Well, today is the day that the Interim tag was taken off the 408(b)(2) regulations and they have become final. In my first perusal of the rules, the biggest change seems to be the timing. The Interim rule was to be effective April 1, 2012 and that has been pushed back to July 1, 2012. The 404(a)(5) disclosures, i.e. participant fee disclosures, was also tied to this effective date so those are also pushed to July 1, 2012. Everyone gets a little more breathing room.
Other major changes I've observed is the exclusion of certain 403(b) Annuity Contracts and custodial accounts, an expansion of the information required to be disclosed and updates to how disclosure of changes are to be made.
Attached is the actual regulation and the DOL's fact sheet on the guidance.
Full Rule
http://www.ofr.gov/(X(1)S(q03r5lzzov2yvhmrvo4qlk5m))/OFRUpload/OFRData/2012-02262_PI.pdf
DOL Fact Sheet
http://www.dol.gov/ebsa/pdf/fs408b2finalreg.pdf
Thursday, February 2, 2012
Tuesday, January 17, 2012
An Oldie but a Goodie - Criminal Rule, listen up Bank Lenders!
This is an oldie but a goodie. The story goes like this, Plan Sponsor of a 401(k) Plan receives a call from their Bank. Specifically, it is from their lender. The Loan Officer, subtley or maybe not so subtley, tells the client that their credit is at risk if they don't put more assets with the bank. Subsequently, a broker (bank registered rep) is introduced and a few short months later the 401(k) Plan is moved to the bank or a different spin where the credit isn't at risk, instead the client is told that their rate will be reduced in exchange for the plan.
For those of us practicing in the ERISA Qualified Plan arena, this story or one like it is very familiar. We all competed against this type of scenario and we all know that it isn't legal. I've often cited that this is a Prohited Transaction (PT) and violates several different ones. Well, thanks to a linked in post that led me to this blog post from the Business of Benefits (nice one Mr. Toth) we can all now specifically cite the US Criminal code when this scenario presents itself. http://www.businessofbenefits.com/2010/06/articles/complex-prohibited-transaction/erisa-plans-ultimateand-criminalprohibited-transaction-rule-of-18-usc-1954/
To summarize the post, this behavior violates ERISA's Prohibited Transaction rules, but it also violates the US Criminal Code, specifically, 18 USC §1954. It specifically is an Anti-Kickback rule and is broad in nature although it does specify ERISA plans that
Whoever being—
(1) an administrator, officer, trustee, custodian, counsel, agent, or employee of any employee welfare benefit plan or employee pension benefit plan; or
(2) an officer, counsel, agent, or employee of an employer or an employer any of whose employees are covered by such plan; or
(3) an officer, counsel, agent, or employee of an employee organization any of whose members are covered by such plan; or
(4) a person who, or an officer, counsel, agent, or employee of an organization which provides benefit plan services to such plan
receives or agrees to receive or solicits any fee, kickback, commission, gift, loan, money, or thing of value because of or with intent to be influenced with respect to, any of the actions, decisions, or other duties relating to any question or matter concerning such plan or any person who directly or indirectly gives or offers, or promises to give or offer, any fee, kickback, commission, gift, loan, money, or thing of value prohibited by this section, shall be fined under this title or imprisoned not more than three years, or both.
Many scenarios could fall under this, but specifically, the act of Tying a company loan to the 401(k) Plan would fall under this. So, sometimes we need to look past ERISA to the Criminal Code itself to find something specific. I wonder if the banks have contemplated that this, technically, should be disclosed as compensation under 408(b)-2.......
Thanks Linked-In and thanks Mr. Toth for the good intelligence.
