The 3(38) IM & Discretionary Trustee Service Model

Over the last several years, there has been increasing awareness of the various fiduciary roles that retirement plan advisors and consultants play when serving their retirement plan clients. In previous posts, we have tackled the topics of Full-Scope §3(21) vs. Limited Scope §3(21) Advisors, as well as how fiduciary delegation and appointment functions. In this post, along with supporting documents, we are focusing on the two main discretionary fiduciary models: that of a Discretionary Trustee and that of an ERISA Section 3(38) Investment Manager.

Please peruse the following Journal of Pension Benefits article we co-authored which discusses the differences between the duties of a Discretionary Trustee and those of an ERISA §3(38) Investment Manager (IM), view article. We believe this is an important topic given Unified Trust’s position as a Discretionary Trustee and given that we have recently launched a new service model called Investment Manager, more information.

In the article we discuss a model for comprehensive Retirement Plan Fiduciary Governance we’ve called The Two Party System, illustrated here.

The idea is for the plan sponsor to hire two separately engaged, independent (of each other) fiduciaries. They may be a Discretionary Trustee and an IM or a Full/Limited Scope §3(21) Advisor. One of these parties does the work required to ensure proper fiduciary governance and the other oversees the first which allows proper adherence to the Duty to Monitor. In the absence of two, the party responsible for oversight is the Plan Sponsor and, in most cases, little if any fiduciary liability exposure is shed. The combination of a Discretionary Trustee and an IM or §3(21) Advisor together make for a potentially superior model to a Discretionary Trustee, §3(38) IM or §3(21) Advisor alone.

Retirement Income - Insurance isn't the only Way

Over the last several years as the Retirement Plan marketplace has matured, service providers have built out an array of services engineered to help participants and plan sponsors in different ways. Plan design in a post Pension Protection Act environment has led to increasing use of techniques such as Automatic Enrollment or Progressive Savings Escalators. But only recently has the shift focused beyond the accumulation phase. As the Boomer generation gets closer and closer to retirement, IRA Specialty providers and Employee Education providers are popping up everywhere. With this comes a new focus on Income Replacement including defining Income Replacement adequacy, strategies that start in the accumulation phase and work throughout life and even Insurance Based Guaranteed Income Vehicles.

Our philosophy has always been to create a more pension-like experience for the participant where the accumulation phase is targeted toward a range of possible retirement ages and amounts and managing that experience to fruition taking the least amount of risk necessary to achieve the goal. We call this style Defined Goal Investment Management. Recently, we’ve observed that several firms out there are starting to come out with their own spin on the ‘Pension-Like’ retirement plan experience. This article from Investment News titled 'Firms are Omitting Annuities in New Retirement Income Products, http://www.investmentnews.com/article/20110320/REG/303209976, does a good job in weighing some of the pros and cons of insurance-based retirement income products and non-insurance based retirement income services.

In the end, we believe the appropriate philosophy is that if we default the participant into an environment that gives them an adequate income replacement than the uptake on that would be much higher than if they had to elect to do it themselves. This is in line with our overall core philosophy, default the participant into all of the decisions that lead to the best outcomes and leave them there unless they choose to opt out.

The Passive vs. Active Debate

Earlier this month, the good folks at Knowledge Wharton published an article on their website entitled 'If Index Funds Perform Better, Why Are Actively Managed Funds More Popular?', linked here --> http://knowledge.wharton.upenn.edu/article.cfm?articleid=2702

While, we at this blog, don't have a strong opinion on the passive vs. active debate, the article does go through a somewhat balanced excercise of the pros and cons of each. That said, while it touches upon this a little in the beginning of the article, I don't think they are giving enough credit to one very important reason why Active management outsells passive to the degree it does.

In this author's opinion, the real reason is the distribution system. Having spent quite a few years employed to distribute actively managed mutual funds, I can tell you first hand that the distribution machine to sell active management is huge and filled with very effective sales professionals. Despite the quantitative data put forth in the article, active management will continue to outsell passive as long as they build in distribution fees (12b-1s) to pay the distributors.....registered reps.

Either way, I think the article is a good read. Thanks Wharton.

Final 408(b)(2) Regulations postponed......briefly

Just last week, February 11 to be exact, the Department of Labor announced that it intends to extend the applicability date for service-provider fee disclosure rules under section 408(b)(2) of ERISA. Disclosure requirements will now apply to contracts or arrangements in existence on or after January 1, 2012, rather than July 16, 2011.

