Crypto in Retirement Plans? Come on…..

  They say that if you follow the history of baseball that it reflects what’s happening in America.  It’s funny, no one ever says anything like that about the retirement plan industry, but then again, most people don’t even know that retirement plans are an industry! I can make a case that retirement plans do, in fact, have a broader tie in to what’s happening in the country at large. Today, we have more women and minorities working in our space and many industry groups have formed to promote equality in our industry. Similarly, just as Environmental and Social change have become forefront, ESG funds have also become topical in retirement plans. So, like baseball, retirement plans can also be used as a mirror reflection of what’s happening in the country around us.

 

If the above is my thesis, the next part is another example which is Cryptocurrency (Crypto) in retirement plans???  So, yes, just as Bitcoin and all the other varieties are becoming more and more mainstream, naturally, people who view these as investable opportunities want them to be available where their money is, which for a lot of people is in retirement plans. Within the last few years, there has been a small number of very noisy providers responding to this demand which has now “forced” the Employee Benefits Security Administration (EBSA), an agency inside of the Department of Labor to take a position on Crypto as a potential investment for retirement plans. The result, Compliance Assistance Release 2022-01 in March of this year.

The reader can read all about it in the above link.  If we had to summarize what we see in this C.A.R. it’s basically a cautionary release. There’s not a lot of new ideas in there. EBSA Deputy Assistant Secretary for Program Operations, Tim Hauser has stated publicly that the release is more about the way these types of investments are being marketed, “I mean the thing that that most concerned us was, you know, fairly aggressive marketing...…of these investments to 401K plans at this moment”.

                

Aggressive Marketers Beware!!!!

It is also reminding Plan Sponsors of one of the primary fiduciary duties, the Prudent Person Rule of ERISA. In his interview with Brian Graff, CEO of the American Retirement Association on June 22, 2022, he reiterated that the obligation of Prudence is a Plan Fiduciaries job and that fiduciaries will need to be prepared to justify any decision to include Crypto in a plan saying “I think it is fair to say that as time goes by I would expect telling people that the issue are Prudence in this and this context is very very real and you need to take it very seriously and think hard about what you're doing here. That means, full analysis weighing all risks such as volatility, recordkeeping concerns and more."

This issue of prudence is very real and like in any other investment decision dealing with retirement plan assets, there isn’t an actual specific set of rules on what will pass muster and what won’t. It’s all facts and circumstances based. This is no different than what they’ve said previously with other “newer” investment ideas such as Private Equity. So, the question for plan fiduciaries is whether participant demand will be sufficient to consider using these funds and then, whether a prudent analysis of Crypto as a potential investment will yield a decision to add them to the plan and then, of course which one??

Let’s not forget that the prudent selection is not a one-time decision, the duty to monitor would also hold. Final thought, plan sponsors may choose to “punt” this plan decision by stewarding participants to use a Self-Directed Brokerage Account (SDBA) as the place to buy these instruments. However, a note of caution here as well. EBSA’s Field Assistance Bulletin 2012 - 02r says that SDBAs are still subject to ERISA 402(a)’s Fiduciary Standard’s of care. This means that the SDBA provider needs to be prudently selected and reasonable boundaries need to be built into the provider to restrict access to imprudent investments (ex. Municipal Securities, Level 2 options, etc.).

OUR TAKE: Over time Crypto may prove to be a viable new asset class OR it may prove to be a fad. I’ve even heard notions of Crypto or its’ underlying technology, blockchain technology, becoming a utility. However, it’s got a lot of uncertainty surrounding it and we would have a very difficult time as plan fiduciaries ourselves in advising a client that they’d be prudent to add to a menu of choices offered in a 401(k) Plan. If you have thoughts on this piece or want to discuss the topic further, please reach out to us! 

 

 

 

 

 

 

 

Jason Grantz is the Managing Director of Institutional Retirement Plans at Integrated Pension Specialists and a Retirement Plan Specialist at Integrated Wealth Concepts.  He can be reached at (978) 847-0140 ext. 820.