For those of us practicing in the ERISA Qualified Plan arena, this story or one like it is very familiar. We all competed against this type of scenario and we all know that it isn't legal. I've often cited that this is a Prohited Transaction (PT) and violates several different ones. Well, thanks to a linked in post that led me to this blog post from the Business of Benefits (nice one Mr. Toth) we can all now specifically cite the US Criminal code when this scenario presents itself. http://www.businessofbenefits.com/2010/06/articles/complex-prohibited-transaction/erisa-plans-ultimateand-criminalprohibited-transaction-rule-of-18-usc-1954/
To summarize the post, this behavior violates ERISA's Prohibited Transaction rules, but it also violates the US Criminal Code, specifically, 18 USC §1954. It specifically is an Anti-Kickback rule and is broad in nature although it does specify ERISA plans that
Whoever being—
(1) an administrator, officer, trustee, custodian, counsel, agent, or employee of any employee welfare benefit plan or employee pension benefit plan; or
(2) an officer, counsel, agent, or employee of an employer or an employer any of whose employees are covered by such plan; or
(3) an officer, counsel, agent, or employee of an employee organization any of whose members are covered by such plan; or
(4) a person who, or an officer, counsel, agent, or employee of an organization which provides benefit plan services to such plan
receives or agrees to receive or solicits any fee, kickback, commission, gift, loan, money, or thing of value because of or with intent to be influenced with respect to, any of the actions, decisions, or other duties relating to any question or matter concerning such plan or any person who directly or indirectly gives or offers, or promises to give or offer, any fee, kickback, commission, gift, loan, money, or thing of value prohibited by this section, shall be fined under this title or imprisoned not more than three years, or both.
Many scenarios could fall under this, but specifically, the act of Tying a company loan to the 401(k) Plan would fall under this. So, sometimes we need to look past ERISA to the Criminal Code itself to find something specific. I wonder if the banks have contemplated that this, technically, should be disclosed as compensation under 408(b)-2.......
Thanks Linked-In and thanks Mr. Toth for the good intelligence.
Friday, January 13, 2012
What!!! For a change, apparently No Delay on Fee Disclosure
In a shocking move by the DOL, they've actually held firm on the Fee Disclosure Deadline!
http://www.benefitspro.com/2012/01/06/dol-says-no-extension-on-fee-disclosure-deadline
This is despite that fact that with approx. 3 months to go they still have not issued the final guidance needed for the variety of different service providers to all comply.
In this author's experience, this is typical. The Fee Disclosure rules, both 408(b)(2) and 404(a)(5) have been around for several years now and it would seem to me that all of the relevant issues have been discussed and vetted ad nauseum, so one would think that final guidance would have been here long before now. But, that is the problem with the regulating bodies. They claim to be sympathetic to industry concerns, but alas not so concerned that they would give industry enough time to implement changes to be in compliance.
Ethically/Morally, we've always been in favor of Fee Disclosure (see former blog posts on the subject) but we remain skeptical that the newly "informed" consumer, i.e. the Plan Sponsor and Participants will either be better off with this new information or outraged by it. Frankly, we believe it very possible that harm will be caused in the form of fewer participants saving money and more plans becoming out of compliance.
In fact, we think it is likely that a whole bunch of Plans that were previously in compliance with ERISA (teh heh....) will now be out of compliance and in many cases be engaging in Prohibited Transactions unknowingly. What remains to be seen is whether or not any of this will actually be enforced. In the meantime, as Samuel Jackson once said in the movie Jurassic Park.... "Hold onto your Butts!"
http://www.benefitspro.com/2012/01/06/dol-says-no-extension-on-fee-disclosure-deadline
This is despite that fact that with approx. 3 months to go they still have not issued the final guidance needed for the variety of different service providers to all comply.
In this author's experience, this is typical. The Fee Disclosure rules, both 408(b)(2) and 404(a)(5) have been around for several years now and it would seem to me that all of the relevant issues have been discussed and vetted ad nauseum, so one would think that final guidance would have been here long before now. But, that is the problem with the regulating bodies. They claim to be sympathetic to industry concerns, but alas not so concerned that they would give industry enough time to implement changes to be in compliance.
Ethically/Morally, we've always been in favor of Fee Disclosure (see former blog posts on the subject) but we remain skeptical that the newly "informed" consumer, i.e. the Plan Sponsor and Participants will either be better off with this new information or outraged by it. Frankly, we believe it very possible that harm will be caused in the form of fewer participants saving money and more plans becoming out of compliance.
