have put this out last year. 

That said, the DOL and the industry knows about this timeline concern.  On April 21st, a letter (The letter) was sent to the DOL from an association of 20 industry trade groups  asking for the Comment Period to be extended from 75 to 120 days.  On April 23, Labor Secretary, Thomas Perez indicated that the DOL has no intentions of delaying this indicating that they want this 'fast-tracked' and not impacted by the next presidential election, 'DOL Not Budging'.  

Also, of interest, according to Bloomberg several democratic Senators have actually pushed back against the DOL's proposal despite presidential backing, see article Dems Pushback

citing significant problems with the bill potentially leading to reductions in consumer services.  Seemingly, the fight here is still ongoing and, more opposition is expected. 

UPDATE: As an update to this delay strategy, a group of democratic congressman, 18 of them, have also joined the voices asking for more time, attached here;  Democratic Reps Want Longer Comment Period.

UPDATE 2: More requests for delay, this time from three dozen republican senators, pressure is mounting!  The senate letter here; Senate Letter asking for delay

A number of groups have put out summaries of the regulations, estimates on impact and some general thoughts as to where the problems are initial visible.  I'm sure more will come on this issue.  Below for links to the summaries.

Happy Reading!

http://napa-net.org/Portals/1/Game-Changer.pdf

http://wagnerlawgroup.com/DOLFiduciaryRuleAlert.htm

http://www.fi360.com/news/detail/executive-summary-of-the-dol-fiduciary-rule-proposal

http://www.ballardspahr.com/alertspublications/legalalerts/2015-04-15-department-of-labor-proposes-new-regulations-on-fiduciary-advice.aspx

http://www.jdsupra.com/legalnews/dol-proposes-sweeping-expansion-of-fiduc-87619/

http://www.jdsupra.com/legalnews/dol-reproposes-expanded-erisa-fiduciary-98660/
http://www.sutherland.com/NewsCommentary/Legal-Alerts/172823/Legal-Alert-DOL-Reproposes-Expanded-ERISA-Fiduciary-Definition-and-Revised-Complex-of-Exemptions

- Jason Grantz

 

Fiduciary Standard - The Big Fight

I've written about this topic online a number of times, but I feel like the subject to non-industry people (and even some industry people) is a bit nebulous.   The issue at hand isn't whether or not the retirement plan industry, or the individuals making up the financial services industry are against the idea of a standard of care which puts the individual clients interest first.  In fact, arguably, just about everyone whom I've encountered in my career operates with the idea that putting the clients interests and needs is the primary/exclusive consideration when making recommendations or making decisions on behalf of clients.

The issue at hand isn't one of altruism vs. evil, rather it is one of practicality of implementation.  Simply put, the delivery systems in place that allows financial services to be delivered has primarily been built as a commission for service (sales) foundation.  Combine this payment system with the idea that giving advice which then generates a commission is a conflict of interest and what you have is 'conflicted advice'.  Under most regulations, whether it be ERISA or SEC rules, or the IRC all have conflicted advice in the category of prohibited.

It is in this area that the fight for/against the fiduciary standard lives, not whether or not actually providing advice in the best interest of clients is the right thing to do or not.  We all know it is.  Over the years, many practitioners; more and more every day are switching to a fee for service model.  This business model disconnects the revenue payment to the practitioner from the advice they are giving and eliminates the conflict of interest......theoretically.

However, I have seen registered reps (brokers, financial consultants, etc.) give very sound advice, frankly sole interest of the client type advice which would be a prohibited transaction should a fiduciary standard be applied ---AND--- I've witnessed so-called fiduciary, fee-only practitioners, significantly overcharge (because they can) for mediocre, and sometimes poor advice. 

What I'm positing is that the practitioner who operates in one model or another can be great, okay, mediocre or poor and the environment that they operate in shouldn't matter, but the legislation that gets drafted to deal with the practical issues shouldn't penalize any of the great practitioners from continuing to provide great financial services.  Unfortunately, from what I've seen from the DOL and the SEC on this so far, final rules not yet published, it appears that barriers are being built rather than roads.

In short, all clients are owed a fiduciary standard of care and as practitioners we should all operate that way.  Legislating a one-way system is not the answer, however, both models, the fee-only and the commission-based should have a valid way to operate so that it isn't a practical issue anymore.

- Jason Grantz

  

Obama directs Labor Department to move ahead on fiduciary rule

Earlier today, the white house put out a press release stating that the president plans to direct the Department of Labor to move ahead with a proposal that would raise investment-advice standards for brokers handling retirement accounts, arguing that conflicted advice is costing Americans billions.

It is the opinion of this author that the government doesn't understand that the cost of distribution is the main reason for the high costs of financial products in the retail channel, and that registered reps steer people into products whose expenses cover the cost of distribution--not necessarily because they want Americans to pay excessively for those products.




Professionally, in my experience, most of the financial service professionals (registered reps, financial advisers, financial consultants, RIAs, etc.) all genuinely try to give good advice or good counsel to their clients and prospects.  No one works for free, and thus when working with a client often times the mechanics of payment force this financial professional to choose between embedding their fees into the products (mutual fund 12b-1's for example) or working with clients on a fee-only arrangement where the client is invoiced.  


Strictly from the perspective of ease, it is often easier to have the investments foot the bill of the professional.  That is what the government is using as its primary factor in stating that the industry costs clients billions.  Not that the advice is bad, but rather that the investments are more expensive and thus intentionally harmful when really, they are more expensive due to the fees paid for the advice received.  


A good old American exchange of fees for services rendered.  


Don't get me wrong, I'm all for the idea that financial consultants must be required to always act in the client's sole interest when giving advice, however this rule will paint all financial professionals as fiduciary advice givers when many of them really aren't doing that or are even qualified to do so.  It's a poorly written rule from where I sit and think it needs to go back to the drawing board.

The link to the press release here: 
  
http://www.whitehouse.gov/sites/default/files/docs/cea_coi_report_final.pdf


**UPDATE**
http://www.sec.gov/news/speech/022015-spchcdmg.html#.VOtkXi65lz6


See the above link.  Apparently, SEC Commissioner Gallagher agrees with my opinion.  Within this speech is some pretty harsh criticism of the DOL's rule making calling it a "runaway train" and goes on to really pick apart the White House's internal memo.  Worth the read.



- Jason Grantz