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

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

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

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

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

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

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

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

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

- Jason Grantz, QPA, AIFA

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

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

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

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

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

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

- Jason Grantz, QPA, AIFA

 

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The Fiduciary Rule: Intentions vs. Results

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

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

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

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

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

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

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

The DOL Conflict of Interest Rule is finally here! Some implications....

Implications of the Fiduciary Rule  After months of anticipation and years of debate, the Department of Labor (DOL) “Conflict of Interest Rule” has finally been released.  During the proposal process, the DOL fielded over 400,000 comments, some of which were in opposition to the rule while others were seeking clarification to specific areas within the rule.  The one thing there is little debate about is the intent of the rule.  There may be arguments around the government’s role in this process, or the nuances of what constitutes investment advice, but how do you argue that a rule requiring the industry to act in the best interest of their clients is a bad thing? It will likely take weeks, if not months, to fully dissect and understand the scope of the new fiduciary rule and how the landscape will change as it is phased into implementation.  Here are a few of my initial interpretations and what I think the potential implications are.    Potential Impact on Financial Advisors The registered investment advisors (RIAs) that have already been acting in a fiduciary capacity just saw their marketplace get considerably more crowded.  With the vast majority of advisors now being considered fiduciaries, RIAs will be forced to adjust their value proposition to distinguish themselves amongst their competitors.  My opinion is that the most impactful point of differentiation will be to not only improve outcomes for participants but to quantify those outcomes for the plan sponsors and retirement plan committees. Some broker-dealer registered reps may need to utilize the ‘education carve-out’ to limit or avoid fiduciary status.  However, the carve-out is going to be narrower than it previously was (per DOL Interpretive Bulletin 96-1) and the education provided under this approach will be limited and may be considered unsatisfactory to many plans.  Registered reps who wish to stay in the retirement plan industry using the education carve-out may ultimately need to rely on a very strong fiduciary partner to do so (a view shared by notable fiduciary expert Fred Reish in a recent blog post as an evolving “common solution” for 401k-focused registered reps in the wake of the new fiduciary rule). Potential Impact on Advisory Fees In recent years, fees have been compressing as a result of the DOL’s fee disclosure initiatives and the increasingly competitive nature of the marketplace—something that is expected to accelerate under the new fiduciary definition rule.  It’s also highly likely we’ll see increased litigation over the matter.   However, we don’t believe that there will be a bright-line test on fee reasonableness.  It’s not necessarily about the fee but rather what is being done to earn the fee.  For that reason we believe that an advisor’s business model will need to include greater fee transparency, a prudent documentation and monitoring process, and the ability to quantify participant level outcomes.  Advisors that can accomplish this will be in a better position to justify their fees and differentiate their services in a fiduciary environment where everyone is essentially viewed as an equal. Potential Impact on Compliance Compliance complexity and oversight will greatly increase.  For example, testimony to the DOL indicated in the first year the rule goes into effect financial institutions will have to produce more than 86 million written disclosures and notices.  This does not come without a cost.  Who will pay for this? Potential Impact on Vendors Many major vendors will be exempt from the fiduciary rule or attempt to structure relationships to avoid fiduciary status under the rule.  This means litigation that develops may be between the plan sponsor and the advisor since the vendors may not be a fiduciary—that is unless you are working with a vendor that is willing to accept fiduciary status such as my firm, Unified Trust who not only is willing to accept fiduciary status, we sign on as discretionary trustee, and thus a named plan fiduciary, in the plan document for every plan on our platform. The DOL Conflict of Interest Rule will no doubt have a sizable impact on the industry.  The extent of that impact will unfold over the coming months and years.  We do firmly believe that it will increase the need to have a fiduciary process that is not only accurate but also automated and algorithm-based.  In other words, it won’t be enough to say you’re a fiduciary, rather you will need to show prudent fiduciary processes are in place and in the best interest of the investor.  - Jason Grantz, QPA, AIFA

DOL Fiduciary Rule Set To Shake Up Retirement Marketplace

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



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

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

 


-Jason Grantz

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
 

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