In fact, we think it is likely that a whole bunch of Plans that were previously in compliance with ERISA (teh heh....) will now be out of compliance and in many cases be engaging in Prohibited Transactions unknowingly. What remains to be seen is whether or not any of this will actually be enforced. In the meantime, as Samuel Jackson once said in the movie Jurassic Park.... "Hold onto your Butts!"
Friday, January 6, 2012
Discretionary v. Directed Trustees: Fiduciary Focus
In case you haven't seen it, yesterday in Morningstar's Fiduciary Focus column, Here --> http://www.morningstar.com/advisor/t/50458854/discretionary-trustees-vs-directed-trustees.htm, author Scott Simon tackled a topic that we, and our firm, Unified Trust, have been tackling for years. The topic is Discretionary Trustees vs. Directed Trustees. I got rather excited, thinking to myself selfishly that finally, someone else is going to discuss the merits of appointing a discretionary corporate trustee and the advantages of that over the more common, less valueable step-sister, the Directed Corporate Trustee.
Note, that while the article is, in my opinion, well written, factual and fairly thorough, I was disappointed, nonetheless, to read that he was referring to Discretionary Trustees in the broader sense. He makes the valid point that all trustees appointed by the Plan Sponsor are Discretionary Trustees unless specifically appointed as a Directed Trustee. That includes individuals, such as business owners or boards or officers appointed in this role. The only place he even mentions that you can appoint a Discretionary CORPORATE Trustee is as an aside where he states how uncommon this appointment is. He doesn't go into the merits of Prudent Fiduciary Appointment, or even compare contrast the differences between the two types of Corporate Trustees. You can incidentally find that on this blog.
Here -->http://the401kplanblog.blogspot.com/2011/11/practical-differences-of-various.html
and
Here -->http://the401kplanblog.blogspot.com/2011/04/338-im-discretionary-trustee-service.html
Disappointment aside, he does make a few very good points.
1.) All trustees are Discretionary unless specifically identified as Directed in the Plan Document at which point the responsibilities of trustee fall back to the Named Fiduciary, typically the Plan Sponsor. The good example of US Airways and their relationship to Fidelity Trust Company is provided.
2.) Directed Trustees provide a very limited array of services, typically asset custody, following direction and ensuring transaction accuracy. They are a highly limited fiduciary, and most (that I've seen) disavow fiduciary status in the contracts.
3.) No one can ensure blanket relief from fiduciary liability. There are only degrees of limited relief. Unfortunately, he doesn't point out that the highest degree is to prudently appoint a Discretionary Corporate Trustee.
So, long story short (too late, I know), Scott Simon wrote a decent article making the point that the devil is in the details, and that Plan Sponsors should be wary of unscrupulous sales pitches about fiduciary relief.
Note, that while the article is, in my opinion, well written, factual and fairly thorough, I was disappointed, nonetheless, to read that he was referring to Discretionary Trustees in the broader sense. He makes the valid point that all trustees appointed by the Plan Sponsor are Discretionary Trustees unless specifically appointed as a Directed Trustee. That includes individuals, such as business owners or boards or officers appointed in this role. The only place he even mentions that you can appoint a Discretionary CORPORATE Trustee is as an aside where he states how uncommon this appointment is. He doesn't go into the merits of Prudent Fiduciary Appointment, or even compare contrast the differences between the two types of Corporate Trustees. You can incidentally find that on this blog.
Here -->http://the401kplanblog.blogspot.com/2011/11/practical-differences-of-various.html
and
Here -->http://the401kplanblog.blogspot.com/2011/04/338-im-discretionary-trustee-service.html
Disappointment aside, he does make a few very good points.
1.) All trustees are Discretionary unless specifically identified as Directed in the Plan Document at which point the responsibilities of trustee fall back to the Named Fiduciary, typically the Plan Sponsor. The good example of US Airways and their relationship to Fidelity Trust Company is provided.
2.) Directed Trustees provide a very limited array of services, typically asset custody, following direction and ensuring transaction accuracy. They are a highly limited fiduciary, and most (that I've seen) disavow fiduciary status in the contracts.
