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

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

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

2014 ERISA settlements top $1.3 billion

The largest class-action settlements in claims brought under the Employee Income Retirement Security Act topped $1.3 billion in 2014, almost 10 times the sum of the biggest settlements from the previous year.

No other area of employment workplace law saw that kind of explosive growth last year. In fact, settlement numbers in other areas of workplace class-action claims were down, according to the 2015 Workplace Class Action Litigation Report, published by Seyfarth Shaw, a Chicago-based law firm.

The settlement figures for the biggest ERISA cases were higher in 2014 than at any other time in recent history. In 2011, sponsors settled nearly $900 million in the largest cases, the only time since 2009 when the figures were remotely close to last year’s record numbers.

Settlement figures for other areas of labor law paled in comparison: $215 million was settled in wage and hour class-actions, and about $228 million in employee discrimination cases.

By the close of 2014, ERISA lawsuits totaled 7,163, down marginally from 2013. Several “mega-settlements” pushed the ERISA tab for the 10 largest settlements beyond the billion-dollar mark. Among them: 

In August 2014, a $480 million settlement was reached in Meyers vs. Daimier Trucks North America LLC, in a class-action filed by retired UAW workers alleging the truck manufacturer illegally cut benefits. 

The next month, a $415 million settlement was approved in Healthcare Strategies Inc. vs. ING Life Insurance & Annuity Co. 

And in December, a tentative $140 million settlement was reached in Haddock vs. Nationwide after 13 years of litigation. It’s believed to be the largest ever in a service-provider revenue-sharing case. 

A couple of quick conclusions:

• The amounts here are staggering, especially from the perspective of class action attorneys.  Surely, this information will draw more attorneys into the fray.
• Based on these figures, litigation on ERISA cases seemingly is poised to increase in both quantity and voracity.
• As a result, one would naturally expect the number of players in the ERISA space to decrease due to the risks, with a natural result being those firms doing the right thing for their clients and those firms with a truly dominant position in the space where litigation can be fought or absorbed.

-Jason Grantz

I'm on the Radio! Hear a 30 minute interview discussing Cash Balance Plans from 'The 401(k) Study Group'!

Last week I was lucky enough to be interviewed on the radio by Chuck Hammond of The 401(k) Study Group and we discussed Cash Balance plans.  It is a continuation from the previous posting on this blog about Cash Balance plans.  Hope you enjoy listening to it.  Linked Here.

http://www.blogtalkradio.com/the401kstudygroup/2014/10/10/cashing-in-on-cash-balance

Best - Jason

Curbing Enthusiasm for 401(k) Plan Loans

Here are some friendly tips for employers when considering the loan provisions available in the 401(k) Plan they offer to their employees.  Enjoy!

 

SITUATION:

We allow our employees to borrow against their 401(k) plan account balances. We understand that the ability to take out a loan can reassure employees that they have access to their account assets if they need them and can increase plan participation and contribution rates. However, we have to spend time and money administering the loans. And we’re concerned our employees may be hurting their chances for a comfortable retirement by borrowing too much and too often.

 

QUESTION:

Other than not offering loans, what can we do to discourage employees from taking unnecessary plan loans?

 

ANSWER:

You can take a number of actions to limit plan loans, including educating employees about the pitfalls of plan loans and placing restrictions on loans.

 

DISCUSSION:

Eliminating plan loans entirely might hurt plan participation.  Instead, to discourage employees from taking plan loans they may not really need, provide information about both the advantages

and disadvantages of borrowing from a 401(k) plan account. While employees may already know about the ease and convenience of plan loans, they might not be aware that:

 

• Loan repayments are made with after-tax money.

• Taxes will be paid again when the money is distributed from the plan.

• It can be difficult to continue to save for retirement and pay back a loan.

• If they leave employment, loans generally must be repaid at that time.

• If a loan isn’t repaid, the outstanding balance would be treated as a taxable withdrawal subject to both income tax and a possible 10% early withdrawal penalty.

Before processing a loan request, provide employees with a summary of the potential disadvantages of a plan loan.  Other actions you can take to discourage excessive loans include:

 

• Limiting the number of outstanding loans an employee can have at one time.

• Limiting the number of loans an employee can take in a 12-month period.

• Restricting borrowing to only money that the employee has contributed.

• Increasing the loan origination fee.

To potentially reduce the number of loan defaults, arrange for repayment to be made through payroll deductions or automatic checking account deductions.

State of the Union - Mostly good, with a mix of ignorance

If you watched last night’s State of the Union speech by President Obama, you were probably moved by the President's passion and eloquence and also excited by his remarks surrounding the minimum wage increase, energy independence and support for small business.  However, upon a closer observation the president had a few choice (albeit ignorant) words regarding the state of the private retirement system. I'm not sure that I was horrified to hear what he said, but I was dismayed to say the lest.  The President claimed that only the wealthiest Americans were benefiting from tax incentives for the employer-based retirement system, calling them, “upside down retirement tax incentives.”

Plainly stated, he is wrong.  He has incorrect facts, wrong data or wrong data interpretation.  So here are some truths:  80% of 401(k) plan participants are middle class Americans making less than $100,000.  Households making more than $200,000 (the wealthiest Americans) only get 17% of the tax benefits from 401(k) plans, while middle income households enjoy the majority of such tax benefits.”

It's a shame that he chose to taint a moment like this where he discussed expanding coverage by creating a payroll deduct IRA with a subtle, yet slanted attack on the current private system.  So, while we agree that expanding coverage with new and different vehicles is a good idea, it cannot be at the expense of undermining the current retirement plan system.

