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

Why would ANYONE want to self-trustee a 401(k) Plan?

Very interestingly, a recent lawsuit has made a lot of noise in the retirement plan industry, but not for the reason people think.  This suit doesn’t involve a famous company or a huge service provider or even a large sum of money, rather what makes this case so interesting is that it is, in fact, a very ordinary every day plan.  The case I’m referring to is Damberg v. LaMettry’s Collision a $9-$10 million 401(k) plan who’s trustees (two owners) are being sued by two long term employees for excessive fees.  This is the first case of this nature that is “down market” of notoriety.   

Joe Reese walks through the paces of the implications here in a recent blog post on Unified Trust’s blog, linked here à http://blog.unifiedtrust.com/index.php/2016/05/25/show-me-the-money/.  

Makes me wonder, why would ANYONE want to self-trustee a 401(k) Plan?

- Jason Grantz

 

Managed Accounts are More Effective

Recently, Plan Sponsor Magazine published their 2015 PLANSPONSOR Defined Contribution Survey and in it was some very interesting data regarding Managed Accounts and outcomes.  See the full survey here: PLANSPONSOR 2015 Defined Contribution Survey

After reviewing the data, one thing becomes very apparent, plans that use a Managed Account combined with an advisor acting in a fiduciary capacity have better results than plans not using these services.  The article below from planadviser magazine dives into the data a little deeper and focuses on average balances.

Managed Accounts - Plans with Managed Accounts have better outcomes

**WARNING: A little commercial below, apologies, but that stats are what they are.**

These results correlate to my personal experience.  At my firm, Unified Trust, approximately 9 out of every 10 plans we bring on board are choosing to adopt our full suite of recommendations, most of which are maternalistic.   We suggest clients utilize automatic enrollment (starting at 6%), automatic deferral escalators and the UnifiedPLan Managed Account Solution.  When looking at these plans, the results are astounding.

As of the date of this writing, we see roughly 80% of participants stay in the defaulted managed account solution.  This solution provides the participants with the answers AT enrollment to most of their questions.  When can I afford to retire? Am I on track?  What will my monthly income be?  How much of that is from the plan, social security, outside assets and other sources of income?  What should my deferral rate be in order for me to get or stay on track?

Of the participants offered this managed account, we are seeing 71% of those participants on track for a fully funded benefit.  Most industry studies we've reviewed has the industry average at about 25% (lowest I've seen is 15%, highest is 40%).  The system of defaulting participants into a solution that delivers AND implements all of the answers is proven here to be nearly 3 times more effective than traditional methods in delivering the outcome that matters most, retirement readiness.

Whether it is outside studies like PLANSPONSOR's survey, or our first hand experience, I think the results speak for themselves.  The more that we as professionals take on ourselves and do for our clients, the better the results.

-Jason Grantz

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 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