3.) No one can ensure blanket relief from fiduciary liability. There are only degrees of limited relief. Unfortunately, he doesn't point out that the highest degree is to prudently appoint a Discretionary Corporate Trustee.
So, long story short (too late, I know), Scott Simon wrote a decent article making the point that the devil is in the details, and that Plan Sponsors should be wary of unscrupulous sales pitches about fiduciary relief.
Thursday, November 17, 2011
Practical Differences of Various Fiduciary Services
Over the last several years, there has been a growing level of awareness surrounding the various roles that retirement plan advisors and consultants play when serving their clients. The increased awareness can be attributed to the establishment of organizations dedicated to promoting fiduciary best practices, as well as the increased exposure to content available at a growing number of industry conferences. Not surprisingly, this has led to the creation of new business models, new credentials and new expertise.
The sections of the ERISA dealing with fiduciary responsibility, in name, have evolved into marketing terminology. For example, ERISA §3(38) Investment Manager is now a bell or whistle made available by the advisor or the service provider. An unfortunate side effect of this trend is the wide disparity in the quality of the delivery system. Some claim to be ERISA fiduciary “experts” using ERISA fiduciary as a sales feature, when really their expertise is in sales or asset gathering. Even among genuine experts, there are many who lack the depth in understanding the many nuances that distinguish the roles. In a recent competitive situation we observed an advisor team, acting as an ERISA §3(38) Investment Manager, state to a client that they are equivalent to a fully Discretionary Trustee, but that they could do it for less. This claim, in the form of salesmanship, was plainly inaccurate and disappointing, yet it happens all too frequently.
While we find that the uptick in the use and discussion of the various fiduciary roles exciting on some levels, the misuse that occurs with client consulting can be problematic. In the example above, by that advisor claiming that selecting funds for their client is the same as a being a fully discretionary trustee, it substantially diminishes the robust list of services provided by a discretionary trustee that goes well beyond fund selection. Many of those services are equally, if not more, important to the Plan Sponsor and the participants. For that reason, we have created a comprehensive chart that explains the PRACTICAL differences for the various fiduciary services available in the market. Click here
The sections of the ERISA dealing with fiduciary responsibility, in name, have evolved into marketing terminology. For example, ERISA §3(38) Investment Manager is now a bell or whistle made available by the advisor or the service provider. An unfortunate side effect of this trend is the wide disparity in the quality of the delivery system. Some claim to be ERISA fiduciary “experts” using ERISA fiduciary as a sales feature, when really their expertise is in sales or asset gathering. Even among genuine experts, there are many who lack the depth in understanding the many nuances that distinguish the roles. In a recent competitive situation we observed an advisor team, acting as an ERISA §3(38) Investment Manager, state to a client that they are equivalent to a fully Discretionary Trustee, but that they could do it for less. This claim, in the form of salesmanship, was plainly inaccurate and disappointing, yet it happens all too frequently.
While we find that the uptick in the use and discussion of the various fiduciary roles exciting on some levels, the misuse that occurs with client consulting can be problematic. In the example above, by that advisor claiming that selecting funds for their client is the same as a being a fully discretionary trustee, it substantially diminishes the robust list of services provided by a discretionary trustee that goes well beyond fund selection. Many of those services are equally, if not more, important to the Plan Sponsor and the participants. For that reason, we have created a comprehensive chart that explains the PRACTICAL differences for the various fiduciary services available in the market. Click here
Tuesday, November 8, 2011
401(k) Advice, Good but only if Used
There was an article in the Wall Street Journal yesterday titled 'Thanks but No Thanks on 401(k) Advice' found here.
http://online.wsj.com/article/SB10001424052970204346104576638933476020932.html
The gist of this article is that more and more 401(k) plans are offering outside help in the form of participant level investment advice, but that uptake on this advice is generally low.