Last year, yours truly attend a Fly-In to Washington D.C. where we met with various congress people about this issue.  That experience coupled with ongoing negative press and now the State of the Union, it has become apparent to me that there are those in Washington who still do not understand that the retirement savings tax incentive is not a permanent write-off like most other tax breaks – it is a deferral.  A dollar deferred today is a dollar taxed tomorrow.

There's a great website where it will help you facilitate an email to your Congressmen and women, telling them to stay away from our 401(k)s!  Go to SaveMy401k.com today.  It's very easy.

Fiduciaries, Know thy Duty!

Good article posted this AM on NAPA.net authored by John Lekel.  Within the article it cites a webinar that was conducted for NAPA in January presented by Dr. Greg Kasten of Unified Trust Company regarding fiduciary duty for retirement plan fiduciaries.  Within the webinar, Dr. Kasten offers a variety of good pointers on best practices and some warnings about what is being sold in the market vs. what clients think they are buying.  Here's a short list of best practices;
___
"Prudence is key, Kasten argued, in exercising fiduciary duty. He offered these pointers:
• consider what information is relevant to the decision;
• obtain the information;
• analyze the information;
• make a reasoned decision that other experts in similar situations would make; and
• document the decision"

Thanks John and thanks Dr. Kasten.

Retirement Plan Business Models - Some thoughts

In early November, I did an interview with a Paula Aven Gladych of benefitspro (http://www.benefitspro.com/), an online media source for all things related to the benefits marketplace.  The topic of the interview was "broker business models for retirement plans".  Very soon after the interview, they posted an article called "Demand Rising for 401(k) advisors".  I was cited in the piece, but a lot of what she and I had discussed was left out, linked below.

http://the401kplanblog.blogspot.com/2013/11/demand-is-rising-for-401k-advisors.html

Unbeknown to me, the author had intended a second piece which was published on 12/27 entitled "Brokers begin to break into 401(k) market".  More of what she and I had conversed about appears in this article.  In it, I discuss a couple of different service models that can work, the widening gap between "retirement pros" and beginners and how both can succeed in selling and servicing retirement plans.  Please enjoy it, linked below.

http://www.benefitspro.com/2013/12/27/brokers-begin-to-break-into-the-401k-market

Demand is Rising for 401(k) Advisors

Every once and a while someone asks me my thoughts about the retirement plan industry.  Occasionally, they choose to print some of those thoughts.  Below is an article from Benefits Pro featuring myself and a few others discussing the demand for specialization from the investment advisory community.  Happy reading.

http://www.benefitspro.com/2013/11/06/demand-rising-for-401k-advisors?eNL=527bea40150ba0744c000091&utm_source=RetirementAdvisorPro&utm_medium=eNL&utm_campaign=BenefitsPro_eNLs&_LID=143409125

The Fiduciary Definition Fight continues

The U.S. House of Representatives approved legislation Tuesday evening, October 29th that would delay – or possibly kill – the Department of Labor’s regulatory initiative to expand the definition of a fiduciary to encompass retirement plan advisors. The bill passed by a 254-166 margin, including 30 Democrats.

The measure, introduced last summer by Rep. Ann Wagner, R-Mo., would prohibit the DOL from proposing its regulation until 60 days after the Securities and Exchange Commission has finalized a similar rule in the works to raise standards for advisors who provide retail investment advice.
On Monday, the Obama administration threatened to veto the legislation, saying that it undermines the DOL’s efforts to protect workers and retirees from conflicted investment advice.

Supporters of Wagner’s bill say the SEC must go first to ensure coordination between the agencies and avoid duplicative costly fiduciary requirements that would ultimately limit investment advice for smaller investors. Opponents say that the bill would effectively kill the DOL rule if the SEC declines to propose its own regulation.

For those who are not paying close attention to this issue, the DOL has been empowered to rule make on changes to the fiduciary definition but isn't necessarily coordinating with the Securities and Exchange Commission (SEC).  This is one of the issues causing the vote to delay, the desire to have the SEC opine before the DOL makes the rule.  The other issue is the applicability of this new rule making to Qualified Plans but also to IRAs. 

The underlying reasoning is that the current definition of fiduciary under ERISA is written too vaguely.  It is widely assumed that the new rules will pointedly define who is a fiduciary and who is not and potentially pull in a lot of non-fiduciary financial consultants into fiduciary status.  Versions of this potential new rule would also potentially create a 'non-uniform' uniform fiduciary standard. Scenarios could present themselves where financial consultants would be permitted to say that they are fiduciaries while also having the ability to have conflicts of interest with the client.  This would be the opposite of what the uniform fiduciary standard is intended for. 

Ultimately the fight will continue, it is possible that Wagner's bill will not get through the Senate or will be vetoed by the President.  More to come on this issue.

COLA 2014 - IRS Announces Pension Limits w. some changes

The Internal Revenue Service announced the 2014 Cost of Living Adjustments affecting dollar limitations for pension plans.  

The main changes are as follows:

• 415 Limit is increased from $51,000 to $52,000
• Annual Considered Compensation is increased from $255,000 to $260,000
• The Taxable Wage Base for Social Security is increased from $113,700 to $117,000 (yes, that's right, high earners are paying more into Social Security) 

There are other changes as well, but these are the main ones impacting 401(k) plans for 2014.  For a complete list including changes to IRA limits, DB limits and others, you can find them here -->

 http://www.irs.gov/Retirement-Plans/COLA-Increases-for-Dollar-Limitations-on-Benefits-and-Contributions