At this point, nothing other than the effective date has changed. All covered service providers will still be required to provide extensive disclosures about their services and the compensation they expect to receive as well as identifying their fiduciary status.

This delay was made solely so that The Department of Labor can review the public comments that they requested previously in connection with the interim final rule, including comments on the types of service providers who should be covered and on whether the required disclosures should be presented in a standard format or not, and subsequently to allow time for implementation of any changes made based on those comments.

While this extension is sure to be welcomed by certain service providers, it isn't likely to provide any type of reprieve. For those hoping for the "good old days" to come back,.....well there's always hope.

IRS Raises Fees for Most Determination Letters

Fees.....where do we begin? Obviously, the burden of determining if fees are fair, reasonable and necessary is a daunting challenge even for professional fiduciaries. Very few practitioners enjoy going through a fee discussion with clients, the industry has been hiding fees and selling "free" plans for 35 years, necesitating the quite robust set of new rules forthcoming later this year. In many cases, it is hard to get clients to understand all of the moving parts and mechanics of Retirement Plan fees, even harder in some cases to get them to not pass them along to their participants. Of course, in difficult economic times like the present this task becomes even more unplesaant. With that stated, see the below list of IRS imposed fee increases, some of which are 250% increases.....gotta love the timing.

Effective Feb. 1, 2011, The Internal Revenue Service (IRS) has raised the fees for determination letters and advisory letters sought by qualified retirement plans.

These increases will be for almost every type of determination letter request, as follows:

(1) For a plan intending to satisfy a design-based or nondesign-based safe harbor, or a plan not seeking a determination letter with respect to any of the general tests, and the plan is not seeking a determination letter with respect to the average benefits test:

The single employer Form 5300 determination letter fee is increased from $1,000 to $2,500;
The single employer Form 5310 determination letter fee is increased from $1,000 to $2,000;
The multiple employer Form 5300 or Form 5310 determination letter fee is increased as follows:

• 2 to 10 employers from $1,500 to $3,000
• 11 to 99 employers from $1,500 to $3,000
• 100 to 499 employers from $10,000 to $15,000
• Over 499 employers from $10,000 to $15,000

Average Benefit Test Or General Tests

(2) For a plan seeking a determination letter with respect to the average benefit test and/or any of the general tests:

The single employer Form 5300 determination letter fee is increased from $1,800 to $4,500;
The single employer Form 5310 determination letter fee is increased from $1,800 to $4,000;
Adopters of a Master or Prototype Plan or a Volume Submitter Plan will pay a fee that is increased from $1,000 to $1,800;
The multiple employer Form 5300 or Form 5310 determination letter fee is increased as follows:

• 2 to 10 employers from $2,300 to $5,000
• 11 to 99 employers from $2,300 to $5,000
• 100 to 499 employers from $15,000 to $25,000
• Over 499 employers from $15,000 to $25,000

(3) For group trust submissions under Rev. Rul. 81-100, C.B. 1981-1, 326; Rev. Rul. 2004-67, C.B. 2004-2, 28, and Rev. Rul. 2011-1, I.R.B. 2011-2, the fee has been increased from $750 to $1,000. Form 5316 to be used for group trust submissions will be available soon, according to the IRS.

For the complete (260 pages) rule please view IRS Revenue Procedure 2011-8 ---> http://irs%20revenue%20procedure%202011-8%20---%3e%20http//www.irs.gov/pub/irs-irbs/irb11-01.pdf

A start on How to focus on Professional Practices

Earlier this year, Pete Swisher of Unified Trust was interviewed by the CFDD for its' internet broadcasting station. The topic discussed was New Directions For Professional Practices. The discussion centers around how recent Health Care legislation may impact the 'M & A' activity in this industry and the impact on Qualified Plans as a result. It also touches upon the unique plan design sales opportunities. It is worth the listen. Below is the link.

click here

In Plan Roth Conversions

The Small Business Jobs and Credit Act, which was signed by President Obama in September 2010, permits 401(k) and 403(b) plans that have a Roth deferral program in place to also provide for an in-plan Roth rollover provision. This will be extended to 457(b) plans for plan years beginning after December 31, 2010.

An in-plan Roth rollover feature allows a participant who is eligible for a distribution to roll any vested amount to an in-plan Roth rollover account. If amounts are converted in 2010, the taxpayer can choose to recognize the income in 2011 and 2012 instead of in the year of the roll over.

Previously, a participant who wanted to convert to a Roth had to do this outside the retirement plan by rolling the money to a Roth IRA.

For more general information on implementing this feature, please follow the link to more frequently asked questions. Click here.