The fact that more plans are giving participants access to advice, in one form or another, is a very good thing or at least it should be. Many surveys show that formal advice leads participants to better decision making and that leads to better outcomes in the form of income replacement rates. However, if only 25% of the people who have access to advice through their retirement plans actually take advantage of it, then this is an issue. My feeling is that many if not most of the advice programs out there are good, very good or great. So why aren't the participants using these services? I have my thoughts.
Firstly, from a behavioral perspective, it has been my experience that many participants would be better described as speculators rather than investors. The key differnce is in expectations. Investors have an expected return on investment (ROI).
Ex.) I invest $10,000 in a 4% bond, I have an expected outcome of 4% interest for the term of the bond and a return of my $10,000 when the bond matures.
Most participants in 401(k) plans do not have an expectation of ROI, rather what they have is hope. I think, in part, this stems from the experience level of most participants as it pertains to investing. The great majority of investment professionals set minimum requirements on who they will look to as potential clients, such as net worth, or minimum investment amounts, e.g. $250,000. Many 401(k) participants would never qualify to work with investment professionals and are ill-equipped to understand the basics of investing, what the experience will be like, what market volatility is and how that will translate to emotional bias' and poor decision-making. Subsequently, the first and perhaps only investing experience they have is with their 401(k) plan and the only reason they get this access is from the aggregation of the asset of the plan.
Next, behaviorally, we've observed that for most participants that savings is a low priority. Most have a set-it forget-it mentality when it comes to decisions they make. For example, they decide to join the plan at a deferral rate of 4%, when we look back at them 3-4 years from now, they are still deferring just 4%. Asset Allocation is a best guess. The simple act of rebalancing, which is additive, doesn't happen in the aggregate. These and other issues lead to the poor income replacement statistics that we've all been seeing.
So, again, how do we take a valuable service like participant advice and get the uptake on it to be higher than the 25% figure in the article?
1.) Remove the price barriers. Not saying that advice should be free, far from it, what I am saying is that if the participant feels they will pay more for advice, they are likely to not take it. Instead, have the fee for advice be a plan-level fee. I.E. 25 basis points to the Plan Sponsor. If the Plan Sponsor chooses to pass along fees to the plan, then everyone pays for it. It becomes a fee neutral decision for the participant to use it or not.
2.) Make advice the default. Like other automatic provisions, usage goes up SUBSTANTIALLY if you make it a plan default. Our experience is that when we make advice programs a plan default we see a usage rate north of 85%.....that's right, 85% or 60% HIGHER than what the Wall Street Journal article says is the industry norm right now.
3.) Change the conversation at the participant level. Give them information in a way that they truly can understand. Most participants are return-centric, not benefit-centric. They look at what the investments did last quarter. In general, as mentioned, most are ill equipped to do anything with performance information, positive or negative. However, if we communicate to them at what age they will be able to afford to retire, give them the REAL number on what that is for a variety of ages, 66, 67, 68, etc. then they will truly know if they are on target to retire with enough income or not. If they are on a shortfall, we can communicate to them the earliest age that they can afford to retire or show them the impact of saving more.....what a novel concept, use the 401(k) Savings Plan as just that, a SAVINGS PLAN!
4.) Use the advantages offered in the Pension Protection Act of 2006. Automate savings, automate escalation, default people to Qualified Default Investment Alternatives, and automate rebalancing.
Those are real, practical solutions that can be implemented easily for many plans and will change the dialogue with Plan Sponsors and participants from investments and fees to something that really matters more which is income replacement rates.
http://online.wsj.com/article/SB10001424052970204346104576638933476020932.html
The gist of this article is that more and more 401(k) plans are offering outside help in the form of participant level investment advice, but that uptake on this advice is generally low.
The fact that more plans are giving participants access to advice, in one form or another, is a very good thing or at least it should be. Many surveys show that formal advice leads participants to better decision making and that leads to better outcomes in the form of income replacement rates. However, if only 25% of the people who have access to advice through their retirement plans actually take advantage of it, then this is an issue. My feeling is that many if not most of the advice programs out there are good, very good or great. So why aren't the participants using these services? I have my thoughts.
Firstly, from a behavioral perspective, it has been my experience that many participants would be better described as speculators rather than investors. The key differnce is in expectations. Investors have an expected return on investment (ROI).
Ex.) I invest $10,000 in a 4% bond, I have an expected outcome of 4% interest for the term of the bond and a return of my $10,000 when the bond matures.
Most participants in 401(k) plans do not have an expectation of ROI, rather what they have is hope. I think, in part, this stems from the experience level of most participants as it pertains to investing. The great majority of investment professionals set minimum requirements on who they will look to as potential clients, such as net worth, or minimum investment amounts, e.g. $250,000. Many 401(k) participants would never qualify to work with investment professionals and are ill-equipped to understand the basics of investing, what the experience will be like, what market volatility is and how that will translate to emotional bias' and poor decision-making. Subsequently, the first and perhaps only investing experience they have is with their 401(k) plan and the only reason they get this access is from the aggregation of the asset of the plan.
Next, behaviorally, we've observed that for most participants that savings is a low priority. Most have a set-it forget-it mentality when it comes to decisions they make. For example, they decide to join the plan at a deferral rate of 4%, when we look back at them 3-4 years from now, they are still deferring just 4%. Asset Allocation is a best guess. The simple act of rebalancing, which is additive, doesn't happen in the aggregate. These and other issues lead to the poor income replacement statistics that we've all been seeing.
So, again, how do we take a valuable service like participant advice and get the uptake on it to be higher than the 25% figure in the article?
1.) Remove the price barriers. Not saying that advice should be free, far from it, what I am saying is that if the participant feels they will pay more for advice, they are likely to not take it. Instead, have the fee for advice be a plan-level fee. I.E. 25 basis points to the Plan Sponsor. If the Plan Sponsor chooses to pass along fees to the plan, then everyone pays for it. It becomes a fee neutral decision for the participant to use it or not.
2.) Make advice the default. Like other automatic provisions, usage goes up SUBSTANTIALLY if you make it a plan default. Our experience is that when we make advice programs a plan default we see a usage rate north of 85%.....that's right, 85% or 60% HIGHER than what the Wall Street Journal article says is the industry norm right now.
3.) Change the conversation at the participant level. Give them information in a way that they truly can understand. Most participants are return-centric, not benefit-centric. They look at what the investments did last quarter. In general, as mentioned, most are ill equipped to do anything with performance information, positive or negative. However, if we communicate to them at what age they will be able to afford to retire, give them the REAL number on what that is for a variety of ages, 66, 67, 68, etc. then they will truly know if they are on target to retire with enough income or not. If they are on a shortfall, we can communicate to them the earliest age that they can afford to retire or show them the impact of saving more.....what a novel concept, use the 401(k) Savings Plan as just that, a SAVINGS PLAN!
4.) Use the advantages offered in the Pension Protection Act of 2006. Automate savings, automate escalation, default people to Qualified Default Investment Alternatives, and automate rebalancing.
Those are real, practical solutions that can be implemented easily for many plans and will change the dialogue with Plan Sponsors and participants from investments and fees to something that really matters more which is income replacement rates.
Thursday, October 20, 2011
New Retirement Plan Limits for 2012 (COLA)
Not my usual kind of post, but this blog should be a source for all relevant Qualified Plan news and the IRS changing the Annual Limits for plans is pretty important information. Below is all of the changes, and there were some changes.
Internal Revenue Service cost-of-living adjustments applicable to dollar limitations for retirement plans.
Internal Revenue Service cost-of-living adjustments applicable to dollar limitations for retirement plans.
401(k), 403(b) & 457 Elective Deferral Limit increases from $16,500 in 2011 to $17,000 in 2012
Catch-Up Contribution Amount stays unchanged at $5,500
415 Defined Contribution Annual Additions Limit increases from $49,000 to $50,000
Compensation Considered increases from $245,000 to $250,000
Income Subject to Social Security Tax (Taxable Wage Base) increases from $106,800 to $110,000
There are others that are important for use with Non-Discrimination and Top-Heavy tests, but the above are the relevant ones to Plan Sponsors and participants.
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